July 12, 2019 / 2:00 PM / 3 months ago

Wall St Week Ahead-Union Pacific, other freight co earnings eyed for tariff effects

    NEW YORK, July 12 (Reuters) - Results from two major U.S.
railroads next week are likely to attract more scrutiny than
usual as investors look for signs of how deeply U.S. President
Donald Trump's multi-front trade war is affecting freight
companies and the wider economy.
    Among those reporting as the second quarter earnings season
kicks off next week are Union Pacific Corp on Thursday
and Kansas City Southern on Friday, amid worries that
new U.S. import tariffs threatened by the Trump administration
could also herald weakening demand for goods movers, including
truckers, container companies and package carriers. 
    There is even talk of a "freight recession" and investors
look to the transportation sector as a barometer of U.S.
economic health.
   The S&P 500, which crossed the 3,000 mark for the
first time this week, has seesawed between record highs and
selloffs in recent months on increasing U.S.-China trade
acrimony and concerns about a U.S. economic slowdown.  
    "If these companies come out with reports that confirm
people's concerns about tariffs and inventory build-up, that
won't be good for the market," said Chuck Carlson, chief
executive officer at Horizon Investment Services in Hammond,
Indiana.  
    Omaha, Nebraska-based Union Pacific operates a
32,000-route-mile rail network that includes the Los
Angeles/Long Beach complex, a port responsible for most of the
U.S.-China cargo flow. 
    Tariffs have already affected the company's bottom line. In
the first quarter, overall freight volume fell, hurt by a 7%
reduction in grain carloads driven by reduced exports to China. 
    In June, CEO Lance Fritz told Reuters the trade war is "a
significant threat" to Union Pacific's outlook.   
    Kansas City Southern is expected to report year-on-year
earnings and revenue growth in the mid-single-digits, according
to Refinitiv data. 
    The company's U.S.-Mexico cross-border traffic contributes a
large share of its revenue, and investors will be listening
closely to the company's guidance for any mention of the tariffs
on Mexican imports threatened by President Trump in late May.  
    Road and rail stocks have handily outperformed the broader
market since Trump fired the trade war's opening salvo in
January 2018. 
 
    But that could be attributable in part to companies beefing
up their inventories, which have been steadily on the rise as
companies "front load" imports to stay ahead of potential
tariff-related price hikes.
    Shipping container volumes jumped in late 2018 ahead of
threatened tariffs, with container imports spiking 13% in both
October and December, followed by a weak first quarter,
according to data provided by ACT Research. 
    This was followed by a weak first quarter, when container
volume plummeted as businesses drew down their bloated
inventories and freight demand softened.
    "U.S. freight volumes were down on both trucks and rails in
the first half of 2019 – a freight recession," said Tim Donoyer,
vice president of ACT Research in Columbus, Indiana.
    The trend is well-illustrated by the Cass Shipments Index,
which shows year-on-year U.S. freight volume has been on the
decline since December.
 
    Falling freight demand has been particularly hard on
truckers, who account for approximately 70% of U.S. shipment
tonnage. The Dow Jones U.S. Trucking Index has
significantly underperformed the broader market this year,
gaining 4.9% compared with the S&P 500's 19.4% advance.
    ACT Research's index of truck carrier volumes has been in
contraction territory since February, and the latest data shows
May volumes hitting the lowest level in nearly three years.
    JB Hunt Transport Services Inc, a trucking company
due to report on Monday, is now seen posting second quarter
earnings growth of 1.7%, down from the 15.2% jump analysts
expected just six months ago when the inventory build-up was in
full-swing.
    Package deliverers have perhaps the most exposure to the
tariff dispute because of the international scope of their
operations.
    FedEx Inc, a global economic bellwether that has
beefed up its international capacity by 19% since 2016,
according to a Bernstein analysis, is beginning to feel the
trade war's sting.
    On June 25, the company reported better-than-expected
quarterly profit, but on its earnings call the company's chief
financial officer Alan Graf warned "our fiscal 2020 performance
is being negatively affected by continued weakness in global
trade and industrial production."
    United Parcel Service Inc, expected to report on
July 24, is now seen posting earnings of $1.93 per share, down
0.5% from a year ago, and 5.4% lower than analysts expected in
January.
    "The key to this market is transportation stocks," Carlson
added. "The reports next week will provide a pretty nice window
into how these companies are responding to tariffs." 

    
 (Reporting by Stephen Culp; additional reporting by Lisa
Baertlein
Editing by Alden Bentley and Nick Zieminski)
  
 
 
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