TD Cowen recently hosted a call with industry executives from the rail equipment market. From that, we heard order books are seeing no notable growth, attributable to tariff uncertainty, and used car valuations are increasing. Bonus depreciation likely won’t be an incremental driver of rail equipment demand. Consolidated rail service hasn’t seen improvements despite Class I emphasis.
TD Cowen Insight:
- Tariff uncertainty continues to pressure the order book. Railcar end users are unwilling to make capital decisions due to volatile policy, and the second quarter is expected to be on par or slightly below weak first-quarter levels. The inquiry-to-order conversion rate remains weak, and panelists noted that railcar users need six to seven months of forecast clarity to justify the capex. While panelists are seeing speculative purchases up slightly, the bulk of ordering activity is replacement or linked to new plants.
- Bonus depreciation in the tax bill is likely not a big driver of incremental demand for rail equipment. Interest rates play a much more significant factor for purchase decisions; our panelists believe that if we get tariff clarity along with other tailwinds (bonus dep, rate cuts), then this should drive demand for rail equipment, but tax bill on its own is not a needle mover.
- Rail service has been a shallow roller coaster, and one panelist (who surveyed 29 terminals) saw terminal dwell worsen sequentially in the second quarter. June was not any better than May, according to our panelist who looked at terminals on both the East and West coasts. Certain carriers on each coast have performed marginally better than their competitor, though there have been no noteworthy service improvements despite Class I emphasizing its importance in recent quarters.
- Used car valuations are elevated despite the relatively tepid demand picture. Inflation in manufacturing input costs for new cars has led railcar customers to the used market. One panelist attested to a 30%-45% increase in the cost of five-year assets. While lease rates are fairly reasonable (down slightly) at this time according to panelists, used price surge and consolidation in the lessor fleet could result in upward pricing pressure in the future (the GATX wells fleet now accounts for approximately 25% of the aggregate lessor fleet).
- Panelists discussed the various channels through which a transcontinental rail merger could impact the equipment market. Merger-driven carload growth enabled by fewer interchanges would support increased equipment demand in the long term. Near-term service impacts resulting from recalibrating the network could also support intermittent equipment demand. However, longer term, fluidity and efficiencies would likely allow the railroads to do more with less equipment. It is too early to tell how these puts and takes would net out.
Further Reading:
- 2025 Guide to Equipment Leasing: Managing Through Discontent
- TD Cowen 2Q25 Rail Shipper Survey Says …
- Dan Elliott: East-West Merger ‘20%-25%’ Likely
- If All Else Fails, Attempt to Merge
- Jason Seidl, TD Cowen: Class I Service, Growth and the Final Consolidation Round – RAIL GROUP ON AIR
- Rail Equipment Call: Decision Paralysis
- REF 2025: Searching for Sanity in ‘Interesting’ Times
