The uptick in e-commerce demand amid pandemic-led restrictions has so far boosted the Zacks
Transportation - Air Freight and Cargo industry immensely. Despite economies reopening, the thirst for online shopping is rampant among consumers. Strong demand for midsize freighters is also a boon. We expect companies like United Parcel Service ( UPS Quick Quote UPS - Free Report) , FedEx Corporation ( FDX Quick Quote FDX - Free Report) and Air Transport Services Group ( ATSG Quick Quote ATSG - Free Report) to gain from the favorable trends. However, supply-chain woes continue to hurt the industry. About the Industry
The companies belonging to the Zacks Transportation - Air Freight and Cargo industry provide air-delivery and freight services. Most players in this 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 Key Trends to Watch in the Transportation-Air Freight & Cargo Industry
The northward movement in e-commerce demand during the coronavirus-induced restrictions that confined people to their homes has been a huge support for stocks in the Air Freight & Cargo industry to date. Ushering in further good news for the industry participants, the penchant for online shopping remains strong even with economies reopening and people going out for work. This is driven by the race to digitization and alteration in consumer habits among other things. The global e-commerce market is anticipated to see a E- Commerce Demand Should Remain Strong: CAGR of 14.7% in the 2020-202S7 time frame. This bodes well for the industry participants. Dividend Hikes Signal Financial Strength :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 and FedEx had announced dividend hikes even during the coronavirus-induced uncertainty in 2021, thus highlighting their pro-shareholder stance. UPS paid out dividends worth $3,437 million in 2021, up 1.9% year over year. In 2021, UPS repurchased shares worth $500 million, up 130% year over year. UPS aims to reward its shareholders with $6.2 billion in 2022 through dividends ($5,200 million) and share buybacks ($1,000 million).
Supply-Chain Issues a Major Headwind : The pandemic disrupted operations, compelling most companies to struggle with supply-chain bottlenecks. These supply-chain and capacity challenges flared up transportation and labor costs due to the need to deliver finished goods to customers on time. For example, high transportation and labor costs hurt FedEx's recently released third-quarter fiscal 2022 results. The Ground segment (the second largest segment at FedEx in terms of contribution to revenues) was badly hit by weak segmental operating results due to steep operating expenses because of labor market and wage pressures as well as increased costs related to network expansion. Expenses related to salaries and employee benefits increased 18% in the fiscal third quarter due to escalated labor expenses and network inefficiencies. Purchased transportation expense increased 7% due to the unfavorable labor market conditions. Costs also rose due to supply-chain troubles at the other major industry player UPS. Zacks Industry Rank Indicates Sunny Prospects
The Zacks Air Freight and Cargo industry, housed within the broader Zacks
Transportation sector, currently flaunts a Zacks Industry Rank #87. This rank places it in the top 35% 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. Notably, the industry’s earnings estimate for 2022 has moved 16.1% north year over year.
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 its current valuation at first.
Industry Lags S&P 500 but Outperforms Sector
The Zacks Air Freight and Cargo industry has underperformed the Zacks S&P 500 composite but outpaced the broader Transportation Sector over the past year.
The industry has gained 5.3% over this period compared with the S&P 500’s appreciation of 14.9%. Meanwhile, the broader sector has declined 0.3% in the time frame.
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 11.77X compared with the S&P 500’s 15.02X. It is also lower than the sector’s trailing 12-month EV/EBITDA of 15.58X.
Over the past five years, the industry has traded as high as 13.79X, as low as 6.57X and at the median of 10.36X.
Enterprise Value-to-EBITDA Ratio
3 Transportation - Air Freight and Cargo Stocks to Keep Tabs on
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, Air Transport Services, currently carrying a Zacks Rank #2 (Buy), has seen the Zacks Consensus Estimate for 2022 being raised 5.91%. The stock has rallied 28.8% 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 buoyant demand for midsize freighters, ATSG issued a bullish adjusted EBITDA view for 2022. ATSG expects the metric to be $640 million, nearly $100 million above the 2021 levels. Owing to the strength of its freighter leasing and airline operations, ATSG expects adjusted EPS for 2022 to be $2, indicating growth of 20% from the 2021 actuals.
Price and Consensus: ATSG
UPS: The exponential e-commerce growth rate in the current scenario is a huge plus for Atlanta-based UPS, which currently carries a Zacks Rank #3 (Hold). Robust free cash flow generation by UPS is a major positive, leading to an uptick in its shareholder-friendly activities.
Primarily owing to the e-commerce surge, UPS’ shares have gained 28.1% in a year’s time. Over the past 60 days, the Zacks Consensus Estimate for 2022 earnings has moved 7.47% north.
Price and Consensus: UPS
FedEx: FedEx is gaining from tailwinds like favorable pricing and a strong demand scenario. We are also pleased with FDX’s efforts to reward its shareholders even in these difficult times. The FDX stock currently carries a Zacks Rank of 3.
Robust free cash flow generation by FedEx is a boon and is ramping up its shareholder-friendly activities. FDX’s earnings for the current fiscal year are likely to increase 13.1% from the last fiscal year’s reading.
Price and Consensus: FDX