It is a no-brainer that the coronavirus pandemic dealt a body blow to the stocks in the Zacks Transportation-Services industry as demand for the services diminished with a slowdown in global trade. However, the industry has been gradually clawing its way back from the coronavirus-led crisis. The gradual increase in economic activities and signs of recovery in the freight market bode well for the transport service providers.
Additionally, upbeat airfreight revenues and cost-containment measures bode well for the industry participants. For instance, Expeditors International of Washington (EXPD - Free Report) , Matson (MATX - Free Report) , Echo Global Logistics (ECHO - Free Report) are well placed to gain from these trends.
About the Industry
The companies housed in the Zacks Transportation-Services industry offer logistics, leasing and maintenance services to transporters. Some of the industry players focus on the business of global logistics management including international freight forwarding and consolidation for both air and ocean freight. The third-party logistics (3PL) provide offer innovative supply-chain solutions. They also focus on services like product sourcing, warehousing and freight shipping.
Apart from renting out vehicles, car rental companies in the space are engaged in the sale of value-added products and services. Some of these companies also offer domestic and international express delivery services.
3 Key Investing Trends to Watch in the Transportation-Services Industry
Improved Freight Demand Scenario: After months of coronavirus-induced disruptions, freight volumes are gradually expanding. The recovery in freight demand following the ramp-up of economic activities as restrictions are being relaxed is a boon for the transport service providers. Per the latest Cass Freight Shipments Index report, shipment volumes improved 8% in August from the July levels. Notably, shipment volumes rose 4.8% in July from the June reading. The rebound in airfreight revenues further adds to the freight-related buoyancy. Freight forwarding companies like Expeditors are benefiting from this scenario owing to the increased usage of charters to meet customer needs following the cancellation of passenger flights (that usually carry freight as well as passenger luggage). Such revenues are likely to be strong at least in the near term owing to upbeat air-charter business.
Low Costs Supporting Bottom Line: Despite the recent improvement, revenues for the industry participants are still far below the year-ago levels. To combat this revenue weakness, companies in the space are adopting various means like workforce reductions and temporary pay cuts for some executives to contain costs, which in turn, are aiding the bottom line and generating substantial savings. For example, freight broker C.H. Robinson Worldwide (CHRW - Free Report) intends to save costs worth approximately $80 million in 2020, higher than its previous forecast of $60 million. Low fuel costs are also contributing to the bottom line of the transport service providers. Oil prices are currently trending at around $40 a barrel. Although that represents a marked betterment from the lows of a negative $38 per barrel in April, it is a long way from the highs of above $70 a barrel touched in 2019. Notably, oil prices are unlikely to move much higher this year as commercial passenger flights remain infrequent.
Sluggish Demand for Rental Cars: Car rental companies in the industry like Hertz Global Holdings (HTZ - Free Report) are witnessing lackluster demand for rental cars in this coronavirus-dominant scenario. In fact, Hertz Global filed for bankruptcy earlier this year as its business was crippled by the coronavirus-induced waning demand for rental hire services with most people staying indoors. With the health peril still very much around, rental car demand is likely to remain suppressed going forward as well. Moreover, the presence of players like Uber and Lyft is a major threat to the need for car rental services.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Transportation-Services industry is a 28-stock group within the broader Zacks Transportation sector. The industry currently carries a Zacks Industry Rank #102, which places it in the top 41% 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, implies sunny 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 position in the top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential. Since June 2020, the industry’s earnings estimate for 2020 and 2021 has been revised 7.6% and 3% upward, respectively.
Given the bullish near-term prospects of the industry, we will present a few stocks that 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 Lags S&P 500 but Outperforms Sector
The Zacks Transportation-Services industry has underperformed the Zacks S&P 500 composite but outperformed the broader Transportation Sector over the past year.
The industry has rallied 8.4% over this period compared with the S&P 500’s appreciation of 9.1%. Meanwhile, the broader sector has gained 4.7%.
One-Year Price Performance
Industry’s Current Valuation
On the basis of trailing 12-month enterprise value-to-EBITDA (EV/EBITDA), which is a commonly used multiple for valuing Transportation-services stocks, the industry is currently trading at 13.44X compared with the S&P 500’s 13.95X. It is, however, higher than the sector’s trailing 12-month EV/EBITDA of 9.66X.
Over the past five years, the industry has traded as high as 21.76X, as low as 8.81X and at the median of 12.84X.
Enterprise Value-to-EBITDA Ratio
Enterprise Value-to-EBITDA Ratio
3 Transport Services Stocks to Keep Tabs on
Matson: This Honolulu, Hawaii- based provider of ocean transportation and logistics services currently sports a Zacks Rank #1 (Strong Buy). Over the past 60 days, the company has seen the Zacks Consensus Estimate for 2020 move 53.9% north. The stock has gained 24.7% over the past six months on the back of factors like improved freight demand and cost-management actions.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: MATX
Expeditors International of Washington: This Seattle, WA- based company is engaged in the business of global logistics management including international freight forwarding and consolidation for both air and ocean freight. Over the past 60 days, this #2 Ranked company has seen the Zacks Consensus Estimate for 2020 increase 19.5%. The stock has surged 38.8% over the past six months.
Expeditors is being bolstered by the uptick in airfreight revenues. Its sound balance sheet is also encouraging. As of Jun 30, 2020, the company had no long-term debt obligations.
Price and Consensus: EXPD
Echo Global Logistics: This Chicago-based provider of technology-enabled transportation management services currently carries a Zacks Rank #2 (Buy). Over the past 60 days, the company has seen the Zacks Consensus Estimate for 2020 rise 4.6%. The stock has soared 50.4% over the past six months. Factors like improvement in truckload and LTL (less-than-truckload) volumes bode well for the stock. The recent decision to boost its buyback program is an added positive.
Price and Consensus: ECHO