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The supply chain issue that we have been talking about for months continues to date. And the companies in the middle of it all are the ones engaged in transporting goods. While for most companies the glitch is negative as it raises the cost of production, transportation companies are net beneficiaries because the constraints increase demand for transportation services, which in the face of limited capacity enables them to continue raising prices.
There are primarily two situations that are leading up to the constraints. The first is port congestion, which is making it difficult to manage container supply. So containers that aren’t getting unloaded, cant get shipped back to say, China, so they cant bring more goods.
Additionally, inability to move the containers, even when emptied, increases congestion. And the second situation is related to the first, i.e. limited availability of truck drivers means containers cant be unloaded as needed, which again increases congestion.
When demand is very high as it is now because of continued strength in manufacturing, the rebound in tourism and hospitality (in some regions), as well as continued momentum in consumer goods and garments, the orders keep piling up but can’t be fulfilled because of slow supply, thus steadily increasing prices.
Rising oil prices should have been negative for the sector, but many of the players, certainly all of the ones discussed below seem unaffected because of rising freight rates.
And best of all, despite the strength they are seeing, market uncertainties have driven down prices. All of the stocks mentioned below are significantly undervalued (based on P/E) with respect to both the transportation sector and the S&P 500.
Honolulu, Hawaii based Matson is as an ocean transportation and logistics company. It offers shipping services in Hawaii, Guam and Micronesia islands and expedited service from China to southern California. The company's logistics services include rail intermodal service, long haul and regional highway truckload services, less-than-truckload transportation, specialized hauling, flatbed, and project works, warehousing and distribution services, transloading, cross-dock services, and packaging services, and network analysis and freight management services.
Matson is seeing strength in both the ocean transport and logistics business lines. Ocean transport is benefiting from both the China line and the Hawaii business, mainly on account of the economy opening up. The strength in the China line is attributable to stronger demand for ecommerce, garments and other goods, supply chain constraints and inventory restocking.
The Hawaii business is benefiting from higher retail and hospitality-related demand due to the return of tourism and an improved economy. The logistics business gained for much the same reasons.
Freight rates remain elevated, helping to generate higher profits.
The Zacks Rank #1 (Strong Buy) stock has value, growth and momentum scores of A, A and B, respectively. This is an indication that most investors, including those that are risk averse would benefit from buying them.
Analysts have been raising their estimates on Matson. In the last 60 days, its 2022 earnings estimate went from $14.46 to $26.11, an increase of over 80%. The 2023 estimate have also approximately doubled. Both revenue and earnings are expected to grow double digits this year.
Nippon Yussen Kabushiki Kaisha provides ocean, land and air transportation services.
The port congestion and driver shortage particularly in North America is leading to fewer trips in the ocean liner business despite increased utilization, resulting in fewer loadings. At the same time, the high level of demand and lack of containers is pushing some of these goods into air cargo. Volumes in the air cargo business, mainly auto components and semiconductors remain strong.
Logistics revenue is also encouraging, driven by higher volumes. Additionally, freight rates are considerably notably higher, leading to stronger profitability.
The Zacks Rank #1 stock has scored A for value, growth and momentum. So this stock too is suitable for every kind of investor.
The lone analyst providing estimates has significantly increased them. So expected earnings for 2022 have gone from $7.90 to $10.22 in the last 7 days. The 2023 estimate has jumped even higher. Earnings are expected to triple in 2022 before falling off on a much lower line item
The logistics company is mainly operational in the dry bulk segment. It caters to industrial customers that require the movement of a wide variety of dry bulk cargoes, including grains, pig iron, hot briquetted iron, bauxite, alumina, cement clinker, dolomite and limestone.
Given its operations in the dry bulk segment, Pangea is affected by the Russia-Ukraine war. But it has realigned its cargo to the changed environment and with a new and revamped fleet and continued strength in the Time Charter Equivalent rate (TCE) is set to sail higher.
The Zacks Rank #1 stock has value, growth and momentum scores of A, D and D, respectively, indicating that while it is undervalued and therefore a relatively safe investment, there could be some near-term constraints on its growth.
Analysts have raised their 2022 estimates on Pangea by 43% in the last 60 days.
Florida-based Ryder System is one of the world's largest providers of integrated logistics and transportation solutions, mainly fleet management solutions, supply chain solutions and dedicated transportation solutions. Ryder’s customers range from small businesses to large international enterprises. They are drawn from a wide variety of industries, the most significant of which include automotive, electronics, transportation, grocery, lumber and wood products, food service and home furnishing.
Management has said that in the last completed quarter, tight truck capacity led to an exceptionally strong rental and used vehicle sales market. As of now, Ryder has successfully transferred “40% of the lease fleet at higher return spreads and lower residual value assumptions, raising and de-risking portfolio returns.” There were also record new contract wins on supply chain and dedicate.
The Zacks Rank #1 stock has value, growth and momentum scores of A, B and A, respectively.
Analysts have raised their 2022 estimates on Ryder by almost 30% in the last 60 days.
USA Truck, Inc.
USA Truck operates as a truckload carrier in the United States, Mexico and Canada. Its Trucking segment offers motor carrier services as a medium-haul common and contract carrier, as well as freight services. Its USAT Logistics segment provides freight brokerage, logistics and intermodal rail services.
Execution on its strategic initiatives, operational strategy and a strong freight and pricing market facilitated strong results in the last quarter.
The Zacks Rank #1 stock has value, growth and momentum scores of A, C and B, respectively.
Analysts have raised their 2022 earnings estimate by 63 cents (21%) in the last 60 days.
