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 focus on offering domestic and international express delivery services.
Let’s take a look at the industry’s three major themes:
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 eight consecutive months starting from December 2018. What is more concerning is that the sluggish freight environment is expected to persist through the rest of this year as predicted by C.H. Robinson Worldwide CHRW while releasing its second-quarter 2019 results. Moreover, increased costs and escalated debts are impeding growth prospects of most of these transport service providers. Slowdown in global trade due to Sino-U.S. trade tensions is a major headwind for companies in the space as it is hurting demand. For instance, Expeditors International of Washington EXPD, which has significant exposure to China, witnessed a decline of almost 5% in its revenues from North Asia in the first six months of 2019. In fact, revenues from Expeditors' primary unit, Airfreight Services, declined 5% in the first half of 2019. Volumes with respect to airfreight tonnage also declined in the period. Moreover, car rental companies like Hertz Global Holdings ( HTZ Quick Quote HTZ - Free Report) are suffering from pricing pressure due to low used-car prices. Moreover, the presence of players like Uber and Lyft is a major threat to the need for car rental services. The impressive balance sheets of most major companies in the space have enabled them to engage in shareholder-friendly activities. For instance, Expeditors announced an 11.1% hike in semi-annual cash dividend to 50 cents per share (annualized $1 per share) in May 2010. Low tax rates are also supporting bottom-line growth at most of these companies.
Zacks Industry Rank Indicates Gloomy Prospects
The Zacks Transportation-Services industry is a 27-stock group within the broader Zacks
Transportation sector. The industry currently carries a Zacks Industry Rank #216, which places it at the bottom 16% 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 September 2018, the industry’s earnings estimate for the current year has gone down by approximately 14.4%.
Despite the dull 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 and 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 lost 17.4% of its value over this period compared with the S&P 500’s appreciation of 2.5%. Meanwhile, the broader sector has declined 9.7%.
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 12.43X compared with the S&P 500’s 11.1X. It is also higher than the sector’s trailing 12-month EV/EBITDA of 7.52X.
Over the past five years, the industry has traded as high as 21.6X, as low as 9.76X and at the median of 12.48X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
Even though strong balance sheets of most key players in the space have enabled them to engage in shareholder-friendly activities, we believe that the Zacks Transportation Services industry will struggle in the near term due to headwinds like increased costs, high debt levels, slowdown in global trade due to Sino-U.S. trade tensions and a sluggish freight environment.
The industry’s unwelcoming near-term prospects are further highlighted by the fact that there are only two top-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. HyreCar HYRE, sporting a Zacks Rank #1, is based in Los Angeles, CA. The company offers a car-sharing platform thereby allowing car owners to rent their idle cars to ride-sharing service drivers. The company has expected earnings growth of 46.7% for current quarter, higher than the industry’s 26.9%. Price and Consensus: HYRE XPO Logistics XPO is a third-party logistics provider offering expedient, single-source solutions for time-critical and service-sensitive shipments through its non-asset-based transportation network. The company, carrying a Zacks Rank #2 (Buy), has expected earnings growth of 19.8% for current year. The Zacks Consensus Estimate for the current year has improved by 9.5% over the past 60 days. Price and Consensus: XPO 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 2.3% upward over the past 60 days. Price and Consensus: EXPD