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

 (Repeats story first published Friday with no changes to text)  By Stephen Culp  NEW YORK, July 12 (Reuters) - Results from two major U.S.railroads next week are likely to attract more scrutiny thanusual as investors look for signs of how deeply U.S. PresidentDonald Trump's multi-front trade war is affecting freightcompanies and the wider economy. Among those reporting as the second quarter earnings seasonkicks off next week are Union Pacific Corp on Thursdayand Kansas City Southern on Friday, amid worries thatnew U.S. import tariffs threatened by the Trump administrationcould also herald weakening demand for goods movers, includingtruckers, container companies and package carriers.

There is even talk of a “freight recession” and investorslook to the transportation sector as a barometer of U.S.economic health. The S&P 500, which crossed the 3,000 mark for thefirst time this week, has seesawed between record highs andselloffs in recent months on increasing U.S.-China tradeacrimony and concerns about a U.S. economic slowdown. “If these companies come out with reports that confirmpeople’s concerns about tariffs and inventory build-up, thatwon’t be good for the market,” said Chuck Carlson, chiefexecutive officer at Horizon Investment Services in Hammond,Indiana. Omaha, Nebraska-based Union Pacific operates a32,000-route-mile rail network that includes the LosAngeles/Long Beach complex, a port responsible for most of theU.S.-China cargo flow.

Tariffs have already affected the company’s bottom line. Inthe 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 “asignificant threat” to Union Pacific’s outlook.

Kansas City Southern is expected to report year-on-yearearnings and revenue growth in the mid-single-digits, accordingto Refinitiv data. The company’s U.S.-Mexico cross-border traffic contributes alarge share of its revenue, and investors will be listeningclosely to the company’s guidance for any mention of the tariffson Mexican imports threatened by President Trump in late May. Road and rail stocks have handily outperformed the broadermarket since Trump fired the trade war’s opening salvo inJanuary 2018.

But that could be attributable in part to companies beefingup their inventories, which have been steadily on the rise ascompanies “front load” imports to stay ahead of potentialtariff-related price hikes. Shipping container volumes jumped in late 2018 ahead ofthreatened tariffs, with container imports spiking 13% in bothOctober and December, followed by a weak first quarter,according to data provided by ACT Research. This was followed by a weak first quarter, when containervolume plummeted as businesses drew down their bloatedinventories and freight demand softened. “U.S. freight volumes were down on both trucks and rails inthe 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 thedecline since December. Falling freight demand has been particularly hard ontruckers, who account for approximately 70% of U.S. shipmenttonnage. The Dow Jones U.S.

Trucking Index hassignificantly 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 incontraction territory since February, and the latest data showsMay volumes hitting the lowest level in nearly three years. JB Hunt Transport Services Inc, a trucking companydue to report on Monday, is now seen posting second quarterearnings growth of 1.7%, down from the 15.2% jump analystsexpected just six months ago when the inventory build-up was infull-swing.

Package deliverers have perhaps the most exposure to thetariff dispute because of the international scope of theiroperations.

FedEx Inc, a global economic bellwether that hasbeefed up its international capacity by 19% since 2016,according to a Bernstein analysis, is beginning to feel thetrade war’s sting.

On June 25, the company reported better-than-expectedquarterly profit, but on its earnings call the company’s chieffinancial officer Alan Graf warned “our fiscal 2020 performanceis being negatively affected by continued weakness in globaltrade and industrial production.” United Parcel Service Inc, expected to report onJuly 24, is now seen posting earnings of £1.93 per share, down0.5% from a year ago, and 5.4% lower than analysts expected inJanuary. “The key to this market is transportation stocks,” Carlsonadded. “The reports next week will provide a pretty nice windowinto how these companies are responding to tariffs.” (Reporting by Stephen Culp; additional reporting by LisaBaertleinEditing by Alden Bentley and Nick Zieminski)
Our Standards:The Thomson Reuters Trust Principles.

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