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3 Transport Equipment & Leasing Stocks to Gain From Uptick in Volumes

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The Zacks Transportation - Equipment and Leasing industry is gradually recovering from the coronavirus-induced slump as economic activities ramp up and business conditions improve.

Even though business volumes are yet to reach pre-pandemic levels, there is an air of optimism surrounding the industry’s prospects, thanks to vaccines being rolled out in the United States, which is anticipated to boost economic recovery. Against this backdrop, transport equipment and leasing companies namely Ryder System (R - Free Report) , GATX Corporation (GATX - Free Report) and Herc Holdings (HRI - Free Report) are set to benefit.

About the Industry

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.

A prominent industry player is Wabtec Corporation (WAB - Free Report) , which is a provider of locomotives, value-added, technology-based equipment, systems and services to the freight rail and passenger transit industries across the globe.

3 Trends Shaping the Future of the Transport Equipment and Leasing Industry

Recovery in Business Volumes: Gradual improvement in the economy is leading to an uptick in business volumes for transport equipment and leasing companies. Thanks to ramp-up in economic activities, third-quarter 2020 performance of most industry participants improved sequentially. For instance, Triton International’s (TRTN - Free Report) bottom line surged a remarkable 32.6% in the third quarter on a sequential basis, with a spike in trade volumes and container demand. With the worst of the pandemic-driven economic slowdown seemingly in the rearview mirror, things are looking up for the transport equipment and leasing industry as economic recovery picks up pace in 2021 on wider availability of vaccines. Additionally, the industry might see an improvement in lease demand this year as corporations are likely to increase capital investments, thanks to the second coronavirus relief package.

Cost-Control Measures: To combat coronavirus-led woes, industry participants are undertaking significant cost-reduction measures. For instance, during the third quarter conference call, Ryder’smanagement stated that it expects annual savings of $50 million owing to cost actions implemented last July. Additionally, the company estimates annual savings of $30 million in 2020 from its multi-year maintenance initiative. Meanwhile, Trinity Industries (TRN - Free Report) is controlling costs in order to reduce the effects of lower lease rate on renewal. The company reduced its manufacturing workforce by 47% in the first nine months of 2020. Trinity expects to improve its rail segment margin through these cost-cutting efforts.

Debt Woes: 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 third quarter with cash and cash equivalents of $684 million, much lower than the current debt of $1,133 million, implying that it does not have sufficient cash to meet its current debt obligations.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Transportation - Equipment and Leasing industry, housed within the broader Transportation sector, currently carries a Zacks Industry Rank #113. This rank places it at the top 45% 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, indicates encouraging 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 the end of August 2020, the industry’s earnings estimate for 2021 has been revised 19.6% upward.

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 Outperforms Sector But Lags S&P 500

While the Zacks Transportation - Equipment and Leasing industry has outperformed the broader Transportation sector over the past year, it has underperformed the Zacks S&P 500 composite.

Over this period, the industry has appreciated 13.5% compared with the broader sector and S&P 500 Index’s increase of 12.1% and 17.7%, respectively.

One-Year Price Performance

 

Industry’s Current Valuation

On the basis of forward P/E (F12M), which is a commonly used multiple for valuing equipment and leasing stocks, the industry is currently trading at 15.55X compared with the S&P 500’s 23.16X. It is also below the sector’s P/E (F12) ratio of 24.32X.

Over the past five years, the industry has traded as high as 16.77X, as low as 8.63X and at the median of 13.52X as the chart below shows.

Forward Price/Earnings (F12M) Ratio

Forward Price/Earnings (F12M) Ratio

 

3 Transport Equipment & Leasing Stocks to Keep a Tab On

Herc Holdings: Through its subsidiary Herc Rentals, this company provides equipment rental services primarily in North America. Strong cost management is driving the company’s margins. Additionally, with gradual recovery in the economy, the company has been seeing sequential improvement in volumes and rental revenues over the past few months. The uptrend should continue as the economy further improves. Moreover, the company’s recent acquisition of Houston, TX-based Champion Rentals is expected to foster growth.

The Zacks Consensus Estimate for Herc Holdings’ 2021 earnings has been revised northward by 38.5% in the past 90 days. Shares of this Zacks Rank #1 (Strong Buy) company have gained more than 100% over the past six months. You can see the complete list of today’s Zacks #1 Rank stocks here.

Price and Consensus: HRI



 

GATX Corporation: Based in Chicago, IL, this company leases, operates and manages long-lasting, widely used assets in rail, marine and industrial equipment markets. The company’s recent buyout of the world’s fourth-largest tank container lessor company — Trifleet Leasing Holding has strengthened its railcar leasing operations. More railcars on lease are driving revenues at the Rail International segment, while the company’s Portfolio Management unit has been benefiting from higher remarketing income at the Rolls-Royce and Partners Finance affiliates. Despite coronavirus related disruptions, GATX continued to reward its shareholders. Notably, the company paid out $53.7 million to shareholders through dividends in the first nine months of 2020.

The Zacks Consensus Estimate for GATX’s 2021 earnings has been revised upward by 10.3% in the past 90 days. Shares of this Zacks Rank #2 (Buy) company have rallied 47.2% in the past six months.

Price and Consensus: GATX



 

Ryder System: This company provides integrated logistics and transportation solutions to customers ranging from small businesses to large international enterprises. Reduced capital investments as a result of lower investments in lease and rental fleets are boosting the company’s free cash flow. Ryder’s Supply Chain Solutions division rebounded in the third quarter of 2020 with revenues rising 11% year over year (revenues declined 20% year over year in the second quarter) driven by new business, higher volumes, and favorable pricing. With continued recovery in the economy, other segments should see improvements as well.

The Zacks Consensus Estimate for Ryder’s 2021 earnings has been revised upward by 44.1% in the past 90 days. Shares of this Zacks Rank #3 (Hold) company have surged 69.9% in the past six months.

Price and Consensus: R

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