That the spurt in e-commerce demand amid pandemic-led restrictions has turned out to be a huge boon for the Zacks
Transportation - Air Freight and Cargo industry so far is no longer news. Despite economies reopening, the penchant for online shopping is very much present among consumers. The upcoming holiday season in the United States should boost stocks in the space further. We expect companies like United Parcel Service ( UPS Quick Quote UPS - Free Report) , Atlas Air Worldwide Holdings ( AAWW Quick Quote AAWW - Free Report) and Air Transport Services Group ( ATSG Quick Quote ATSG - Free Report) to benefit from the favorable trends surrounding the industry. Despite the robust demand environment, supply-chain woes are making the companies struggle to meet elevated demand. Worker shortage is flaring up costs, thereby acting as a major headwind. About the Industry
The companies housed in the Zacks Transportation - Air Freight and Cargo industry provide air-delivery and freight services. Most players in the space are involved in offering specialized transportation and logistics services. Some participants offer a range of supply-chain solutions, such as freight forwarding, customs brokerage, fulfillment, returns, financial transactions and repairs. The well-being of the companies in this industrial cohort is directly proportional to the health of the economy. Leading industry players, including UPS, transport millions of packages each day across the globe. Apart from operating a ground fleet of multiple vehicles, some of these companies maintain an air fleet. While some players focus on providing air-transportation services for passengers and cargo, others deliver services to entities that outsource air-cargo lifting requirements.
3 Transportation --Air Freight and Cargo Industry Trends to Watch out for
Holiday Season Should Drive Growth: The current holiday season is expected to add further luster to the promising industry. Holiday package deliveries should gain additional momentum, thereby boosting the prospects of the likes of UPS. It is no secret that the ongoing pandemic scenario aided the e-commerce industry and helped it broaden its footprint not only in the United States but across the globe as people stayed indoors and favored online shopping. The trend is likely to continue in the upcoming holiday season. Evidently, UPS lifted its 2021 adjusted operating margin target to about 13% from 12.7%, anticipating solid sales in the holiday season. Supply-Chain Disruptions: A Major Woe: Supply-chain disturbances and a tight labor market are ailing the Air Freight and Cargo Industry players. Evidently, management at UPS stated while releasing third-quarter 2021 results in October that the global supply-chain market is challenging. Capacity constraints are shooting up transportation costs within United Parcel Service's supply-chain solutions segment. In fact, within the same segment, logistics-related operating costs increased $442 million in the first nine months of 2021.
Shareholder-Friendly Measures Gather Pace: With the resumption of economic activities, many companies are reactivating their shareholder-friendly measures like dividend payouts and buybacks, underlining their financial strength and confidence in the business. Among the Air Freight and Cargo players, UPS' board approved a 1% increase in its quarterly dividend to increase the total to l$1.02 per share in February. In the first nine months of 2021, UPS paid out dividends worth $2.6 billion. In August, UPS' board cleared a new share repurchase program worth $5 billion, replacing the existing $2.1-billion authorization. Zacks Industry Rank Indicates Positive Outlook
The Zacks Air Freight and Cargo industry, housed within the broader Zacks
Transportation sector, currently flaunts a Zacks Industry Rank #104. This rank places it in the top 41% of more than 250 Zacks industries.
Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates upbeat 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 top 50% of the Zacks-ranked industries is a result of the positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gaining confidence from this group’s earnings growth potential. The industry’s earnings estimate for the current year and next year has moved 21% and17.1% north from the year-ago reported figures, respectively.
Given the bright near-term prospects of the industry, we will present a few stocks that investors can buy to enrich their portfolios. But it’s worth taking a look at the industry’s shareholder returns and the current valuation at first.
Industry Lags the S&P 500 & the Sector
The Zacks Air Freight and Cargo industry has underperformed the Zacks S&P 500 composite and also the broader Transportation Sector over the past year.
The industry has rallied 5.7% over this period compared with the S&P 500’s appreciation of 32.3%. The broader sector has appreciated 9.5%. One-Year Price Performance
Industry's Current Valuation
On the basis of the trailing 12-month enterprise value-to-EBITDA (EV/EBITDA), a commonly used multiple for valuing Transportation-Air Freight and Cargo stocks, the industry is currently trading at 9.38X compared with the S&P 500’s 15.79X. It is also lower than the sector’s trailing 12-month EV/EBITDA of 15.38X.
Over the past five years, the industry has traded as high as 13.78X, as low as 6.56X and at the median of 10.17X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio (Past Five Years)
3 Transportation --Air Freight and Cargo Stocks to Keep Tabs on
Atlas Air Worldwide Holdings: AAWW provides outsourced aircraft and aviation operating services. Atlas Air is supported by strong demand for airfreight in the coronavirus-triggered scenario. The boom in e-commerce trends amid the current scenario is a huge positive. The rise in online sales emerged as a key catalyst for the cargo carriers.
Over the past 60 days, AAWW, currently carrying a Zacks Rank #2 (Buy), has seen the Zacks Consensus Estimate for 2021 earnings being revised 15.5% upward. The Atlas Air stock has appreciated 64.4% so far this year.
Price and Consensus: AAWW
UPS: The exponential e-commerce growth rate in the current scenario is a huge plus for this Atlanta-based UPS, which currently carries a Zacks Rank #3 (Hold). We are also encouraged by UPS' ability to generate solid free cash flow.
Primarily, owing to the e-commerce surge, UPS shares have gained more than 23.8% year to date. Over the past 60 days, the stock has seen the Zacks Consensus Estimate for 2021 earnings move 3.8% north.
Price and Consensus: UPS Air Transport Services Group: Wilmington, OH-based ATSG is a leading provider of aircraft leasing, and air-cargo transportation and related services, globally. Over the past 60 days, this presently #3 Ranked Air Transport Services Group has seen the Zacks Consensus Estimate for 2021 being raised 2.5%. The stock has rallied 13.1% over the past six months.
The boom in e-commerce demand during these coronavirus-ravaged times is a tailwind to Air Transport Services Group. Driven by increased demand for midsize freighters, ATSG raised its adjusted EBITDA view for 2021, expecting the metric to be at least $535 million, indicating a 1.9% increase from the earlier guidance.
Price and Consensus: ATSG