Transportation - Equipment and Leasing industry is suffering from headwinds like raging inflation, higher interest rates, supply-chain disruptions and high operating costs. The headwinds are likely to hurt the demand for containers.
Nonetheless, we believe that betting on two industry players, namely
TGH Quick Quote TGH - Free Report
) is a prudent move as they are better positioned to brave multiple industry challenges.
The Zacks Transportation - Equipment and Leasing industry includes 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.
3 Key Trends Influencing the Transportation - Equipment and Leasing Industry
Most companies in the industry have been experiencing rising costs in the form of elevated operating expenses. The inflationary environment, together with supply-chain tightness, is not only pushing up costs but also affecting their capital programs. We believe that inflation-related headwinds will continue to challenge growth and margin numbers with little chance of a quick resolution or respite. Inflationary Pressure: : With economic activities gaining pace from the pandemic lows, more and more companies are allocating their increasing cash pile by way of dividends and buybacks to pacify long-suffering shareholders, thereby underlining their financial strength and confidence in business. Strong Financial Returns for Shareholders
Softness in Leasing Revenues: The headwinds related to high interest rates, supply-chain woes and other geo-political tensions are hurting demand for containers. These headwinds are likely to persist at least in the near term, thereby hurting the revenues of the industry participants. For example, revenues from operating leases at TRTN fell 5% year over year in first-quarter 2023. Zacks Industry Rank Indicates Dull Prospects
The Zacks Transportation - Equipment and Leasing industry, housed within the broader
Transportation sector, currently carries a Zacks Industry Rank #166. This rank places it in the bottom 34% of more than 250 Zacks industries.
Zacks Industry Rank, basically the average of the Zacks Rank of all the member stocks, indicates bleak 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 bottom 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 pessimistic about this group’s earnings growth potential. The industry’s earnings estimates for 2023 have moved down 5% since December 2022.
Despite the gloomy outlook, there are a couple of stocks worth investing in from the industry. But before we present them, it is worth looking at the industry’s shareholder returns and current valuation first.
Industry Outperforms S&P 500 As Well As the Sector
The Zacks Transportation - Equipment and Leasing industry has outperformed the Zacks S&P 500 composite index and the broader sector over the past year.
Over this period, the industry has gained 19% compared with the S&P 500 Index’s northward movement of 14.8%. The broader sector has gained 5.9% in the same timeframe.
One-Year Price Performance
Industry's Current Valuation
On the basis of the forward 12-month price-to-earnings (P/E- F12M), a commonly used multiple for valuing equipment and leasing stocks, the industry is currently trading at 11.56X, compared with the S&P 500’s 19.04X. It is also below the sector’s P/E (F12) ratio of 13.01X.
Over the past five years, the industry has traded as high as 15.07X, as low as 8.29X and at the median of 11.56X as the chart below shows.
P/E Ratio (Forward 12-Month)
2 Transport Equipment Leasing Stocks to Buy Now
Triton and Textainer Group currently carry a Zacks Rank #2 (Buy).
Triton: Headquartered in Hamilton, Bermuda, Triton engages in the acquisition, leasing, re-leasing, and sale of various types of intermodal containers and chassis to shipping lines and freight forwarding companies.
We are impressed by Triton International’s impressive liquidity position and efforts to reward shareholders. TRTN has outpaced the Zacks Consensus Estimate for earnings in each of the last four quarters. The average beat is 6.29%.
Price and Consensus: TRTN Textainer Group: Headquartered in Hamilton, Bermuda, TGH is the world's largest lessor of intermodal containers. We are impressed by the company’s efforts to grow its fleet.
The Zacks Consensus Estimate for TGH’s 2024 earnings has been revised 1.63% upward over the past 60 days. TGH outpaced the Zacks Consensus Estimate for earnings in each of the last four quarters, the average beat being 6.2%.
Price and Consensus: TGH