Prospects of the Zacks
Transportation - Equipment and Leasing industry are bolstered by strong trade volumes and upbeat container demand. The improvement in the demand scenario with respect to railcars is also a positive for the industry. Stocks like Ryder System ( R Quick Quote R - Free Report) , GATX Corporation ( GATX Quick Quote GATX - Free Report) and Trinity Industries ( TRN Quick Quote TRN - Free Report) are well-poised to gain from the buoyant demand scenario. However, high operating costs and the increasing interest rate scenario act as deterrents. About the Industry
The Zacks Transportation - Equipment and Leasing industry consists of companies offering equipment financing as well as leasing and supply-chain management services. The industry includes aircraft, railcar and intermodal container lessors. Some of these companies even provide logistics and transportation solutions, such as vehicles, drivers, management and administrative services. Most industry participants offer fleet management solutions and serve customers varying from small businesses to large international enterprises. Customers range from a wide variety of industries, the most significant being automotive, electronics, transportation, grocery, lumber and wood products, food service and home furnishing. A few of these companies provide locomotives, plus value-added and technology-based equipment, systems and services to freight rail and passenger transit industries.
Factors Shaping the Future of the Transport Equipment & Leasing Industry
: With economic activities picking up, trading volumes are increasing. This led to an uptick in consumer demand, further resulting in a favorable scenario in relation to equipment and lease demand. An increase in demand for railcars is driving growth of railcar lessors, while intermodal container lessors are benefiting from an improvement in trade volumes and container demand. The healthy demand scenario should continue serving the industry participants well. Healthy Equipment and Lease Demand 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 business. Among the Transportation - Equipment and Leasing industry players, Ryder announced a 7% hike in its quarterly dividend in July 2022, taking the total of its quarterly dividend payout to 62 cents per share (annualized $2.48). In January 2022, GATX raised its quarterly dividend 4% to 52 cents per share, marking its 104th consecutive year of dividend payment. Increased Shareholder Returns: High Costs Hurting the Bottom line: Operating expenses are on the way up, mainly due to the uptick in fuel costs. Fuel expenses represent a key input cost for any transportation player. High oil price (up 48% in first-half 2022) is augmenting fuel costs. Even though oil price declined from their multi-year highs due to recession fears, they remain high. The Fed’s latest move to raise its core interest rate by another 0.75% means that the central bank has hiked interest rates 300 basis points so far this year. Interest rate hikes do not bode well for the industry as these flare up finance costs and potentially weaken borrowing and lending activities. Risks associated with an economic slowdown, geopolitical tensions, supply-chain woes and dwindling liquidity may dampen the prospects of stocks belonging to this industrial cohort. Economic Uncertainties a Woe:
Zacks Industry Rank Indicates Bright Prospects
The Zacks Transportation - Equipment and Leasing industry, housed within the broader
Transportation sector, currently carries a Zacks Industry Rank #21. This rank places it in the top 8% of more than 250 Zacks industries.
Zacks Industry Rank, 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 position in the top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are highly optimistic about this group’s earnings growth potential. While the industry’s earnings estimate for 2022 increased 28.6% year over year, the same for 2023 rose 18.1%.
Considering the encouraging near-term prospects of the industry, we present a few stocks worth considering for your portfolio. But it’s worth looking at the industry’s shareholder returns and its current valuation first.
Industry Outperforms Sector & S&P 500
The Zacks Transportation - Equipment and Leasing industry has outperformed both the broader Transportation sector and the Zacks S&P 500 composite index over the past year.
Over this period, the industry has declined 16.2% compared with the broader sector’s reduction of 21% and the S&P 500 Index’s southward movement of 17.2%.
One-Year Price Performance
Industry's Current Valuation
On the basis of the forward 12-month price-to-earnings (P/E), a commonly used multiple for valuing equipment and leasing stocks, the industry is currently trading at 10.27X, compared with the S&P 500’s 15.74X. It is also below the sector’s P/E (F12) ratio of 11.92X.
Over the past five years, the industry has traded as high as 17.13X, as low as 8.92X and at the median of 13.96X as the chart below shows.
P/E Ratio (Forward 12-Month)
3 Transport Equipment & Leasing Stocks to Buy Now
Ryder: Miami, FL-based Ryder provides integrated logistics and transportation solutions. With improved economic and freight market conditions, R is benefiting from higher rental revenues owing to strong demand and favorable pricing. Ryder’s acquisitions of Whiplash and Midwest Warehouse & Distribution System expand its e-commerce fulfillment network and boost multi-client warehousing capabilities. The transactions are expected to drive growth in the supply-chain solutions segment.
Ryder currently carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for R’s 2022 earnings has been revised 1% upward in the past 60 days.
Price and Consensus: R GATX: Based in Chicago, IL, GATX is a global railcar lessor with owned fleets in North America, Europe and Asia. Continued recovery in the North American railcar leasing market is expected to support GATX’s growth. Efforts to reward its shareholders also bode well.
Shares of GATX, presently carrying a Zacks Rank of 2, have inched up 1% in a year. The Zacks Consensus Estimate for 2022 earnings has been revised 2.1% upward over the past 60 days.
Price and Consensus: GATX
Trinity: Based in Dallas, TX, Trinity owns market-leading businesses offering rail transportation products and services in North America. Improved railcar demand should boost TRN’s prospects. Cost-control measures are expected to continue boosting TRN’s bottom line.
Trinity’s commitment to rewarding its shareholders indicates its financial prosperity. TRN currently carries a Zacks Rank #2. The Zacks Consensus Estimate for current-year earnings has been revised 2.88% upward over the past 60 days.
Price and Consensus: TRN