The Zacks Transportation - Air Freight and Cargo industry includes players that provide air delivery and freight services. Most companies in this space are involved in offering specialized transportation and logistics services.
Apart from operating a ground fleet of multiple vehicles, some of these companies maintain an air fleet. They also offer air transportation services for passengers and cargo while some others deliver services to entities that outsource air-cargo lifting requirements.
Here are the industry’s three major themes:
- The coronavirus pandemic spelt doom for companies in the Air Freight & Cargo industry due to supply-chain disruptions. The resultant slowdown in global trade hurt earnings results of most industry participants. With the health peril showing no signs of subsiding (in fact, fears of a second wave of coronavirus are keeping investors on edge), major industry players like United Parcel Service (UPS - Free Report) and FedEx Corporation (FDX - Free Report) withdrew their current-year outlook.
- In this coronavirus-ravaged world, e-commerce — the method of buying and selling goods and services via a software platform — is gaining further momentum. This is because the need for door-to-door delivery of essentials during this unprecedented crisis is rising. E-commerce, which already became part and parcel of daily lives in today’s fast-paced world, is witnessing higher demand now amid the pandemic-induced social-distancing protocols, quarantine and lockdowns. Per ACI Worldwide’s data, e-commerce sales soared 81% year over year in May 2020. This exponential growth is a huge positive for the industry entities in these otherwise gloomy times.
- The rise in e-commerce sales in the current scenario proved to be a boon for cargo carriers. Moreover, with many passenger airlines (that usually carry freight as well as passenger luggage) currently shrinking their fleets due to lackluster air-travel demand, cargo carriers are making hay and flying a lot of packages. To meet the swell in e-commerce demand and also to cater to the solid requirement for flying cargos, such carriers are expanding their fleet. Evidently, UPS Airlines, UPS’ air freight division, is adding MD-11 and Boeing 747-8 freighter jets to its fleet.
Zacks Industry Rank Indicates Sunny Prospects
The Zacks Air Freight and Cargo industry, housed within the broader Zacks Transportation sector, currently carries a Zacks Industry Rank #51. This rank places it in the top 20% 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 upbeat 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 the positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gaining confidence from this group’s earnings growth potential. Notably, the industry’s earnings estimate for 2020 has moved 4.2% north since April-end.
Given the bright near-term prospects of the industry, we will present a few stocks that investors can buy or retain in their portfolios. But it’s worth taking a look at the industry’s shareholder returns and the current valuation at first.
Industry Lags S&P 500 but Outperforms Sector
The Zacks Air Freight & Cargo industry has outperformed the broader Transportation sector while lagging the Zacks S&P 500 composite over the past year.
Over this period, the industry has inched up 2.1% against the broader sector’s depreciation of 8.9%. Meanwhile, the S&P 500 Index has appreciated 5.4%.
One-Year Price Performance
Industry’s Current Valuation
On the basis of the trailing 12-month EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation and amortization), which is a commonly used multiple for valuing transportation stocks, the industry is currently trading at 8.9X compared with the S&P 500’s 11.53X. It is, however, higher than the sector’s EV/EBITDA ratio of 7.35X.
Over the past five years, the industry has traded as high as 12.98X, as low as 6.76X and at the median of 9.45X.
Trailing 12-Month Enterprise Value-to-EBITDA (EV/EBITDA) Ratio
Even though supply-chain disruptions due to the coronavirus pandemic indicate a huge setback, the e-commerce boom is a huge boost to the industry players. Moreover, while many passenger carriers are shrinking their fleet in these coronavirus-riddled times, cargo airlines like UPS Airlines are expanding the same owing to buoyant cargo demand and astonishing growth in e commerce.
With the above-mentioned catalysts are set to provide a near-term upside, we are presenting three stocks from the industry, namely Air Transport Services Group (ATSG - Free Report) , Atlas Air Worldwide Holdings (AAWW - Free Report) and UPS. While Air Transport Services Group sports a Zacks Rank #1 (Strong Buy), Atlas Air Worldwide and UPS carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.