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Weak Volumes Dull Transport Equipment & Leasing Stock Outlook
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The Zacks Transportation - Equipment and Leasing industry consists of companies offering equipment financing as well as leasing and supply chain management services. The industry includes aircraft, railcar and intermodal container lessors. Some of these companies even provide transportation solutions, such as vehicles, drivers, management and administrative services. Most industry participants offer fleet management solutions.
Let’s take a look at the industry’s three major themes:
Business volumes have improved with the re-opening of economies after it bottomed in the second quarter following the outbreak of coronavirus. Yet it is still way below year-ago levels. Given the weak economic conditions amid the pandemic, a rebound in volumes is quite unpredictable at this point. GATX Corporation (GATX - Free Report) expects continued pressure on lease rate, renewal activity and asset utilization across all its business segments. Ryder System (R - Free Report) too expects continued low sales activity due to the coronavirus-led economic slowdown. Moreover, it expects a delay in the recovery of used-vehicle pricing due to the effects of coronavirus. Weak used-vehicle market conditions have long been a concern for Ryder and coronavirus has only worsened the situation.
To combat the coronavirus-led woes, industry participants are undertaking significant cost-reduction measures. For instance, Ryder generated cost savings of $35 million in the second quarter due to temporary furloughs of employees, reduced discretionary spending and low medical expenses. In July, the company trimmed its workforce primarily in Fleet Management Solutions. The move is expected to generate savings of $12 million per quarter. Meanwhile, Trinity Industries (TRN - Free Report) has reduced its manufacturing workforce by 35% since the beginning of 2020, thus generating nearly $40 million of overhead cost savings. These cost-cutting measures are meant to support bottom-line growth.
Due to the capital-intensive nature of this business, most of the industry participants carry a huge debt burden. This can be detrimental to their financial health if they do not have sufficient cash to cover it. For instance, Ryder exited the second quarter with cash and cash equivalents of $831 million, much lower than the current debt of $1,461 million. Additionally, Westinghouse Air Brake Technologies Corporation (WAB - Free Report) , operating as Wabtec Corporation exited the second quarter with cash and cash equivalents of $588 million, below the current debt of $697 million. This implies that these companies do not have sufficient cash to meet their current debt obligations.
Zacks Industry Rank Indicates Bleak Prospect
The Zacks Transportation - Equipment and Leasing industry, housed within the broader Transportation sector, currently carries a Zacks Industry Rank #191. This rank places it at the bottom 24% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, suggests discouraging near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. The group’s current-year EPS estimate has decreased 44.5% since August 2019.
Despite the industry’s bleak near-term view, we will present a few noteworthy stocks for your portfolio. But before that, it’s worth taking a look at the industry’s shareholder returns and current valuation.
Industry Underperforms Sector & S&P 500
The Zacks Transportation - Equipment and Leasing industry has underperformed both the broader Transportation sector and the Zacks S&P 500 composite over the past year.
Over this period, the industry has dipped 1.7% compared with the broader sector and S&P 500 Index’s appreciation of 9.4% and 20.9%, respectively.
One-Year Price Performance
Industry’s Current Valuation
On the basis of forward P/E (F12M) ratio, which is a commonly used multiple for valuing equipment and leasing stocks, the industry is currently trading at 14.99X compared with the S&P 500’s 23.36X. It is also below the sector’s P/E (F12) ratio of 29.15X.
Over the past five years, the industry has traded as high as 16.77X, as low as 8.63X and at the median of 12.32X as the chart below shows.
Forward Price/Earnings (F12M) Ratio
Forward Price/Earnings (F12M) Ratio
Bottom Line
The gradual improvement in business volumes bodes well for the transport equipment and leasing companies. Additionally, cost-cutting measures should continue to support the bottom lines of these companies. However, given the significant slowdown in the global economy amid ongoing coronavirus concerns, a full recovery in volumes seems to be a distant possibility. This softness in volumes is likely to weigh on the industry’s near-term prospects.
Below we present one stock with a Zacks Rank #1 (Strong Buy) and three more stocks with a Zacks Rank #3 (Hold) that you may retain in your portfolio. You can see the complete list of today’s Zacks #1 Rank stocks here.
CAI International Inc is one of the leading intermodal freight container leasing and management companies.
The Zacks Consensus Estimate for this Zacks Rank #1 company’s current-year earnings has been revised upward by 43.4% in the past 60 days. The company also has an impressive earnings history, having outperformed the Zacks Consensus Estimate in three of the past four quarters (missed in one), the average beat being 18.4%.
Price and Consensus: CAI
Triton International Limited is an intermodal container lessor based in Hamilton, Bermuda.
The Zacks Consensus Estimate for the company’s current-year earnings has been revised upward by 1.3% in the past 60 days. Shares of the company have outperformed its industry over the past year, gaining 8.3%.
Price and Consensus: TRTN
Wabtec provides services to freight rail and passenger transit industries across the globe.
The Zacks Consensus Estimate for the company’s current-year earnings has been revised upward by 7.1% % in the past 60 days. The company delivered an average earnings surprise of 3.7%, having surpassed estimates in three of the trailing four quarters and missing in one.
Price and Consensus: WAB
Air Lease is a leading aircraft leasing company based in Los Angeles, CA.
The Zacks Consensus Estimate for the company’s current-year earnings has been revised upward by 8.1% in the past 60 days. This company also surpassed earnings estimates in three of the preceding four quarters (missed in one), the average beat being 4.8%.
Price and Consensus: AL
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Weak Volumes Dull Transport Equipment & Leasing Stock Outlook
The Zacks Transportation - Equipment and Leasing industry consists of companies offering equipment financing as well as leasing and supply chain management services. The industry includes aircraft, railcar and intermodal container lessors. Some of these companies even provide transportation solutions, such as vehicles, drivers, management and administrative services. Most industry participants offer fleet management solutions.
