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What Are The Transports Telling Us?
The market has been looking to the financial sector for clues about the health of the economy and the strength of any pending recovery. But this is a departure from the past, mostly because of the group's role in the global economic meltdown that shook the markets last fall.
Historically speaking, other industries have offered more clues about the country's economic health, one of the best being transports.
Transports Are A Leading Indicator
Transports are considered early cycle indicators, with consumer and business spending quickly showing up in the group's results. So while the financials are squarely in the spotlight, the transports deserve some attention too in order to develop a more rounded view of the economic landscape.
Let's take a closer look at some major players operating in different segments of the transports sector.
Federal Express (FDX - Analyst Report) has rebounded nicely from its March low of $34, recently topping off above $64. But estimates continue to fall, with the current year down 77 cents in the last 90 days to $2.71. That means this stock trades with a P/E multiple of 23X, a fairly steep premium to the overall market. So what does that earnings multiple get you? Well, the next-year estimate is projecting 40% earnings growth, but CFO Alan Graf recently said that "The operating environment for our first two quarters in fiscal 2010 is expected to be extremely difficult."
Union Pacific (UNP - Analyst Report) operates in a different segment of the market than FedEx, servicing corporate/industrial clients. The company's July 23, second-quarter results were respectable, posting earnings of 92 cents against the expected 78. But once again, CEO Jim Young said that he expects it to be some time before the economy recovers. Estimates are down here also, with the current year off 32 cents in the last 90 days to $3.68 per share.
Genco Shipping & Trading Ltd. (GNK - Snapshot Report) operates as a dry good shipper worldwide. Shares of GNK are up more than 300% since bottoming out late last year, but the next-year estimate is projecting an earnings contraction. The valuation picture does looks solid though with a P/E multiple of 7X. Take a look at the chart below.
Frontline Ltd. (FRO - Snapshot Report) give us a window into the energy industry, as the company specializes in transporting crude. In spite of crude's big run-up over the last 3 months, estimates for FRO have been slumping, with the current-year down 10 cents to $1.29 per share and the next year down 61 cents to a modest $1.50. In order for the company to send its share price even higher after a nice rebound from recent lows, it will have to consistently produce major earnings growth. Take a look below.
Conclusion
The recent market rally has been awesome, a breath of fresh air to many investors who took a hit earlier in the year when the market crumbled. But optimism must be supported by fundamentals. Right now, the transports are recording respectable results against lowered expectations, but guiding quite cautiously. When you balance out financial sector optimism with the transport sector's caution tone, somewhere in the middle is probably the best place to be.
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| Market Summary | Feb 10, 2010 09:33 am ET |
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