The Zacks Transportation-Services industry includes companies offering logistics, leasing and maintenance services to transporters.
Some of the constituents are engaged in the business of global logistics management, including international freight forwarding and consolidation, for both air and ocean freight. The third-party logistics (3PL) companies offer innovative supply chain solutions. They also focus on services like product sourcing, warehousing and freight shipping.
Apart from renting out vehicles, car rental companies in the space focus on sales of value-added products and services. Some of these companies offer domestic and international express delivery services.
Let’s take a look at the industry’s three major themes:
- With the U.S. economy in good shape, companies offering services to transporters have performed impressively in 2018. This bullish trend should continue in 2019, with 3PL providers in the United States expected to generate gross revenues worth $195 billion, reflecting an increase of 11.4% over 2017 levels. Moreover, robust freight demand, supported by the fact that the Cass Freight Shipments Index has expanded on a year-over-year basis in each of the 11 months of 2018, is also a tailwind for 3PL companies like C.H. Robinson Worldwide (CHRW - Free Report) .
- The current tax law, which came into effect late last year, is a huge positive for the transport service providers. A considerably lower corporate tax rate is boosting cash flow and improving the bottom line of the companies. Huge savings owing to the reduction in corporate tax rate implies that more cash will be available to fund their capital expenditures, acquisitions and share repurchases, among others. Lower tax related outflow of most of these service providers has enabled them to undertake shareholder-friendly activities. For instance, Expeditors International of Washington (EXPD - Free Report) and C.H. Robinson have hiked their respective dividend payouts this year.
- Car rental companies like Hertz Global Holdings (HTZ - Free Report) , which forms part of the transportation services industry, are suffering from headwinds like pricing pressure due to low used-car prices. Moreover, the presence of private players like Uber and Lyft is a major threat as far as the need for car rental is concerned. In fact, user-friendly mobile applications enable consumers to book rides using their smartphones. Increased costs (both labor and fuel) and high debt levels are the other headwinds to service providers. Even though oil prices are currently on a downward trend, they still are well above the $30 a barrel mark touched in February 2016.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Transportation-Services industry is a 26-stock group within the broader Zacks Transportation sector. The industry currently carries a Zacks Industry Rank #92, which places it at the top 36% 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 solid 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 positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts have gained confidence in this group’s earnings growth potential. The industry’s earnings estimate for the current year has increased by 23.2%.
Before we present a few Transportation Services stocks that are well positioned to outperform the market based on a strong earnings outlook, let’s take a look at the industry’s shareholder returns and current valuation.
Industry Lags Sector & S&P 500
The Zacks Transportation-Services industry has outperformed both the broader Transportation Sector and the Zacks S&P 500 composite over the past year.
The industry has declined 14.5% over this period compared with the S&P 500’s fall of 0.9%. Meanwhile, the broader sector has lost 10.7%.
One-Year Price Performance
Industry’s Current Valuation
On the basis of 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 13.24X compared with the S&P 500’s 10.21X. It is also above the sector’s trailing-12-month EV/EBITDA of 10X.
Over the past five years, the industry has traded as high as 21.59X, as low as 9.76X and at the median of 12.48X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
Despite concerns related to increased costs, high debt levels and other headwinds, there are ample positives for the sector like lower tax rates, a flourishing economy leading to a surge in freight demand and favorable freight rates.
Below we present three stocks with a favorable Zacks Rank that are well positioned to grow amid challenges.
One of them carries a Zacks #1 (Strong Buy) while the other two are Zacks Rank #2 (Buy) stocks.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Hub Group (HUBG - Free Report) : This Oak Brook, IL-based company provides multi-modal solutions throughout North America, including intermodal, truck brokerage, dedicated and logistics services. Hub Group carries a Zacks Rank #1. The stock has seen the Zacks Consensus Estimate for current-year earnings being revised 7.2% upward over the last 60 days.
Price and Consensus: HUBG
Echo Global Logistics (ECHO - Free Report) : This Chicago-based company offers technology-enabled transportation and supply chain management services. The company currently has a Zacks Rank #2. The stock has seen the Zacks Consensus Estimate for current-year earnings being revised 6.5% upward over the last 60 days.
Price and Consensus: ECHO
C.H. Robinson Worldwide: This Eden Prairie, MN -based company offers a wide range of logistics services, fresh produce sourcing and managed services. The company currently has a Zacks Rank #2. It has an impressive track record with respect to earnings surprises. It has outshined the Zacks Consensus Estimate in each of the trailing four quarters. The average beat is approximately 8%.
Price and Consensus: CHRW
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