Transportation Sector Top Stock Picks from John L. Barnes III, Managing Director, RBC Capital Markets

Wall Street Transcript

67 WALL STREET, New York - October 5, 2012 - The Wall Street Transcript has just published its Transportation and Logistics Report offering a timely review of the sector to serious investors and industry executives. This special feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: FMCSA CSA Regulations - Regulatory Issues in the Trucking Industry - Trucking Pricing & Capacity Dynamics - Retail and Industrial Transportation Demand - Truckload, LTL, Parcel, Rail and Intermodal - Capacity Constraints Result in Pricing Power

Companies include: United Parcel Service, Inc. (UPS), Ryder System, Inc. (R), Con-Way, Inc. (CNW), Atlas Air Worldwide Holdings I (AAWW), Kirby Corporation (KEX), YRC Worldwide Inc. (YRCW), Werner Enterprises Inc. (WERN)

In the following excerpt from the Transportation and Logistics Report, an expert analyst discusses the outlook for the sector for investors:

TWST: Please start with a snapshot of your coverage universe.

Mr. Barnes: I'm responsible for airfreight and surface transportation at RBC Capital Markets. My universe includes the parcel companies, the railroads, truckload and less-than-truckload, and other freight transportation companies.

TWST: How would you describe your overall sentiment on the space right now and why? And does it differ between the airfreight and surface subsectors?

Mr. Barnes: I think this is the first time in a while that the macro very much matters. As we've seen a deceleration in some of the macro data points and some of the freight-related data points, this space as a whole is obviously under pressure in that regard. If I went back six months ago, I think you could parse it out a little bit more and say it was more in favor of this versus that sector or specific company, whereas now I believe that the group as a whole is being more influenced by the macro trends, and I think you have to look at transportation almost as a whole now. You can't really parse out the various segments.

Our belief is that it's as bad as it's going to get. I don't think it's going to get materially worse than what we're experiencing right now. I don't think the U.S. economy is in for a double dip. I don't think volumes - either rail, airfreight or truck volumes - are going to crater. And so we have been pretty vocal about putting the risk-on trade in our space over the last several weeks. We believe that the best time to buy transports is when it's the darkest before the dawn, and I think that's about where we are today. And if that is actually the case, then I think now is an appropriate time to be thinking about putting risk on the portfolio.

TWST: Are you seeing signs of increased investor interest as a result?

Mr. Barnes: I think it depends on specific names. If there's one sector that I think continues to hold up better than others, it's the railroads. Big, liquid names, weekly carload data, so you're always getting constant data flow. I think investors are pretty comfortable owning the rails, especially since you get a little dividend yield, and it's someplace safe to hang out for now.

I think UPS (UPS) has been remarkably resilient, even as pessimistic as they've been about their second-half growth prospects. From an economic standpoint, they've been pretty bullish about their own internal initiatives, but highlighting a 1%, 1.5% GDP environment in the back half in the U.S. - that's not going to win you a lot of friends when you're being that bearish. But I think the stock is holding up remarkably well, and again, you've got a company that's a big, liquid name. It's not going to blow up on you. It's kind of a safe place to hang out.

TWST: What are some of your other top picks in your universe right now?

Mr. Barnes: Given that we like the risk-on trade, we basically like anything that's got a little hair on it. The dirtier the story, the better, the more operating leverage to a rebound in the economy, the better. I want that sharp explosive earnings growth when the volumes begin to turn.

Our favorite names in the space right now? We like Ryder (R) on the equipment leasing and logistics side; Swift Transportation (SWFT) on the truckload side; Con-way (CNW) in LTL; Atlas Air (AAWW) in airfreight; and Kirby Corporation (KEX) on the barging side. I think those are the names where you're going to get that explosive growth as the economy begins to recover and as volumes begin to move to the upside.

TWST: How are conditions trending right now in terms of supply/demand and pricing?

For more of this interview and many others visit the Wall Street Transcript - a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs, portfolio managers and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

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