Two years ago, I released an article cautioning the freight rail industry to expect higher railcar prices and lease rates. At the following Rail Equipment Finance conference, the article was met with some skepticism and lively debate. The article highlighted the consolidation that had taken place in the railcar supply industry and its impact on sustained higher lease rates. Railcar builders had endured unsustainably low profit margins since the last cyclical boom that ended in 2016 and were, and continue to be, under extreme pressure to increase margins through lower costs and higher prices.
Lessors, meanwhile, were enjoying a significant rebound in lease renewal rates and terms, with renewal rates averaging 33% higher and lease terms going out 60 months. Was this sustainable, or was it simply a moment in time when lessors finally gained the upper hand after a long bout of flat renewal rates?
Last December, I published an article reinforcing the “sea change” that had taken place in railcar supply and highlighted the secular change occurring with lease renewals. The “Rational” and “Disciplined” behavior highlighted in 2022 were indeed evident as the railcar builders rightsized their production footprints to meet the realities of “replacement demand.” It was highlighted in the article that industry railcar capacity had gone from 75,000-plus in 2016 to around 55,000 today with the closure of several plants and assembly lines.
Two years later, lease rates have continued their march higher, as reflected in GATX’s and Trinity’s recent forward lease price indicators reflecting 26%-plus increases. Lease rate increases have indeed proven “sticky.”
Railcar Builder Performance and Railcar Prices
In response to the pressure on margins, all the carbuilders have approached or exceeded their 10%-plus manufacturing margin goals on their railcar sales. As a result of this improved performance, the stock market has rewarded them nicely, as evidenced by the chart below. Ironically, an investment in railcar builders, suppliers and leasing companies has proven to be a better investment than investing in the railroads themselves over the same period. Something has indeed changed.
Newsflash: On Jan. 6, 2025, Greenbrier announced their fiscal first-quarter 2025 results that far exceeded analysts’ estimates. Despite soft recent orders, Greenbrier maintained its delivery outlook for 2025 and was very optimistic about the pace of new orders and inquiries since the end of their Q1. Even having open production slots in the July/August timeframe, Greenbrier seemed confident these will fill in soon. Stay tuned.
In other news, on Jan. 9, 2025, Freightcar America announced the successful restructuring of its capital that reduces financing costs by 40%. After all the company has been through to restructure over the past 10 years, this is a testament to its accomplishments.
Wall Street’s View of Rail Supply
Unfortunately, just as excitement returned to the railcar builders, investment houses pared back their coverage of the industry. During this time, we have lost the valuable insights of Allison Poliniak, Matt Elkott and Justin Long, to name a few. There remain a few stalwarts from the investment community who are to be commended and rewarded for their tenacity and support of the rail supply industry.
Railcar Orders and Backlogs
Railcar orders have been depressed over the past four quarters, and the backlog has declined from 58,680 to 39,752 over that period. With Greenbrier projecting 20,900-23,600 North American deliveries in its fiscal year 2025 that began 9/1/24, it appears to capture the majority of the outstanding backlog. Some say the decline in orders is in response to the higher prices, but in my article from June 21, 2024, I postulated that a prolonged order drought will result in excessive pent-up demand soon, especially as carloads rebound and railcar scrap rates remain elevated. When that time comes, carbuilder lead times will extend, backlogs will increase and prices will continue their upward trajectory. Importantly, don’t expect the carbuilders to rush to build capacity in response to an uptick in orders, as they’ve done in the past. They’ve learned a hard lesson since 2016, and besides, there are fewer of them now thanks in large part to the historical boom/bust nature of railcar supply.
With disciplined production and capacity management, combined with continued speculation restraint, will come a sustained environment for higher lease rates, especially if railroads can execute their growth plans. After all, it’s difficult to grow if you don’t have the right equipment at the right place, at the right time. The winning lessors will offer modern equipment and will back it up with full-service leases. Besides, with so much old equipment nearing retirement, prospective customers won’t be impressed when they see the condition of the equipment they begin receiving, especially boxcars and old hoppers. The market will demand newer equipment, and the AAR 50-year age limit may become irrelevant.
Finally, Greenbrier’s optimism on recent orders and pace of inquiries supports the need to place orders sooner than later.
Summary
I’m bucking the trend when I predict a robust rebound in new railcar demand. With replacement demand of 35,000-42,000 railcars (depending upon to whom you talk ), orders below this level don’t make any sense at all. Should carloads grow 2% annually and railcar scrapping remain elevated, the fleet will need to grow, not shrink, even if velocities accelerate and dwell times decline. Customers will demand better equipment, and railroads will benefit as well. Running 40– to 50-year-old equipment benefits no one except car owners who have fully depreciated their equipment.
Had you invested in the railcar builders, leasing companies, and supply companies in December 2022, you’d have outperformed many others who invested in much “sexier” industries, even many in the AI space! Just as you “coulda, woulda, shouda” invested in Microsoft in 1986 or Amazon in 1997, an investment in rail supply in December 2022 would feel pretty good right now. Let’s hope it keeps up!
As mentioned in my bio, I am not a Wall Street analyst or a prognosticator of next year’s carbuilds (I leave that to my friend Dick Kloster). Rather, I have been around this industry a very long time and have had a front row seat to many of our successes and failures in rail supply. Importantly, I focus on strategic shifts in the marketplace and invest in them accordingly. Despite a rocky, feast-or-famine history for railcar builders, I believe they have now structured themselves to be resilient, reliable, disciplined and profitable industry partners for years to come.
Principal of Rail Supply Chain Associates, Robert H. Cantwell spent more than 40 years in executive positions in the rail supply industry. He spent the first 26 years of his rail industry career growing a successful company, Hadady Corp. (now part of Caterpillar), a designer and manufacturer of truck (bogie) components and systems for locomotives and transit railcars. Following the sale of his business, Bob helped transform Amsted Rail, holding various executive positions for 16 years. He has been active in the Rail Transportation Division of the ASME (American Society of Mechanical Engineers) and is past Chairman of the Division. Bob holds degrees in Mechanical Engineering from the Georgia Institute of Technology and an MBA from the University of Chicago. He possesses a unique perspective on the rail supply industry, combining his engineering experience along with robust economic and financial acumen. As an active investor in the rail industry, he has a vested interest in the success of the industry. He has also actively advocated with members of Congress in support of the rail and rail supply industry. The opinions expressed here are his own.
