The Zacks Transportation - Equipment and Leasing industry offers equipment financing, leasing and supply chain management services and includes aircraft and railcar lessors among others.
The industry is currently in good shape thanks to a buoyant U.S. economy. Consumer confidence is critical to the growth of this industry. This is because an upbeat economy increases consumer confidence leading to increased propensity to spend. A firming labor market is anticipated to further boost consumer spending. Healthy credit conditions also add to the positive scenario.
Last month’s Monthly Confidence Index for the Equipment Finance Industry (MCI-EFI) released by the Equipment Leasing & Finance Foundation showed that the confidence in the industry was 66.2, up from 64.6 in May. The figure also compares favorably with the year-ago index of 63.5. Moreover, the confidence index has been high overall since the beginning of the year and is above the levels attained in 2017.
Demand in the industry has been strong especially on speculation of future interest rate hikes. Consumers and businesses are keen on making the most of the present situation until finance costs rise even further. Apart from the recent interest rate hike, two more hikes are expected in the year.
In fact, this rise in interest rate is a major headwind for stocks in the industry, as it has the potential to weaken lending activity and affect customer base.
The Zacks Transportation - Equipment and Leasing industry which is a 16-stock group within the broader Zacks Transportation Sector has outperformed its own sector in a year’s time. However, the industry has underperformed the broader market over the same time frame.
Stocks in the industry have collectively gained 7.4%, while the Zacks Transportation Sector has declined 3.6%. On the other hand, the S&P 500 appreciated 12.1%.
One-Year Price Performance
The industry’s outperformance with regard to the broader transportation sector can be attributed to a strengthening U.S. economy. With growing demand for air travel, it is of little wonder that aircraft lessors are seeing bright days.
Railcar lessors aren’t far behind, with the key driver in the market being a spike in demand for tank cars. With growing crude oil production, an increasing number of shippers are using tank cars to transport flammable liquids and gases.
Equipment & Leasing Stocks Slightly Expensive
One might get a good handle on the industry’s relative valuation by looking at its price-to-earnings ratio (P/E), which essentially shows how much an investor is willing to pay for each unit of earnings.
Owing to the outperformance with respect to the transportation sector over the past year, stocks in the industry when compared to the broader sector look slightly expensive.
The industry currently has a trailing 12-month P/E (ttm) ratio of 17.57, above the lowest level of 16.38 in a year. However, the figure lies below its median level of 17.84 and its highest level of 19.32. Moreover, the figure is slightly higher than the Zacks Transportation Sector’s trailing 12-month P/E (ttm) ratio of 17.38. The corresponding median level for the sector is 17.95.
However, a comparison with the broader market ensures that the group is trading at a decent discount. This is because the P/E (ttm) ratio for the S&P 500 is 19.99 and the median level is 20.18. Both measures are higher than the equipment and leasing industry’s respective figures.
Outperformance May Continue on Solid Earnings Outlook
The financial prosperity and sound balance sheets have enabled companies in the industry to engage in shareholder-friendly activities especially in the wake of the new tax law. For instance, this February, Ryder System, Inc. (R - Free Report) announced a 13% dividend hike. Earlier in the year, GATX Corp. (GATX - Free Report) also raised its dividend.
But what really matters to investors is whether this group has the potential to perform better than the broader market in the quarters ahead. The earlier valuation discussion shows that market participants have been willing to pay up for these stocks already, potentially limiting further upside from the current levels.
One reliable measure that can help investors understand the industry’s price performance prospects is its earnings outlook. Empirical research shows that earnings outlook for the industry, a reflection of the earnings revisions trend for the constituent companies, has a direct bearing on its stock market performance.
The Price & Consensus chart for the industry shows the market's evolving bottom-up earnings expectations for it and the industry's aggregate stock market performance. The red line in the chart represents the Zacks measure of consensus earnings expectations for 2019, while the light blue line represents the same for 2018.
Price and Consensus: Zacks Transportation - Equipment and Leasing
This becomes even clearer by focusing on the aggregate EPS revisions trend. The chart below shows the evolution of aggregate consensus expectations for 2018.
Please note that the $3.39 EPS estimate for the industry for 2018 is not the actual bottom-up EPS estimate for every company in the Zacks Transport Equipment and Leasing Industry, but rather an illustrative aggregate number created by our proprietary analytics model. The key factor to keep in mind is not the earnings per share of the industry for 2018, but how this estimate has evolved recently.
Current Fiscal Year EPS Estimate Revisions
As you can see here, the EPS estimate for 2018 is down from $3.54 at the end of May. This sharp drop could possibly be due to the interest rate hike announced mid last month. However, the same has risen 1.8% since last December.
Zacks Industry Rank Indicates Bright Prospects
The group’s Zacks Industry Rank is basically the average of the Zacks Rank of all the member stocks.
The Zacks Transportation - Equipment and Leasing industry currently carries a Zacks Industry Rank #17, which places it at the top 7% of more than 250 Zacks industries. 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.
Moreover, our proprietary Heat Map shows that the industry’s rank was consistently in the top 50% for the past eight weeks.
Equipment & Leasing Stocks Promise Long-Term Growth
The long-term prospects for the industry indicate steady growth. When compared with the broader Zacks S&P 500 composite, the long-term (3-5 years) EPS growth estimate for the Zacks Transport Equipment and Leasing industry of 10.1% appears promising. The corresponding figure for the Zacks S&P 500 composite is 9.8%.
Though the group’s mean estimate of long-term EPS growth rate has declined sharply from the high of 11.49 achieved in January and February 2018, it has been steady ever since and is above the low of 9.9% in a year’s time frame.
Mean Estimate of Long-Term EPS Growth Rate
In fact, the basis of this long-term EPS growth could be a steady increase in top line that the Zacks Transport Equipment and Leasing industry has shown since the end of 2016.
Even though tight labor market conditions and rising disposable income of consumers are anticipated to put these companies on a solid growth path for the long term, over the near term, frequent interest rate hikes could be a dampener.
Nonetheless, we have a few stocks carrying a Zacks Rank #1 (Strong Buy) or 2 (Buy) and undergoing positive estimate revisions, that investors may consider keeping the long-term expectations in mind.
(You can see the complete list of today’s Zacks #1 Rank stocks here.)
Herc Holdings Inc. (HRI - Free Report) provides equipment rental suppliers primarily in North America through its subsidiary Herc Rentals Inc.. The company sports a Zacks Rank #1 and the Zacks Consensus Estimate for the current year has been revised 43.5% upward in the last 60 days.
Price and Consensus: HRI
GATX Corp., carrying a Zacks Rank of 2 is a leading global railcar lessor, based in Chicago, IL. The Zacks Consensus Estimate for the current year has been revised 2.2% north over the last 60 days.
Price and Consensus: GATX
Trinity Industries, Inc. (TRN - Free Report) is a diversified industrial company based in Dallas, TX. The company holds a Zacks Rank of 2 and has seen the current-year Zacks Consensus Estimate being revised 1.5% upward in the last 60 days.
Price and Consensus: TRN
Triton International Limited (TRTN - Free Report) is a Zacks Rank #2 company offering acquisition, leasing, re-leasing and sale of intermodal containers. The Zacks Consensus estimate for the current-year moved 3.3% northward in 60 days.
Price and Consensus: TRTN
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