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

NEW YORK — 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)