For Immediate Release
Chicago, IL – August 1, 2022 – Today, Zacks Equity Research discusses United Parcel Service UPS, FedEx Corp. FDX and Air Transport Services Group ATSG.
Industry: Transportation - Air Freight & Cargo
Even though economies are reopening, the thirst for online shopping is rampant among consumers. High shipping rates also bode well for players in the Zacks Transportation - Air Freight and Cargo industry. We expect companies like United Parcel Service, FedEx Corp. and Air Transport Services Group to benefit from the favorable trends surrounding the industry.
Despite the robust demand environment, industry players are not spared of challenges. Supply-chain woes are making the companies struggle to meet elevated demand. High fuel costs are hurting their bottom lines.
About the Industry
The companies belonging to the Zacks Transportation - Air Freight and Cargo industry provide air-delivery and freight services. Most players in the space are involved in offering specialized transportation and logistics services. Some participants offer a range of supply-chain solutions, such as freight forwarding, customs brokerage, fulfillment, returns, financial transactions and repairs. The well-being of the companies in this industrial cohort is directly proportional to the health of the economy.
Leading industry players, including UPS, transport millions of packages each day across the globe. Apart from operating a ground fleet of multiple vehicles, some of these companies maintain an air fleet. While some players focus on providing air-transportation services for passengers and cargo, others deliver services to entities that outsource air-cargo lifting requirements.
3 Key Trends to Watch in the Transportation-Air Freight & Cargo Industry
High Shipping Rates Bode Well: Although the shift in the spending pattern of consumers from goods to services, as coronavirus-related restrictions ease, might have hurt shipping volumes, rates are buoyant. The buoyant demand scenario is pushing up the shipping rates. With this scenario likely to continue, at least in the near term, shipping rates should remain elevated. This augurs well for the industry participants.
Shareholder-Friendly Measures Signal Financial Bliss: With the resumption of economic activities, many companies are reactivating their shareholder-friendly measures like dividend payouts and buybacks, underlining their financial strength and confidence in the business. Among the Air Freight and Cargo players, UPS and FedEx had announced dividend hikes even during the coronavirus-induced uncertainty in 2021, thus highlighting their pro-shareholder stance.
Continuing this shareholder-favored attitude, FedEx raised its dividend 53% to $1.15 per share in June 2022. In July, UPS' board of directors decided to increase its current-year share buyback target to $3 billion from $2 billion.
Supply-Chain Disruptions a Major Headwind: Supply-chain disturbances and a tight labor market are ailing the Air Freight and Cargo Industry players. Like the last few quarters, high transportation and labor costs hurt FedEx's fourth-quarter fiscal 2022 results, released in June. The Ground segment (the second largest segment at FedEx in terms of contribution to revenues) was hard hit, with segmental operating results being hurt by higher operating expenses pertaining to labor market woes, wage pressures and increased costs related to network expansion.
Costs will likely continue to be high going forward due to supply-chain troubles. High fuel costs are also flaring up the operating expenses of the industry players.
Zacks Industry Rank Indicates Sunny Prospects
The Zacks Air Freight and Cargo industry, housed within the broader Zacks Transportation sector, currently flaunts a Zacks Industry Rank #40. This rank places it in the top 16% 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 upbeat 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 top 50% of the Zacks-ranked industries is a result of the positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gaining confidence from this group's earnings growth potential. The industry's earnings estimate for 2022 has moved 4.6% north since January-end on a year-over-year basis.
Given the bright near-term prospects of the industry, we present a few stocks that investors can buy to enrich their portfolios. But it's worth looking at the industry's shareholder returns and current valuation first.
Industry Lags S&P 500 and Sector
The Zacks Air Freight and Cargo industry has underperformed the Zacks S&P 500 composite and the broader Transportation sector over the past year.
The industry has declined 14.4% over this period compared with the S&P 500's depreciation of 9.7%. The broader sector has declined 10.3% in the same time frame.
Industry's Current Valuation
On the basis of the trailing 12-month enterprise value-to-EBITDA (EV/EBITDA), a commonly used multiple for valuing Transportation-Air Freight and Cargo stocks, the industry is currently trading at 8.96X compared with the S&P 500's 12.44X. It is also lower than the sector's trailing 12-month EV/EBITDA of 12.49X.
Over the past five years, the industry has traded as high as 13.79X, as low as 6.57X and at the median of 10.34X.
3 Transportation --Air Freight and Cargo Stocks to Watch
Air Transport Services Group: Wilmington, OH-based ATSG is a leading provider of aircraft leasing, and air-cargo transportation and related services, globally. Over the past 60 days, Air Transport Services, currently sporting a Zacks Rank #1 (Strong Buy), has seen the Zacks Consensus Estimate for 2022 being raised 3%.
The boom in e-commerce demand during these coronavirus-ravaged times is a tailwind to Air Transport Services Group. Driven by buoyant demand for midsize freighters, ATSG issued a bullish adjusted EBITDA view for 2022. ATSG expects the metric to be $640 million, nearly $100 million above the 2021 levels. Owing to the strength of its freighter leasing and airline operations, ATSG expects adjusted EPS for 2022 to be $2, indicating growth of 20% from the 2021 actuals.
You can see the complete list of today's Zacks #1 Rank stocks here
UPS: The rapid e-commerce growth rate in the current scenario is a huge plus for Atlanta-based UPS, which currently carries a Zacks Rank #3 (Hold). Robust free cash flow generation by this shipping courier is a major positive, leading to an uptick in its shareholder-friendly activities.
Over the past 30 days, the Zacks Consensus Estimate for 2022 earnings has moved 0.3% north. UPS earnings outshined the Zacks Consensus Estimate in each of the last four quarters, the average being 8.5%.
FedEx: FedEx is gaining from tailwinds like favorable pricing and a strong demand scenario. We are also pleased with FDX's efforts to reward its shareholders. The stock currently carries a Zacks Rank of 3.
FDX's robust free cash flow generation is a boon for its shareholder-friendly activities. Its earnings for the current fiscal year are likely to increase 12.4% from the last fiscal year's reading.
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