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Why Transportation Stocks Are Still Attractive
The supply chain issue that we have been talking about for months continues to date. And the companies in the middle of it all are the ones engaged in transporting goods. While for most companies the glitch is negative as it raises the cost of production, transportation companies are net beneficiaries because the constraints increase demand for transportation services, which in the face of limited capacity enables them to continue raising prices.
There are primarily two situations that are leading up to the constraints. The first is port congestion, which is making it difficult to manage container supply. So containers that aren’t getting unloaded, cant get shipped back to say, China, so they cant bring more goods.
Additionally, inability to move the containers, even when emptied, increases congestion. And the second situation is related to the first, i.e. limited availability of truck drivers means containers cant be unloaded as needed, which again increases congestion.
When demand is very high as it is now because of continued strength in manufacturing, the rebound in tourism and hospitality (in some regions), as well as continued momentum in consumer goods and garments, the orders keep piling up but can’t be fulfilled because of slow supply, thus steadily increasing prices.
Rising oil prices should have been negative for the sector, but many of the players, certainly all of the ones discussed below seem unaffected because of rising freight rates.
And best of all, despite the strength they are seeing, market uncertainties have driven down prices. All of the stocks mentioned below are significantly undervalued (based on P/E) with respect to both the transportation sector and the S&P 500.
Matson, Inc. (MATX - Free Report)
Honolulu, Hawaii based Matson is as an ocean transportation and logistics company. It offers shipping services in Hawaii, Guam and Micronesia islands and expedited service from China to southern California. The company's logistics services include rail intermodal service, long haul and regional highway truckload services, less-than-truckload transportation, specialized hauling, flatbed, and project works, warehousing and distribution services, transloading, cross-dock services, and packaging services, and network analysis and freight management services.
Matson is seeing strength in both the ocean transport and logistics business lines. Ocean transport is benefiting from both the China line and the Hawaii business, mainly on account of the economy opening up. The strength in the China line is attributable to stronger demand for ecommerce, garments and other goods, supply chain constraints and inventory restocking.
The Hawaii business is benefiting from higher retail and hospitality-related demand due to the return of tourism and an improved economy. The logistics business gained for much the same reasons.
Freight rates remain elevated, helping to generate higher profits.
The Zacks Rank #1 (Strong Buy) stock has value, growth and momentum scores of A, A and B, respectively. This is an indication that most investors, including those that are risk averse would benefit from buying them.
Analysts have been raising their estimates on Matson. In the last 60 days, its 2022 earnings estimate went from $14.46 to $26.11, an increase of over 80%. The 2023 estimate have also approximately doubled. Both revenue and earnings are expected to grow double digits this year.
Nippon Yusen Kabushiki Kaisha (NPNYY - Free Report)
Nippon Yussen Kabushiki Kaisha provides ocean, land and air transportation services.
The port congestion and driver shortage particularly in North America is leading to fewer trips in the ocean liner business despite increased utilization, resulting in fewer loadings. At the same time, the high level of demand and lack of containers is pushing some of these goods into air cargo. Volumes in the air cargo business, mainly auto components and semiconductors remain strong.
Logistics revenue is also encouraging, driven by higher volumes. Additionally, freight rates are considerably notably higher, leading to stronger profitability.
The Zacks Rank #1 stock has scored A for value, growth and momentum. So this stock too is suitable for every kind of investor.
The lone analyst providing estimates has significantly increased them. So expected earnings for 2022 have gone from $7.90 to $10.22 in the last 7 days. The 2023 estimate has jumped even higher. Earnings are expected to triple in 2022 before falling off on a much lower line item
Pangaea Logistics Solutions (PANL - Free Report)
The logistics company is mainly operational in the dry bulk segment. It caters to industrial customers that require the movement of a wide variety of dry bulk cargoes, including grains, pig iron, hot briquetted iron, bauxite, alumina, cement clinker, dolomite and limestone.
Given its operations in the dry bulk segment, Pangea is affected by the Russia-Ukraine war. But it has realigned its cargo to the changed environment and with a new and revamped fleet and continued strength in the Time Charter Equivalent rate (TCE) is set to sail higher.
The Zacks Rank #1 stock has value, growth and momentum scores of A, D and D, respectively, indicating that while it is undervalued and therefore a relatively safe investment, there could be some near-term constraints on its growth.
Analysts have raised their 2022 estimates on Pangea by 43% in the last 60 days.
Ryder System, Inc. (R - Free Report)
Florida-based Ryder System is one of the world's largest providers of integrated logistics and transportation solutions, mainly fleet management solutions, supply chain solutions and dedicated transportation solutions. Ryder’s customers range from small businesses to large international enterprises. They are drawn from a wide variety of industries, the most significant of which include automotive, electronics, transportation, grocery, lumber and wood products, food service and home furnishing.
Management has said that in the last completed quarter, tight truck capacity led to an exceptionally strong rental and used vehicle sales market. As of now, Ryder has successfully transferred “40% of the lease fleet at higher return spreads and lower residual value assumptions, raising and de-risking portfolio returns.” There were also record new contract wins on supply chain and dedicate.
The Zacks Rank #1 stock has value, growth and momentum scores of A, B and A, respectively.
Analysts have raised their 2022 estimates on Ryder by almost 30% in the last 60 days.
USA Truck, Inc.
USA Truck operates as a truckload carrier in the United States, Mexico and Canada. Its Trucking segment offers motor carrier services as a medium-haul common and contract carrier, as well as freight services. Its USAT Logistics segment provides freight brokerage, logistics and intermodal rail services.
Execution on its strategic initiatives, operational strategy and a strong freight and pricing market facilitated strong results in the last quarter.
The Zacks Rank #1 stock has value, growth and momentum scores of A, C and B, respectively.
Analysts have raised their 2022 earnings estimate by 63 cents (21%) in the last 60 days.