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Transport Equipment & Leasing Stock Outlook: Dull Near Term

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The Zacks Transportation - Equipment and Leasing industry consists of companies offering equipment financing, leasing and supply chain management services. The industry includes aircraft, railcar and intermodal container lessors. Some of these companies even provide transportation solutions such as vehicles, drivers, management and administrative services. Most industry participants offer fleet management solutions.

Prominent industry players include Westinghouse Air Brake Technologies Corporation (WAB - Free Report) , a leading provider of value-added and technology-based equipment and services, integrated logistics and transportation solutions leader Ryder System (R - Free Report) , and intermodal container lessor Triton International Limited (TRTN - Free Report) .

Let’s take a look at the industry’s three major themes:

  • With the transport equipment and leasing industry highly reliant on the domestic economy, the ongoing sluggishness due to escalation of U.S.-China trade tensions is a major setback for the industry. During these times of low demand, lease rates fall and dent profits of companies. As evidence, Triton International suffered from low container pick-up volumes during the second quarter of 2019 on account of the trade tussle.

  • These companies usually carry a lot of debt burden. A heavy debt load especially during an economic slowdown can take a toll on the companies. In this regard, it is worth noting GATX Corporation (GATX - Free Report) and Air Lease’s (AL - Free Report) debt-to-equity (expressed as a percentage) ratio. Both GATX and Air Lease have a debt-to-equity ratio of more than 200 compared with the industry’s average of 99.2. The same for the S&P 500 Index stands at 84.8. A high debt-to-equity ratio implies that the company is funding most of its ventures with debt.

  • Low interest rates are always a boon to the industry as it increases consumer spending in general and results in an uptick in lending and borrowing activities. Hence, the recent interest rate cut bodes well for the industry.

Zacks Industry Rank Indicates Weak Prospects

The Zacks Transportation - Equipment and Leasing industry, which is housed within the broader Transportation sector, currently carries a Zacks Industry Rank #217. This rank places it at the bottom 15% 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 discouraging 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 negative earnings outlook for the constituent companies in aggregate. The group’s current-year EPS estimate has decreased 2.5% since the end of May.

Despite the industry’s bleak near-term view, we will present a few stocks that you may want to consider for your portfolio. But, before that, it’s worth taking a look at the industry’s shareholder returns and current valuation.

Industry Lags Sector & S&P 500

The Zacks Transportation - Equipment and Leasing industry has lagged both the broader Transportation sector and the Zacks S&P 500 composite over the past year.

Over this period, the industry has declined 21.2% versus the broader sector’s decrease of 10.4% and the S&P 500 Index’s increase of 0.1%.

One-Year Price Performance



 

Industry’s Current Valuation

On the basis of a forward P/E (F12) ratio, which is a commonly used multiple for valuing equipment and leasing stocks, the industry is currently trading at 10.56X compared with the S&P 500’s 16.6X. It is also lower than the sector’s P/E (F12) ratio of 12.01X.

Over the past five years, the industry has traded as high as 16.22X, as low as 8.63X and at the median of 12.84X, as the chart below shows.

Forward Price/Earnings (F12) Ratio



 

Forward Price/Earnings (F12) Ratio

 

Bottom Line

The economic slowdown from trade tensions is affecting demand at several industry verticals and the scenario is not likely to change in the near term unless the trade war is resolved. The potential increase in demand from a low interest rate is not likely to be sufficient to counteract this challenge.
 
Below we present two stocks with a Zacks Rank #2 (Buy) that are poised to grow amid challenges. We also present another stock with a Zacks Rank #3 (Hold) that you can hold in your portfolio. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

GATX is a Chicago, IL-based company which leases, operates and manages long-lasting, widely used assets in rail, marine and industrial equipment markets. The company carries a Zacks Rank #2 and the Zacks Consensus Estimate for its current-year earnings has been revised upward by 3 cents in the past 90 days. The company has an impressive earnings history, having outperformed the Zacks Consensus Estimate in each of the preceding four quarters with an average beat of 18.2%.

Price and Consensus: GATX



 

Herc Holdings Inc. (HRI - Free Report) provides equipment rental suppliers primarily in North America through its subsidiary Herc Rentals Inc. The company carries a Zacks Rank of 2 and the Zacks Consensus Estimate for its current-year earnings has been revised upward by 3.3% in the last 90 days. Shares of the company have rallied more than 55% so far this year, against the industry’s 11.8% increase.

Price and Consensus: HRI



 

Fly Leasing Limited (FLY - Free Report) is a global aircraft lessor of modern, high-demand and fuel-efficient commercial jets. The Zacks Consensus Estimate for this Zacks Rank #3 company’s current-year earnings has moved 3.3% upward in the last 90 days. The company has a stellar earnings history, having outperformed the Zacks Consensus Estimate in each of the trailing four quarters with an average beat of 41.3%.

Price and Consensus: FLY



 

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