Let’s take a look at the industry’s three major themes:
Business volumes have improved with the re-opening of economies after it bottomed in the second quarter following the outbreak of coronavirus. Yet it is still way below year-ago levels. Given the weak economic conditions amid the pandemic, a rebound in volumes is quite unpredictable at this point. GATX Corporation (GATX - Free Report) expects continued pressure on lease rate, renewal activity and asset utilization across all its business segments. Ryder System (R - Free Report) too expects continued low sales activity due to the coronavirus-led economic slowdown. Moreover, it expects a delay in the recovery of used-vehicle pricing due to the effects of coronavirus. Weak used-vehicle market conditions have long been a concern for Ryder and coronavirus has only worsened the situation.
To combat the coronavirus-led woes, industry participants are undertaking significant cost-reduction measures. For instance, Ryder generated cost savings of $35 million in the second quarter due to temporary furloughs of employees, reduced discretionary spending and low medical expenses. In July, the company trimmed its workforce primarily in Fleet Management Solutions. The move is expected to generate savings of $12 million per quarter. Meanwhile, Trinity Industries (TRN - Free Report) has reduced its manufacturing workforce by 35% since the beginning of 2020, thus generating nearly $40 million of overhead cost savings. These cost-cutting measures are meant to support bottom-line growth.
Due to the capital-intensive nature of this business, most of the industry participants carry a huge debt burden. This can be detrimental to their financial health if they do not have sufficient cash to cover it. For instance, Ryder exited the second quarter with cash and cash equivalents of $831 million, much lower than the current debt of $1,461 million. Additionally, Westinghouse Air Brake Technologies Corporation (WAB - Free Report) , operating as Wabtec Corporation exited the second quarter with cash and cash equivalents of $588 million, below the current debt of $697 million. This implies that these companies do not have sufficient cash to meet their current debt obligations.
Zacks Industry Rank Indicates Bleak Prospect
The Zacks Transportation - Equipment and Leasing industry, housed within the broader Transportation sector, currently carries a Zacks Industry Rank #191. This rank places it at the bottom 24% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, suggests discouraging near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. The group’s current-year EPS estimate has decreased 44.5% since August 2019.
Despite the industry’s bleak near-term view, we will present a few noteworthy stocks for your portfolio. But before that, it’s worth taking a look at the industry’s shareholder returns and current valuation.
Industry Underperforms Sector & S&P 500
The Zacks Transportation - Equipment and Leasing industry has underperformed both the broader Transportation sector and the Zacks S&P 500 composite over the past year.
Over this period, the industry has dipped 1.7% compared with the broader sector and S&P 500 Index’s appreciation of 9.4% and 20.9%, respectively.
One-Year Price Performance
Industry’s Current Valuation
On the basis of forward P/E (F12M) ratio, which is a commonly used multiple for valuing equipment and leasing stocks, the industry is currently trading at 14.99X compared with the S&P 500’s 23.36X. It is also below the sector’s P/E (F12) ratio of 29.15X.
Over the past five years, the industry has traded as high as 16.77X, as low as 8.63X and at the median of 12.32X as the chart below shows.
Forward Price/Earnings (F12M) Ratio
Forward Price/Earnings (F12M) Ratio
Bottom Line
The gradual improvement in business volumes bodes well for the transport equipment and leasing companies. Additionally, cost-cutting measures should continue to support the bottom lines of these companies. However, given the significant slowdown in the global economy amid ongoing coronavirus concerns, a full recovery in volumes seems to be a distant possibility. This softness in volumes is likely to weigh on the industry’s near-term prospects.
Below we present one stock with a Zacks Rank #1 (Strong Buy) and three more stocks with a Zacks Rank #3 (Hold) that you may retain in your portfolio. You can see the complete list of today’s Zacks #1 Rank stocks here.
CAI International Inc is one of the leading intermodal freight container leasing and management companies.
The Zacks Consensus Estimate for this Zacks Rank #1 company’s current-year earnings has been revised upward by 43.4% in the past 60 days. The company also has an impressive earnings history, having outperformed the Zacks Consensus Estimate in three of the past four quarters (missed in one), the average beat being 18.4%.
Price and Consensus: CAI
Triton International Limited is an intermodal container lessor based in Hamilton, Bermuda.
The Zacks Consensus Estimate for the company’s current-year earnings has been revised upward by 1.3% in the past 60 days. Shares of the company have outperformed its industry over the past year, gaining 8.3%.
Price and Consensus: TRTN
Wabtec provides services to freight rail and passenger transit industries across the globe.
The Zacks Consensus Estimate for the company’s current-year earnings has been revised upward by 7.1% % in the past 60 days. The company delivered an average earnings surprise of 3.7%, having surpassed estimates in three of the trailing four quarters and missing in one.
Price and Consensus: WAB
Air Lease is a leading aircraft leasing company based in Los Angeles, CA.
The Zacks Consensus Estimate for the company’s current-year earnings has been revised upward by 8.1% in the past 60 days. This company also surpassed earnings estimates in three of the preceding four quarters (missed in one), the average beat being 4.8%.
Price and Consensus: AL
Today's Best Stocks from Zacks
Would you like to see the updated picks from our best market-beating strategies? From 2017 through Q2 2020, while the S&P 500 gained an impressive +44.0%, five of our strategies returned +50.9%, +93.8%, +122.2%, +153.0%, and even +156.8%.
This outperformance has not just been a recent phenomenon. From 2000 – Q2 2020, while the S&P averaged +5.5% per year, our top strategies averaged up to +51.7% per year.
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