The companies housed in Zacks Transportation-Services industry offer logistics, leasing and maintenance services to transporters.
Some of the industry participants focus on 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 are engaged in the sale of value-added products and services. Some of these companies also offer domestic and international express delivery services.
Let’s take a look at the industry’s three major themes:
- Sluggish freight shipments are unwelcome transport service providers. In fact, according to the latest Cass Freight Shipments Index report, North American freight shipments declined for 13 consecutive months starting from December 2018. Weak pricing and soft freight volumes have been denting the top lines of industry participants. Even though the situation might improve in 2020, particularly due to tariff relief following the signing of the U.S.-China Phase 1 trade deal, significant growth in terms of freight volumes is not expected at least in the near term.
- Increased costs and escalated debts are impeding growth prospects of most of these transport service providers. As evidence, operating expenses increased 4.2% in the first nine months of 2019 at Expeditors International of Washington (EXPD - Free Report) . Operating expenses are likely to have been high in the December quarter as well mainly due to higher labor costs. Moreover, 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 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, in December 2019, the Minnesota-based freight broker C.H. Robinson Worldwide (CHRW - Free Report) announced an increase in its quarterly dividend by 2% to 51 cents a share ($2.04 annually) from 50 cents ($2 annually). Some transport service providers are also active on the buyback front. Moreover, low tax rates are supporting bottom-line growth at most of these companies.
Zacks Industry Rank Indicates Gloomy Prospects
The Zacks Transportation-Services industry is a 24-stock group within the broader Zacks Transportation sector. The industry currently carries a Zacks Industry Rank #188, which places it at the bottom 26% 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 January 2019, the industry’s earnings estimate for the current year has gone down 45%.
Despite the lackluster near-term prospects of the industry, we will present a few stocks that one can buy 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 gained 11.6% in a year’s time compared with the S&P 500’s appreciation of 23.9%. Meanwhile, the broader sector has appreciated 11.8%.
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 13.06X compared with the S&P 500’s 12.12X. It is also higher than the sector’s trailing 12-month EV/EBITDA of 7.90X.
Over the past five years, the industry has traded as high as 21.45X, as low as 9.69X and at the median of 12.78X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
Even though the recently signed Phase 1 trade deal between the world’s two largest economic superpowers bodes well, significant growth in terms of freight volumes is not expected in the near term. Also, headwinds like increased costs and high debt levels are likely to impede growth for participants in the Zacks Transportation Services industry.
However, shareholder-friendly activities of most industry participants should add to their financial strength. In fact, we have zeroed in on three stocks, carrying either a Zacks Rank #1 (Strong Buy) or 2 (Buy), which are well positioned to grow despite challenges. You can see the complete list of today’s Zacks #1 Rank stocks here.
Grupo Aeroportuario del Centro Norte, S. A. B. de C. V. (OMAB - Free Report) is based in Mexico. The company operates and manages multiple international airports in the north and central regions of Mexico. The Zacks Consensus Estimate for 2020 EPS has been revised 4.5% upward over the past 60 days. The stock sports a Zacks Rank #1.
Price and Consensus: OMAB
Grupo Aeroportuario del Pacifico, S.A.B. de C.V. (PAC - Free Report) is headquartered in Guadalajara, Mexico. The company is currently responsible for operating 12 airports throughout Mexico’s Pacific region. The Zacks Consensus Estimate for 2020 EPS has been revised 9.4% upward over the past 60 days. The stock sports a Zacks Rank #1.
Price and Consensus: PAC
Grupo Aeroportuario del Sureste, S. A. B. de C. V. (ASR - Free Report) is based in Mexico City, Mexico. The company is a leading international airport operator. It operates in Mexico, the United States and Colombia. The Zacks Consensus Estimate for 2020 EPS has been revised 2.8% upward over the past 60 days. The stock carries a Zacks Rank #2.
Price and Consensus: ASR