Pink outlook for the transportation services industry: 3 solid choices – October 25, 2021
The rapid spread of the highly contagious Delta variant of the coronavirus in many places around the world, including the United States, has threatened to derail the economic recovery seen at the start of this year.
Zacks’ transportation services industry is also not spared from pandemic ills with supply chain disruptions brought about by the rapid spread of the Delta blemish that is stinging the industry. However, much to everyone’s relief, the threat of the Delta mutant in the United States is receding as the number of cases drops. In addition, the increase in immunization has contributed to the resumption of economic activities. A strong surge in manufactured goods fueled the growth of transport service providers.
The gradual resumption of the freight scenario bodes well for transport service providers such as Schneider National (SNDR – Free report), Matson (MATX – Free report) and Hub Group (HUBG – Free Report) well placed to benefit from it.
About the industry
Companies belonging to the Zacks Transportation-Services sector offer logistics, rental and maintenance services to carriers. Some industry players are focused on global logistics management activities, including international freight forwarding. Third-party logistics companies provide innovative supply chain solutions. They also focus on services such as product sourcing, warehousing and freight forwarding. The companies have expertise in the fields of trucking, air transport and maritime transport. In addition, some of the players in this industry provide domestic and international express delivery services. The well-being of companies in this industrial cohort is directly proportional to the health of the economy. A slight increase in manufactured and retail products, favorable prices and improving global economic conditions bode well for industry participants.
3 key investment trends to watch in the transportation services industry
The recovery of the freight scene bodes well: Supply chain issues due to the spread of the Delta variant have dampened the freight scene in the United States. Clearly, the Cass freight shipments index fell 4.2% and 3.1% month over month in June and July, respectively. However, the same increase rose 4.8% in August from July levels, underscoring the improving scenario. In addition, the strong growth in air freight revenue is a big boost for transport companies like Washington International Expeditors (EXPD – Free report). The increased use of charters to meet customer needs following the cancellation of passenger flights (which typically carry freight as well as passenger baggage) generates air freight revenue. These revenues are expected to skyrocket at least in the near term, as the air charter business is expected to maintain its upward trend.
Rising oil prices are hurting results: The rise in the price of fuel per gallon with oil prices moving northward (the price of oil rose 2.1% in the third quarter from second quarter levels) is not a favorable development for transport service providers with regard to their results. Indeed, fuel costs represent one of the most important input costs for these companies.
Oil prices will continue to climb, as evidenced by the decision of the United States Energy Information Administration (EIA) to increase the forecast for oil prices in 2021 and 2022 to $ 71.38 per barrel for the current year. This marks a significant increase from the EIA’s September forecast, when it expected the average Brent spot price to be $ 68.61 per barrel for 2021. It expects the average Brent price to be $ 68.61 per barrel for 2021. ‘it averages $ 81 a barrel in the December quarter. This expectation is $ 10 a barrel higher than its previous prediction.
The EIA’s rising oil price forecast is another indicator that transportation service providers will also struggle in the near term due to high fuel prices.
Increase in measures favorable to shareholders: With the resumption of economic activities, many companies, including some transport service providers, are reactivating their shareholder-friendly measures such as dividend payments and buybacks, which underscore their financial strength and their confidence in the company. Clearly, in June, Matson’s board of directors authorized a 30.4% increase in its quarterly dividend, bringing the total to 30 cents per share. It also approved a share buyback program of three million shares (approximately 7% of its ordinary shares outstanding). Also, after a temporary pause on its share buyback plans to deal with the coronavirus situation, CH Robinson Worldwide (CHRW – Free Report) picked up the same in the fourth quarter of 2020.
Zacks’ Industry Rankings Shows Bright Prospects
Zacks Transportation Services Industry is a group of 28 stocks within the larger Zacks Transportation industry. The industry currently holds a Zacks Industry Rank # 104, which places it in the top 41% of over 250 Zacks industries.
The group’s Zacks Industry Rank, which is essentially the average Zacks Rank of all member stocks, suggests a sunny outlook for the near term. Our research shows that the top 50% of industries ranked by Zacks outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s position in the top 50% of industries ranked by Zacks is the result of optimistic earnings prospects for all of the constituent companies. Looking at the revisions to the overall earnings estimates, it appears that analysts are gradually gaining confidence with the earnings growth potential of this group. Year over year, the industry’s profit estimate for 2021 has been revised up 34.2%.
Given the encouraging industry dynamics, we’ll outline a few stocks you may want to consider for your portfolio. But it’s worth taking a look at the industry’s shareholder returns and its current valuation first.
Industry surpasses the sector but lags behind the S&P 500
Zacks’ transportation services industry has underperformed the Zacks S&P 500 composite, but has outperformed the transportation industry as a whole for the past year.
The industry grew 22.3% during this period, against a 35% appreciation of the S&P 500. The broader sector has gained 20.4% in one year.
One-year price performance
Current industry assessment
Based on its 12-month Enterprise Value / EBITDA (EV / EBITDA) ratio, which is a multiple commonly used to value transportation services stocks, the industry is currently trading at 21.56X from the 16. 24X of the S&P 500. The value is also above the industry’s 12-month EV / EBITDA of 18.87X.
Over the past five years, the industry has traded as low as 29.63X, as low as 10.90X and at the median of 17.50X.
Enterprise value / EBITDA ratio (EV / EBITDA) over the last 12 months (last five years)
3 Best Transportation Service Stocks To Buy Now
Matson: This Honolulu, Hawaii-based shipping and logistics service provider currently sports a Zacks Rank 1 (strong buy). Over the past 60 days, the stock has seen Zacks’ consensus estimate for 2021 move 38.7% north. The stock has gained 24.5% in the past six months thanks to improved freight demand, a favorable shareholder attitude and cost management actions. Based on improving business conditions, we expect the company to perform well in the third quarter of 2021. Detailed results will be released on November 3.
Price and consensus: MATX
Schneider National: This Brown County, Wisconsin-based transportation and logistics services company currently holds a Zacks Rank # 2 (Buy). It is based on the good performance of the Intermodal and Logistics clusters. The Intermodal segment benefits from yield management and increased volumes while the Logistics unit thrives on favorable market conditions and other factors. Over the past 60 days, the stock has seen Zacks’ consensus estimate for 2021 move 2.1% north. Driven by the headwinds mentioned above, the stock has gained 4.4% in the past six months. Based on improving market conditions, we expect the company to perform well in the third quarter of 2021. Detailed results will be released on October 28.
Price and consensus: SNDR
Hub Group: The Oak Brook, Illinois-based transportation and logistics management solutions provider currently holds a Zacks rank of 2. The company is being helped by the gradual improvement in freight market conditions. Its strong customer base and its strategy of growth by acquisition also bode well. Obviously, Hub Group acquired Choptank Transport in October 2021, expanding its operations related to supply chain solutions. Driven by optimistic intermodal, logistics and truck brokerage revenues, we expect the company to perform well in the third quarter of 2021. Detailed results will be released on October 28.
Price and consensus: HUBG