3 Transport Equipment & Leasing Stocks to Watch Amid Industry Hiccups

·6 min read

Prospects of the Zacks  Transportation - Equipment and Leasing industry appear to have been dented by rising recessionary fears, which may result in demand for containers cooling off. The ongoing banking crisis has added further uncertainty to the already weak economy that is reeling under inflationary woes.  High operating costs and supply-chain woes, too, act as major deterrents.

Nonetheless, we recommend keeping a close eye on three industry players, namely Westinghouse Air Brake Technologies WAB, Ryder System R and GATX Corporation GATX, which are better positioned to brave multiple industry challenges.

Industry Overview

The Zacks Transportation - Equipment and Leasing industry houses companies offering equipment financing as well as leasing and supply-chain management services. The industry includes aircraft, railcar and intermodal container lessors. Some of these companies even provide logistics and transportation solutions, such as vehicles, drivers, management and administrative services. Most industry participants offer fleet management solutions and serve customers, varying from small businesses to large international enterprises. Customers range from a wide variety of industries, the most significant being automotive, electronics, transportation, grocery, lumber and wood products, food service and home furnishing. A few of these companies provide locomotives, plus value-added and technology-based equipment, systems and services to freight rail and passenger transit industries.

What's Shaping the Industry?

Economic Uncertainty: The ongoing turmoil in the banking sector — popularly known as the engine of economic growth — implies that there is no end to uncertainty and volatility that has gripped markets for quite some time due to inflationary woes. The high-interest-rate scenario to tackle the stubborn inflation is a negative for the industry as increasing interest rates push up finance costs and potentially weaken borrowing and lending activities. The economy was already reeling under inflationary disturbances, and the uncertainty has been intensified by the banking scare. Highlighting the fact that the banking sector is indeed undergoing tough times, Moody’s Investors Service downgraded its view on the banking system in the United States to negative from stable. Moody’s attributed the decision to the rapidly deteriorating operating environment. This economic turbulence could soften the currently healthy equipment and lease demand.

Supply-Chain Disruptions & High Costs: Although economic activities picked up from the pandemic gloom, supply-chain disruptions continue to dent stocks in the industry. Increased operating costs are also limiting bottom-line growth. Costs will likely continue to be steep due to supply-chain troubles. The spike in fuel costs (oil price was up 6.7% in the October-December period) is also flaring up the operating expenses of the industry players.

Strong Financial Returns for Shareholders: With economic activities gaining pace from the pandemic lows, more and more companies are allocating their increasing cash pile by way of dividends and buybacks to pacify the long-suffering shareholders, thereby underlining their financial strength and confidence in business. Among the Transportation - Equipment and Leasing industry players, GATX announced a 5.8% increase in the quarterly dividend amounting to 55 cents in January.

Zacks Industry Rank Indicates Dull Prospects

The Zacks Transportation - Equipment and Leasing industry, housed within the broader  Transportation sector, currently carries a Zacks Industry Rank #223. This rank places it in the bottom 11% of more than 250 Zacks industries.

The group’s  Zacks Industry Rank, 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 position in the bottom 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic about this group’s earnings growth potential. The industry’s earnings estimates for 2023 have moved down 8.7% since October 2022.

Despite the gloomy outlook, there are a couple of stocks worth watching in the industry. But before we present them, it is worth looking at the industry’s shareholder returns and current valuation first.

Industry Outperforms S&P 500 as well as the Sector

The Zacks Transportation - Equipment and Leasing industry has outperformed the Zacks S&P 500 composite index and the broader sector over the past year.

Over this period, the industry has declined 10.9% compared with the S&P 500 Index’s southward movement of 13.6%. The broader sector has declined 16.5% in the same timeframe.

One-Year Price Performance

Industry's Current Valuation

On the basis of the forward 12-month price-to-earnings (P/E- F12M), a commonly used multiple for valuing equipment and leasing stocks, the industry is currently trading at 10.5X, compared with the S&P 500’s 17.74X. It is also below the sector’s P/E (F12) ratio of 13.4X.

Over the past five years, the industry has traded as high as 15.07X, as low as 8.29X and at the median of 12. 10X as the chart below shows.

P/E Ratio (Forward 12-Month)

3 Transport Equipment Leasing Stocks to Keep a Tab On

Ryder: Miami, FL-based Ryder provides integrated logistics and transportation solutions. R is benefiting from higher rental revenues owing to strong demand and favorable pricing. Efforts to reward its shareholders through dividends and buybacks also bode well. The transactions are expected to drive growth in the supply-chain solutions segment.

Ryder currently sports a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for R’s 2023 earnings has been revised 7.9% upward in the past 60 days.

You can see  the complete list of today’s Zacks #1 Rank stocks here.  

Price and Consensus: R

GATX: Based in Chicago, IL, GATX is a global railcar lessor with owned fleets in North America, Europe and Asia. Continued recovery in the North American railcar leasing market is expected to support GATX’s growth. Efforts to reward its shareholders also bode well.

Shares of GATX, presently carrying a Zacks Rank of 2, have appreciated 10.6% over the past six months. The Zacks Consensus Estimate for 2023 earnings has been revised 2% upward over the past 60 days.

Price and Consensus: GATX

Westinghouse Air Brake Technologies Corporation, operates under the name of Wabtec Corporation, and is currently based in Wilmerding, PA. WAB is being aided by impressive sales at its Freight segment. Disciplined cost-management is also helping the company’s prospects.

Wabtec has surpassed the Zacks Consensus Estimate for earnings in two of the past four quarters (missing the mark once and reporting in-line earnings in the other quarter). The average beat is 0.4%. The Zacks Consensus Estimate for 2024 earnings has been revised 3.3% upward over the past 60 days.

Price and Consensus: WAB

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