Conditions Tougher For Trucking Than Rail
Falling fuel prices should be a positive for transportation companies, but the recession has offset this benefit. As result, brokerage analysts have cut forecasts on several rail and transportation companies in recent weeks.
Though lower estimates are expected given the current economic environment, Transportation-Trucking appears more vulnerable to further negative revisions than Transportation-Rail.
Trucking Still Stalling
Yesterday, Con-way Inc. (CNW - Snapshot Report) lowered its 2008 guidance. The company expects profits to total between $2.20 and $2.35 per share, down from its previous forecast of $2.60 to $2.80 per share. (The numbers exclude certain charges.)
CNW justified the wide range by citing "turbulent market conditions" and a "lack of reliable visibility".
Throughout 2008, trucking companies have been struggling with a lack of pricing power. This has been particularly evident in the spot market for less-than-truckload (LTL) carriers, though full-truckload carriers have also struggled. Bluntly put, there have been too many trucks.
Adding to the weak prices has been competition from rail for long-haul freight. Not only has this affected prices and volume for the long-haul segment, but it also sent more companies looking for LTL business.
The trucking industry is also more susceptible to economic fluctuations than their rail counterparts. Trucking companies are more likely to ship retail items, whereas railroads move coal. As a result, the benefit of the 45% drop in diesel prices is being more than offset by the recession. (Less demand means fewer items being shipped.)
Con-way's CEO, Douglas W. Stotlar, said that "decelerating volumes in the LTL market" and falling prices were the primary reasons for his company's recent struggles.
Trucking companies with recent, negative revisions include J.B. Hunt Transport Services, Inc. (JBHT - Snapshot Report) and LTL carrier Old Dominion Freight Line Inc. (ODFL - Snapshot Report). JBHT relies more on full-truckload revenues, whereas ODFL is primarily an LTL carrier.
A few brokerage analysts have lowered their 2008 and 2009 forecasts on CNW before yesterday's announcement. However, many more cuts are likely to occur this week since the 2008 consensus earnings estimate is at $2.79 per share.
Railroads Still Moving, Thought Not At Full Steam
Railroad companies enjoyed more pricing power this year. This power included the ability to more effectively use fuel surcharges to boost revenues.
Compared to trucks, rail is a more fuel efficient way to ship freight over long distances. As a result, rail companies were able to keep market share away from trucking companies, while still maintaining control over prices.
Rail companies also benefited from the commodity bubble that occurred earlier this year via more shipments. Though demand for steel and copper has been affected by the slowing economy, coal shipments are holding up. Furthermore, a likely continued push for ethanol will help to support agricultural products.
Offsetting these positives for the industry are the continued housing slump, the problems with the U.S. auto industry and the weakened manufacturing sector.
Therefore, though estimates are being cut for CSX Corporation (CSX - Snapshot Report), Norfolk Southern Corporation (NSC - Snapshot Report) and Union Pacific Corporation (UNP - Analyst Report), the outlook is brighter than it is for trucking companies.
Zacks Rank
All of the aforementioned companies are Zacks #3 Rank ("hold") stocks. This ranking is applied to 60% of the companies within the Zacks Rank universe, or about 2600 stocks. Because the size of this group is so big, there are variances in the quality of companies that have a Zacks #3 Rank.
The Zacks Rank operates on a bell curve, with only the top 20% of all stocks given a "strong buy" or "buy" ranking. Similarly, the bottom 20% of all companies are given a "strong sell" or "sell" ranking. This model makes the buy and sell ranks more powerful, while maintaining the simplicity of a 5-Rank model.
Related ETFs
The iShares Dow Jones Transportation Average Fund (IYT) covers the broad transportation sector. The fund's heaviest weighting is railroads with Burlington Northern Santa Fe Corporation (BNI - Analyst Report) and UNP accounting for 20% of its portfolio. The fund also has 5% allocation to CNW.
Zacks Premium and Zacks Elite subscribers can view the Zacks Industry Rank List at http://www.zacks.com/zrank/zrank_inds.php. This interactive list allows you to see all of the companies, and their Zacks Rank, within more than 200 industries. Shown below is the Zacks Sector Rank List, which shows the trend in estimate revisions on a broader scale.
The sector table now shows revisions for 2009, not 2008.
| Sector Rank as of Dec 10 | ||||||
| Sector | This Week's Zacks Rank | Last Week's Zacks Rank | FY09 Revisions Ratio | FY09 Estimates Revised Up | FY09 Estimates Revised Down | FY08 Revisions Ratio |
| Medical | 2.55 | 2.52 | 0.61 | 219 | 349 | 0.61 |
| Aerospace | 2.83 | 2.83 | 0.46 | 29 | 39 | 0.46 |
| Computer and Technology | 2.92 | 2.92 | 0.12 | 205 | 913 | 0.12 |
| Business Services | 2.94 | 2.94 | 0.23 | 41 | 72 | 0.23 |
| Transportation | 2.97 | 2.99 | 0.27 | 89 | 174 | 0.27 |
| Consumer Discretionary | 3.01 | 3.00 | 0.23 | 90 | 226 | 0.23 |
| Utilities | 3.04 | 3.05 | 0.24 | 50 | 121 | 0.24 |
| Consumer Staples | 3.10 | 3.09 | 0.14 | 59 | 197 | 0.14 |
| Construction | 3.12 | 3.10 | 0.19 | 16 | 84 | 0.19 |
| Retail-Wholesale | 3.17 | 3.16 | 0.09 | 137 | 680 | 0.09 |
| Industrial Products | 3.18 | 3.20 | 0.11 | 45 | 190 | 0.11 |
| Finance | 3.19 | 3.17 | 0.13 | 184 | 732 | 0.13 |
| Basic Materials | 3.27 | 3.34 | 0.06 | 36 | 277 | 0.06 |
| Oils-Energy | 3.28 | 3.27 | 0.14 | 175 | 563 | 0.14 |
| Auto-Tires-Trucks | 3.55 | 3.60 | 0.08 | 8 | 65 | 0.08 |
| Conglomerates | 3.67 | 3.67 | 0.03 | 5 | 59 | 0.03 |
Charles Rotblut, CFA, is the senior market analyst for Zacks.com. He can be reached at crotblut@zacks.com.