Truckers to Pull Ahead of Other Transport Options in 2018, Analysts Say

Date: Friday, February 23, 2018
Source: Bloomberg

Transport will be a mixed bag for investors in 2018, and you can blame airlines for it. The sector, which has recently begun a recovery from one of its deepest stock price slumps, faces another bumpy ride as fuel costs soar and fares are squeezed amid an industrywide price war. 

For rail, trucking and logistics investors, however, the new year is expected to bring cheer as demand rises. For trucking companies especially, the increase in demand will be coming at a time when capacity is expected to tighten, due to a shortage of drivers and a brand-new regulation that requires truckers to install an electronic device to track driving times. The result, better pricing.


Raymond James, Savanthi Syth

  • Assuming 2.5 percent U.S. GDP growth in 2018, supply appears to be growing toward the higher end of the historical demand-to-GDP growth ratio; specifically, expects domestic supply to grow by about 4.5 percent in 2018, up from about 4 percent in 2017
  • Expects 1 percent to 2 percent unit revenue growth in a balanced supply-demand environment; says there would likely to be an additional 1 percentage point of unit revenue growth if airlines were to back away from "sloppy" pricing
    • Notes that rising fuel prices appear to be reinstating some pricing discipline in the domestic market with close-in fares having recovered from August lows, but still below their pre-July levels
  • With the exception of Frontier, JetBlue and Spirit, most major U.S. airlines have visibility in labor cost trends through most of 2019; pilot retirements at legacy airlines should continue to accelerate through 2022-2023, keeping supply tight, although a shortage is not expected
  • Corporate tax rate reduction should give U.S. airlines a commensurate EPS benefit with potentially some leakage in terms of higher profit sharing with labor
  • Among U.S. airlines, favorite long ideas are Alaska, SkyWest, Spirit and Delta

Cowen, Helane Becker

  • Alaska Air the top pick for 2018; notes Alaska and Virgin America are expected to receive a single operating certificate in the first quarter and migrate to a single passenger service system in the second quarter, enabling it to unlock revenue synergies
    • Another catalyst will be capacity growth easing in the second half of the year after the company launched 44 new markets in 2017

Bloomberg Intelligence, George Ferguson

  • U.S. airlines’ profit to fall in 2018 due to lower fares and higher fuel costs; strong capacity additions, especially by the smaller low-cost and full-service airlines, including Spirit, Frontier, Alaska and JetBlue, will continue to pressure U.S. yields as United seeks more domestic share
  • Long-haul fares are being squeezed as foreign carriers seek share on overseas routes, with many less focused on profit; the U.S. airlines will use seat density and corporate/leisure-fare segmentation to try to offset that

Rails, Truckers & Logistics

Deutsche Bank, Amit Mehrotra

  • Drivers of transportation demand are inflecting higher, pricing is better, incremental margins are generally surprising to the upside, and free cash conversion for select sub-sectors has materially improved: good reasons for structurally higher valuation multiples. However, improving truckload trends -- which form the basis of the demand trends -- are notoriously fickle, due to the truckload industry’s severe fragmentation and lack of supply discipline
  • Corporate tax overhaul set to significantly increase book and cash earnings
  • FedEx, Knight Transportation and XPO Logistics will continue to work given significant runway with respect to both earnings power and multiple expansion
  • Remains cautious around the backdrop for rails given the group’s exposure to U.S. industrial production and energy in particular; says there is an 85 percent correlation with the U.S. rig count and year-over-year change in industrial production, and the dynamic poses a risk to U.S. industrial production and thus rail carloads if oil prices remain relatively stable

KeyBanc, Todd Fowler

  • 2018 contract rate expectations seem to start at mid-single digits, and move higher from there; KeyBanc sees tight capacity and firm spot rates, along with flat contract pricing for the past two years, supports at least mid-single digit contract renewals
  • Estimates electronic logging devices (ELDs) will remove about 3 percent to 5 percent of effective capacity in 2018, before a portion is returned through productivity gains; tighter capacity from ELDs could lead to more supply entering the market in 2019, assuming drivers are available
  • Key ideas for 2018 are C.H. Robinson and Ryder System

BMO, Fadi Chamoun

  • BMO’s rail demand index continued to trend higher the past few months, with consumer and industrial indicators suggesting healthy demand levels in future; says it is consistent with bottom-up analysis across various commodity segments; also continues to see positive readings for air freight and parcels
  • Capacity utilization continues to trend higher across all transportation modes with shortages in the trucking market in particular; excluding coal, rail carloads are tracking at the second-highest level since the financial crisis with various pockets of capacity shortages emerging, such as at CN Rail where revenue ton-miles are tracking at record levels
  • Pricing growth has accelerated in recent months and further tightening in transportation capacity is likely to support further gains in coming quarters
  • Cost inflation for railroads expected to be modest, at around 2 percent, which should be more than offset by pricing growth; for trucking and parcel carriers, tight capacity should produce sufficient pricing power to offset inflationary pressures, particularly in labor
  • Says valuation levels justified, given positive backdrop; advocates selective exposure to reasonably priced EPS growth at FedEx, CP Rail and CSX; also sees opportunities at CN Rail and Union Pacific, and is "keeping a close watch" on UPS to take a more constructive view on pullback

Stephens, Brad Delco

  • While fundamentals in the transportation sector have inflected positively in the second half of 2017, the outlook for next year has gotten incrementally better, driven by a strong peak season, a substantial shortage of truck drivers, the implementation of ELDs and signs of an improving economic backdrop
  • Both transportation providers and shippers are expecting the capacity constraints to produce mid-to-high single digit rate increases in 2018
  • Says an increasing amount of industry participants are expecting this to be an extended, multiyear up-cycle
  • While contractual brokerage businesses could continue to face near-term margin challenges given the increased cost associated with buying capacity, bottom-lines should see a "nice tailwind" after many of these contracts are re-priced during the first half of 2018
  • Spot brokerage businesses remain very favorably positioned and depending on a company’s mix, this tailwind could offset all or most of the cost pressure on the contractual side of the business

Bloomberg Intelligence, Lee Klaskow

  • N.A. trucking companies must navigate tighter capacity and increasing costs associated with recruiting and retaining truck drivers; traditional truckload customers could migrate to less-than-truckload networks if shippers are hard-pressed to find capacity
    • The impact of the ELD mandate will dominate the market in 2018; ELDs are estimated to take out about 5 percent to 10 percent of capacity
  • N.A. railroad traffic is expected to grow 2.7 percent in 2018 and will be driven by intermodal, coal and agricultural carloads; intermodal traffic will benefit from increased economic activity, coupled with a tighter trucking market, while rails will use pricing and productivity to drive operating ratios lower
  • The rapid pace of e-commerce and technology innovations will simultaneously give logistics providers with opportunities for growth and challenges for their networks, which were initially designed for traditional big-box retail chains

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