3 Transport-Service Stocks to Watch Despite Industry Concerns
The Zacks Transportation-Services industry faces challenges, ranging from high inflation-induced elevated interest rates, weak freight rates, high costs and supply-chain disruptions.
Despite the challenges, we believe that stocks like Expeditors International of Washington EXPD, C.H. Robinson Worldwide CHRW and Matson MATX should be on an investor’s watchlist despite the improvement in the demand scenario from the pandemic lows.
About the Industry
The companies belonging to the Zacks Transportation-Services industry offer transporters logistics, leasing and maintenance services. Some industry players focus on the business of global logistics management, including international freight forwarding. Third-party logistics entities provide innovative supply-chain solutions. They also focus on services like product sourcing, warehousing and freight shipping. The companies have expertise in trucking, air and ocean transportation. Additionally, some players in this industry deliver domestic and international express delivery services. The well-being of the companies in this industrial cohort is directly proportional to the economy's health. An uptick in manufactured and retail goods, favorable pricing and improvement in global economic conditions bode well for the industry participants.
4 Trends Shaping the Future of the Transportation-Services Industry
Supply-Chain Disruptions & Weak Freight Rates: Although economic activities picked up from the pandemic gloom, supply-chain disruptions continue to dent stocks in the industry. Below-par freight rates are also hurting the industry’s prospects. Highlighting the weak freight demand, the Cass Freight shipments Index declined 2.2% month on month in July. This measure has deteriorated month on month in five of the seven months reported this year, confirming the overall declining trend.
Strong Financial Returns for Shareholders: With economic activities gaining pace from the pandemic lows, more and more companies are allocating their increasing cash pile through dividends and buybacks to pacify long-suffering shareholders. This underlines their financial strength and business confidence. Among the Transportation - Services industry players, Matson announced a 3.2% increase in the quarterly dividend in June.
Economic Uncertainty: Most companies in the industry are experiencing rising costs in the form of increased expenses. The inflationary environment, together with supply-chain tightness, is not only pushing costs higher but also affecting capital programs. The sharp rise in oil prices after Saudi Arabia and Russia extended voluntary supply cuts has also contributed to the recent downtrend in U.S. equity markets. This may lead to a rough road for the Transport- Service providers.
Focus on Cost-Cuts to Drive Bottom Line: Despite signs of cooling inflation, we are not out of the woods. In fact, with inflation still well above the Fed’s 2% target, more interest rate hikes in the near term cannot be ruled out. We note that the industry has been experiencing significant levels of inflation, including higher prices for labor, freight and fuel. The industry players are focusing on cost-cutting measures and improving productivity and efficiency to mitigate high expenses and weaker-than-expected demand scenarios.
Zacks Industry Rank Indicates Dull Prospects
The Zacks Transportation - Services industry is a 26-stock group within the broader Zacks Transportation sector. The industry currently carries a Zacks Industry Rank #183, which places it in the bottom 27% of 250 plus Zacks industries.
The group’s Zacks Industry Rank, the average of the Zacks Rank of all member stocks, indicates dismal near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. The industry’s earnings estimate for 2023 has decreased 2.7% since February-end.
Before we present a few stocks that you may want to add to your portfolio, let’s look at the industry’s recent stock-market performance and its valuation picture.
Industry Lags Sector and S&P 500
The Zacks Transportation-Services industry has underperformed the Zacks S&P 500 composite and the broader Transportation sector over the past year.
The industry has inched up 0.4% over this period compared with the S&P 500's appreciation of 14.8% and the broader sector’s uptick of 1.6%.
One-Year Price Performance
Industry's Current Valuation
Based on the forward 12-month price-to-sales, a commonly used multiple for valuing Transportation-services stocks, the industry is currently trading at 2.1X compared with the S&P 500's 3.71X. The value is, however, higher than the sector's trailing 12-month P/S of 1.58X.
Over the past five years, the industry has traded as high as 2.43X, as low as 1.55X and at the median of 1.97X.
Price-to-Sales Ratio (F12M)
3 Transport Services Stocks to Watch
Matson: This Honolulu, Hawaii- based provider of ocean transportation and logistics services currently sports a Zacks Rank #1 (Strong Buy). We are impressed by the cost-management actions taken by the company to drive its bottom line. Efforts to reward its shareholders are commendable as well.
Over the past 60 days, the stock has seen the Zacks Consensus Estimate for 2023 earnings move 26% north. The stock has gained 43.1% over the past six months.
You can see the complete list of today's Zacks #1 Rank stocks here
Price and Consensus: MATX
Expeditors currently carries a Zacks Rank #3 (Hold). This Seattle, WA-based freight forwarder’s efforts to reward its shareholders are commendable. EXPD’s liquidity position is encouraging too.
EXPD has outshined the Zacks Consensus Estimate in two of the past four quarters (missing the mark in the other two). The stock has gained 11.2% over the past six months.
Price and Consensus: EXPD
C.H. Robinson Worldwide, currently carrying a Zacks Rank #3, operates as an asset-light logistics player. Efforts to control costs bode well for this freight broker. Measures to reward CHRW's shareholders instill further confidence in the stock. CHRW’s liquidity position is encouraging too.
In September, C.H. Robinson opened a new facility to speed up trade across the Mexico border to meet buoyant demand for border logistics facilities owing to nearshoring expansion. This has soared since 2020, boosted by declining U.S.-China trade relations and shifting global supply chains caused by the pandemic.
Price and Consensus: CHRW
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Expeditors International of Washington, Inc. (EXPD) : Free Stock Analysis Report
C.H. Robinson Worldwide, Inc. (CHRW) : Free Stock Analysis Report
Matson, Inc. (MATX) : Free Stock Analysis Report
