Transportation

Stock performance in the transportation sector has been very uneven, reflecting the varying fortunes of particular industries within the sector. The median year-to-date-stock price gain/(loss) has been mixed for industries in the Zacks transportation universe -- all industries are underperforming the S&P 500’s 0.7% increase, with the exception of air freight. Air freight has been helped by large gains in smaller companies as the giants within the air freight sector, United Parcel Service, Inc. (UPS - Analyst Report) and FedEx Corporation (FDX - Analyst Report), are down 4.3% and 15.7% year to date, respectively.

• Air Freight 17.3%
• Equipment & Leasing 0.5%
• Trucking (0.7)%
• Shipping (0.9)%
• Railroads (3.8)%
• Airlines (32.8)%

Among the hardest hit have been airlines and railroads (see the Analyst Blog by Dirk van Dijk, entitled Recovery Derailed?), where demand is dropping precipitously, reflecting the impact of the global economic slowdown. We believe there are a number of countervailing factors that will affect the transportation sector within the coming months:

• Volume weakness - as the global recession takes hold, we expect volumes to weaken from current levels as fewer businesses ship goods, whether by air, sea, rail or road, and fewer individuals decide to travel, which will hurt airlines
• Waning pricing power - to date, pricing has been fairly solid, particularly in those industries that are able to pass through rising fuel costs through fuel surcharges, such as railroads and trucking. Airlines have managed to add revenues through surcharges for second bags and other items. However, as the recession takes hold, we expect revenues to come under pressure, due to competitive pressures as companies fight for a share of a smaller pie
• Falling fuel prices - declining fuel prices, a significant line item on income statements for many transportation companies, should help alleviate cost pressures; on the negative side, this will hurt revenues as fuel surcharge revenue recedes

Stocks of dry bulk shipping companies, the hardest hit industry within the transportation group, have recovered nicely from their lows and are near break-even levels compared to the 32.7% decline at the time of our last report in March, reflecting improvement in shipping rates and other favorable developments. The Baltic Dry Index (BDI) is up to 2,605 from its recent low of 663 on December 5, 2008, though still down precipitously from the record high achieved on May 20, 2008 of 11,793.

Moreover, many dry bulk shippers in the Zacks-covered universe have been successful in negotiating waivers in financial covenants contained within loan agreements, thereby providing some much-needed breathing room to operate in this downturn. That said, dry bulk shippers are not out of the woods yet, and will need to see a sustained uptick in global trade patterns before normal operating trends can be achieved.

OPPORTUNITIES

At this time, we see no near-term opportunities in this space. There are currently no stocks with Zacks ranking of 1 or 2 -- indicating upward bias in the share price over the near term -- in the covered transportation universe.

WEAKNESSES

We would avoid companies that are in very volatile industries, such as shipping and airlines. Stock prices in these industries can display enormous gains and losses on a frequent basis, and are not for the faint of heart.

Specific Sell recommendations include Overseas Shipholding Group, Inc. (OSG - Analyst Report), the second largest publicly listed oil tanker owner in the world, and China Eastern Airlines Corporation Limited (CEA - Analyst Report), one of the 3 largest airliners in China by fleet size and the primary air carrier serving Shanghai.

There are two companies -- DryShips Inc. (DRYS - Analyst Report) and Norfolk Southern Corporation (NSC - Analyst Report) -- in the covered transportation universe that have a Zacks Rank of 5, and five companies -- CAI International, Inc. (CAP - Snapshot Report), Canadian Pacific Railway Limited (CP - Analyst Report), FedEx Corporation (FDX - Analyst Report), Overseas Shipholding Group, Inc. (OSG - Analyst Report) and United Parcel Service, Inc. (UPS - Analyst Report) -- that have a Zacks Rank of 4, indicating near-term selling pressure on the share price.