The Zacks Transportation-Services industry includes companies offering logistics, leasing and maintenance services to transporters.
Some of the participants 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 players also offer domestic and international express delivery services.
Let’s take a look at the industry’s three major themes:
- Car rental companies like Hertz Global Holdings (HTZ - Free Report) are suffering from pricing pressure due to low used-car prices. Moreover, the presence of private players like Uber and Lyft is a major threat to the need for car rental services. In fact, user-friendly mobile applications enable consumers to book rides using their smartphones. Moreover, high debt levels may impede growth of the sector participants.
- The current tax law, which came into effect in December 2017, is a huge positive for transport service providers. A considerably lower corporate tax rate is boosting cash flow and improving the bottom line of 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. Outflow related to lower tax from 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 (CHRW - Free Report) hiked their respective dividend payouts in 2018.
- Sluggish freight shipments do not bode well for transport service providers. In fact, according to the latest Cass Freight Shipments Index report, North American freight shipments declined for four consecutive months starting from December 2018. Increased costs (both labor and fuel) are also hurting their bottom lines. The uptick in fuel costs can be gauged from the fact that oil prices increased 32.4% in the Q1 or January-March period. The increase was in fact the most for the commodity in a quarter since the second quarter of 2009.
Zacks Industry Rank Indicates Gloomy Prospects
The Zacks Transportation-Services industry is a 29-stock group within the broader Zacks Transportation sector. The industry currently carries a Zacks Industry Rank #213, which places it at the bottom 17% 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 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 positioning in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since April 2018, the industry’s earnings estimate for the current year has gone down by approximately 56.9%.
Despite the bleak near-term prospects of the industry, we will present a few stocks that one can buy or retain given their growth prospects. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.
Industry Lags Sector & S&P 500
The Zacks Transportation-Services industry has underperformed both the broader Transportation Sector and the Zacks S&P 500 composite over the past year.
The industry has gained 0.4% over this period compared with the S&P 500’s appreciation of 11.5%. Meanwhile, the broader sector has gained 0.7%.
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 14.12X compared with the S&P 500’s 11.29X. It is also higher than the sector’s trailing-12-month EV/EBITDA of 7.81X.
Over the past five years, the industry has traded as high as 21.6X, as low as 9.77X and at the median of 12.52X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
Even though strong balance sheets of most big companies in the space have enabled them to engage in shareholder-friendly activities, we believe that the Zacks Transportation Services industry will struggle in the short term due to increased costs, high debt levels and a sluggish freight environment.
The industry’s unwelcoming near-term prospects are further highlighted by the fact that there are only two buy-ranked stocks in the space. We have also mentioned a stock from the industry, which we believe investors should retain in their portfolio, as it carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Hertz Global Holdings, based in Estero, FL, is a key player in the vehicle rental industry. Its subsidiary, The Hertz Corporation, is responsible for the operation of vehicle rental services under the Hertz, Dollar and Thrifty brands. The stock carries a Zacks Rank #1. The Zacks Consensus Estimate for current-year EPS has been revised 12.3% upward over the last 90 days.
Price and Consensus: HTZ
Grupo Aeroportuario del Centro Norte, S. A. B. de C. V. (OMAB - Free Report) is based in San Pedro Garza García, Mexico. The company operates and manages multiple international airports in the north and central regions of Mexico. The stock carries a Zacks Rank #2. The Zacks Consensus Estimate for current-year EPS has been revised 8.9% upward over the last 90 days.
Price and Consensus: OMAB
Expeditors International of Washington, based in Seattle, WA, is a leading third-party logistics provider. The stock carries a Zacks Rank #3. The Zacks Consensus Estimate for current-year EPS has been revised 3.2% upward over the last 90 days.
Price and Consensus: EXPD