Who Benefits From Intermodal Market Growth?
This alternative transportation option will remain the central volume driver for railroads and intermodal marketing companies.
Between 2010 and 2015, the rail-intermodal industry enjoyed double-digit revenue expansion, with noteworthy help from truck-to-rail conversions on shorter-haul freight moving less than 1,000 miles. Meaningful Class I infrastructure investment, shippers’ rising focus on slashing supply chain costs, and concerns over capacity constraints in trucking all contributed. Over the past year, however, cheap diesel prices and more readily available truckload capacity linked to a pullback in shipment demand have spoiled the fun and are hampering intermodal’s value proposition relative to trucking.
That said, investors have reason to be optimistic about intermodal’s prospects, especially considering that competing truckload carriers will continue to grapple with capacity-growth headwinds linked to new regulatory restrictions and the constrained driver pool. Said another way, intermodal's value as an alternative transportation option won't disappear—we think the industry can generate mid-single-digit growth over the long run.
This is good news for the major intermodal marketing companies and Class I railroads, and our expectations for intermodal demand improvement over the next few years are reflected in our current fair value estimates. For the rails, intermodal activity has outpaced carload growth for most other goods, and we believe it will be a core volume driver going forward. Following a deep dive into rail industry trends we’ve modestly increase our volume growth assumptions for intermodal and certain industrial commodities for the Class I rails, as well as our long-run earnings growth rate, and increased our fair value estimates 1%-11%. From a valuation perspective, Union Pacific is our favorite rail benefiting from intermodal market growth, combining our view of its intermodal returns and a few free cash flow metrics that look attractive relative to other rails. On the other hand, market-implied assumptions for the IMCs have recently become overly optimistic.
Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.