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Near-Term Outlook for Air Freight & Cargo Stocks Looks Grim

Maharathi Basu

The Zacks Transportation - Air Freight and Cargo  industry includes players that provide air delivery and freight services. Most companies in the space are involved in offering specialized transportation and logistics services.

Apart from operating a ground fleet of multiple vehicles, some of these companies maintain an air fleet. They also offer air transportation services for passengers and cargo. Some companies also render their services to entities that outsource air cargo lift requirements.

Let’s take a look at the industry’s three major themes:

  •  Driven by the advancement of relevant technologies, e-commerce — the method of buying and selling goods and services via a software platform — continues to display phenomenal growth. This growth story is a huge positive for the sector participants.  According to United Parcel Service (UPS), one of the dominant players of this industry, cross-border e-commerce volume will grow by 28% in the 2019-2021 period. Moreover, the fact that the U.S. economy is in sound shape is a positive for the entire transportation space, with the players in the air freight and cargo sub-group being no exception. Additionally, a lower tax rate due to the current tax law will aid margin growth.
  • Recommendations from a task force appointed by President Trump suggested that the United States Postal Service (“USPS”) should raise the price for shipping packages. The move, apart from hurting online retailers may also hit the likes of UPS and FedEx (FDX ) as these companies often use USPS for the last mile delivery. Furthermore, competition is likely to intensify in the space with Amazon.com (AMZN) looking to expand its logistics network. Additionally, the fact that Amazon is looking to expand its fleet of aircraft and increase its stake in its air cargo partners highlights intentions to develop its third-party carrier service.
  • The tariff war between the United States and China is not doing any good to the global economy. In fact, sluggish global trade resulted in soft revenues at FedEx’s third-quarter fiscal 2019 earnings report in March. Moreover, with leading industry players investing significantly to upgrade their facilities following a surge in e-commerce demand, their bottom lines are being stressed by escalated capital expenditures. For instance, UPS’ capital expenditures (adjusted) were $6.6 billion in 2018, bulk of which was directed toward new technology, aircraft and automated capacity. This reflects a massive increase from the 2016 levels, when the company’s capital expenditures were nearly $3 billion.

Zacks Industry Rank Indicates Dim Prospects

The six-member Zacks air freight and cargo industry, housed within the broader Zacks Transportation sector, currently carries a Zacks Industry Rank #210. This rank places it at the bottom 18% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is 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 positioning in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential. Over the past six months, the industry’s earnings estimate for 2019 has declined 8.9%.

Despite the bleak near-term prospects of the industry, we will present a few stocks that one can buy or retain given their growth prospects. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.

Industry Lags Sector & S&P 500

The Zacks Airfreight & Cargo industry has lagged both the broader Transportation sector and the Zacks S&P 500 composite over the past year.

Over this period, the industry has declined 25.7% compared with the broader sector’s depreciation of 10.1% and the S&P 500 Index’s gain of 2.1% respectively.

One-Year Price Performance

Industry’s Current Valuation

On the basis of the trailing 12-month EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation and amortization) ratio, which is a commonly used multiple for valuing transportation stocks, the industry is currently trading at 8.39X compared with the S&P 500’s 10.71X. It is higher than the sector’s EV/EBITDA ratio of 7.5X.

Over the past five years, the industry has traded as high as 12.83X, as low as 8.2X and at the median of 9.91X.

Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio

 

Bottom Line

Even though the uptick in online shopping is encouraging for industry players, we believe that players in the Zacks Transportation Air Freight and Cargo industry will struggle in the short term mainly due to increased capital expenses, global trade slowdown and issues related to the U.S.-China trade war. Moreover, technological failures like the TNT Express cyberattack at FedEx in 2017 have the potential to cripple operations.

Overall, the industry might not be able to tide over the challenges in the near term and therefore none of the stocks in it currently holds a Zacks Rank #1 (Strong Buy). However, below is a stock that has been witnessing positive earnings estimate revisions and carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Radiant Logistics (RLGT) operates as a third-party logistics company. It provides multi-modal transportation and logistics services. The Zacks Consensus Estimate for current-year EPS has been revised 4.3% upward over the past 60 days.

Price and Consensus: RLGT

 

Additionally, we discuss two stocks from this space that investors may want to retain for the time being amid challenges. Both stocks carry a Zacks Rank #3 (Hold).

Atlas Air Worldwide Holdings (AAWW) is a provider of outsourced aircraft and aviation operating services across the globe. The Zacks Consensus Estimate for next-quarter earnings has increased almost 11% in the past 60 days.

 

Price and Consensus: AAWW

 

Air Transport Services (ATSG) provides air cargo transportation and related services to domestic and foreign air carriers, and other companies that outsource their air cargo lift requirements. The Zacks Consensus Estimate for current-year earnings has increased 1.6% in the past 60 days.

Price and Consensus: ATSG

 

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United Parcel Service, Inc. (UPS) : Free Stock Analysis Report
 
Radiant Logistics, Inc. (RLGT) : Free Stock Analysis Report
 
FedEx Corporation (FDX) : Free Stock Analysis Report
 
Air Transport Services Group, Inc (ATSG) : Free Stock Analysis Report
 
Amazon.com, Inc. (AMZN) : Free Stock Analysis Report
 
Atlas Air Worldwide Holdings (AAWW) : Free Stock Analysis Report
 
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