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Transportation Services Industry on the Mend: 3 Stocks to Watch

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Even though coronavirus-induced disruptions are still prevalent, there is a growing belief that the worst is behind us as far as the Zacks Transportation-Services industry is concerned. With the gradual resumption of economic activities, things are on the upswing for most industry participants.

The steady uptick in the freight scenario, an upbeat freight market and cost-containment measures bode well for the transport service providers. Notably, the likes of Expeditors International of Washington (EXPD - Free Report) ,C.H. Robinson Worldwide (CHRW - Free Report) and Matson (MATX - Free Report) are well-positioned to gain from these tailwinds.

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 The third-party logistics provide innovative supply-chain solutions. The companies also focus on services like product sourcing, warehousing and freight shipping. Besides, some of the players offer domestic and international express delivery services.

3 Key Investing Trends to Watch in the Transportation-Services Industry

Favorable Freight Scenario a Boon: With the continuing revival of economic activities, the freight scenario in North America is on the mend. Per the latest report, the Cass Shipments Index grew 6.7% year over year in December 2020. The reading marked a significant acceleration from 2.7% year-over-year growth displayed in November and a 2.4% rise delivered in October. Prior to October 2020, shipment volumes contracted in each month of the year. Strong growth in airfreight revenues, which is a big boost to freight forwarding companies like Expeditors, is another positive for the freight scenario. The increased usage of charters to meet customer needs following the cancellation of passenger flights (that usually carry freight as well as passenger luggage) is driving air freight revenues. Such revenues are likely to shoot up at least in the near term as air-charter business is likely to maintain its uptrend.

Low Operating Expenses Support the Bottom Line: Despite the recent uptick, the top line continues to be suppressed from the year-ago levels. To combat this depressing top-line scenario, many companies are looking at various ways and means to reduce costs and improve efficiencies. Evidently, freight broker C.H. Robinson generated approximately two-thirds of $100 million per year of long-term or permanent cost savings. It expects to achieve the remainder of the amount in long-term savings by mid-2021. In 2021 and beyond, the company hopes to continue delivering long-term cost savings through process redesign and automation across the enterprise. Moreover, moderate fuel costs are aiding bottom-line growth. Notably, operating costs at Schneider National (SNDR - Free Report) declined 10.1% in 2020 owing to lower expenses on items like fuel, salaries, wages and benefits.

Air-Freight Volumes Likely to Remain Weak: Sadly, coronavirus cases are still rampant, resulting in localized lockdowns and social-distancing measures. The scenario implies that supply-chain disruptions are likely to persist at least in the near term due to manufacturing slowdowns, thereby hurting operations of transport service providers. For example, global air freight volumes are still far below the 2019 levels as the pandemic continues to limit movement and aircraft availability. Per the International Air Transport Association data, demand for air cargo decreased 10.6% year over year in 2020. This has been the largest drop in year-over-year demand since IATA started monitoring cargo performances back in 1990. With air-travel demand likely to remain depressed going forward, aircraft utilization is unlikely to improve dramatically at least in the short run. This, in turn, signals softness in air-freight volumes.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Transportation-Services industry is a 29-stock group within the broader Zacks Transportation sector. The industry currently carries a Zacks Industry Rank #100, which places it in the top 40% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all member stocks, suggests 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 an optimistic earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence from this group’s earnings growth potential. Since November 2020 end, the industry’s earnings estimate for 2021 has been revised 10.8% 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 S&P 500 and Sector

The Zacks Transportation-Services industry has outperformed the Zacks S&P 500 composite as well as the broader Transportation sector over the past year.

The industry has rallied 26.2% over this period compared with the S&P 500’s appreciation of 18.1%. Meanwhile, the broader sector has gained 13.8%.

One-Year Price Performance

 

Industry’s Current Valuation

On the basis of its 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 17.92X compared with the S&P 500’s 16.64X. The value is also higher than the sector’s trailing 12-month EV/EBITDA of 14.09X.

Over the past five years, the industry has traded as high as 18.1X, as low as 8.67X and at the median of 13.65X.

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 stock has seen the Zacks Consensus Estimate for 2021 move 21.4% north. The stock has gained 8.8% over the past six months on the back of 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

 

C.H. Robinson: This Minnesota-based company, which specializes in solving logistics-related issues of companies across the globe, currently carries a Zacks Rank #3 (Hold). Over the past 60 days, the company has seen the Zacks Consensus Estimate for 2021 move 3.8% north. The stock has gained 23.4% over the past year.

Better freight market conditions are aiding C.H. Robinson. The company’s efforts to reward its shareholders are also impressive. During 2020, the company returned $209.9 million to shareholders in the form of dividends. We are impressed by the company's growth-by-acquisition policy.

Price and Consensus: CHRW

Expeditors International of Washington: This Seattle, WA-based company is engaged in the business of global logistics management including international freight forwarding. Over the past 60 days, this presently #3 Ranked company has seen the Zacks Consensus Estimate for 2021 move 3.1% north. The stock has appreciated 11.1% over the past six months.

Expeditors is being bolstered by the recovery in airfreight revenues. Its sound balance sheet is also encouraging. As of Sep 30, 2020, the company had no long-term debt obligations.

 

Price and Consensus: EXPD
 

 

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