Supply chains will get ‘a little better in December’ and then ‘tight again in January’: Analyst

Jason Seidl, Cowen managing director of industrials - airfreight and surface transportation, breaks down the outlook for supply chain logistics this winter season, where to expect the most disruptions in shipping, and conflicts that may arise from infrastructure investments.

Video Transcript

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JULIE HYMAN: Well, we've been hearing from the major retailers over the past couple of days, Walmart and Target, saying their inventory seems to be just fine going into the holiday season. But many other companies are not saying that. They're having trouble getting stuff.

So let's talk about that whole process that we've been watching so closely. Jason Seidl is Cowen Managing Director of Industrials Airfreight and Surface Transportation. So he watches this very closely, as well. Jason, thanks for being here. Your latest note was really interesting as it dug into all of this. And you had a panel of different experts that you spoke to.

There's one point that really stood out to me that I thought was interesting. A lot of these big retail companies have chartered their own smaller container ships to try to get around this somehow. And as you say in your note, that doesn't help, it actually might be making things worse. Can you explain that to us a little bit?

JASON SEIDL: Sure. So if you look at sort of the Port of LA, typically, the average TEU size, that's the ship size, is about 11,700. The average size of the ships coming in the port now is about 1,700 on the smaller ship side. So you're creating a lot of ships that are sitting out there on the water. And it's kind of clogging up because you still have to get the ship into port and then you still have to unload it, regardless of the size.

Clearly, a smaller ship is going to be quicker to unload, but you still have to get it in the berth. So right now, we're looking at over a month time between anchor and berth time for a ship, which if you go back earlier in the year, that was in the single digits.

BRIAN SOZZI: Jason, earlier in the week we had on Transportation Secretary, Pete Buttigieg. We asked him about the supply chain issues. Take a listen to what he said.

PETE BUTTIGIEG: We've seen private sector operators of these supply chains stepping up in remarkable ways to get goods to the shelves, to make sure that they're being creative using our existing resources 24/7. It's making an impact and we're going to continue driving that short and medium term change, while for the long term, we make sure we have better ports, better rails, better roads so that our core infrastructure that all of those private sector processes play out on is more resilient for whatever challenge of the future could come.

BRIAN SOZZI: Jason, what should the private sector be doing here to help alleviate this problem?

JASON SEIDL: I think people are doing what they can right now. So, clearly, some of the larger retailers that have in-house logistics operations, and very experienced ones, are doing their part. But it goes beyond just a handful of large retailers, right? So it goes to the port truckers, it goes to the warehousing operations, it goes to the railroads. This is an entire supply chain. And so, these are all links of the chain.

If you look at right now, yeah, things are bad now, but the calendar is going to be our friend with seasonality. Typically, post Thanksgivings the ports gets a lot slower. I think we're going to get about a month to clean up. Normally in a normal year, we probably get a little bit of January to clean up too, but this year is a little different because Lunar New year is coming early. So I think January is going to be slogging back with more ships again.

JULIE HYMAN: So when do you think things will get back to, quote, unquote, "normal," whatever normal is.

JASON SEIDL: Sure. So sort of our baseline view right now is things get a little bit better in December, then we get tight again in January. We start probably clearing up around 2Q and into the back half of the year. Look, we have an infrastructure bill that is signed into law. That's fantastic. We needed one for over a decade. It appropriates about $17 billion to the ports, to all different projects. That's going to help. But that's not going to really get us any near term. That's more of a long term help that Secretary Buttigieg was talking about in your clip.

BRIAN SOZZI: Jason, what stocks do you like off of this?

JASON SEIDL: Sure. So I think we're going to concentrate on three stocks. So let's talk about Hub Group first, that's ticker symbol HUBG. It is an intermodal marketing company, so kind of like a middle man. They have a lot of their rail pricing already locked in from the major rail carriers, and they're pretty confident they're going to be pricing well above their rail cost inflation right now. So that's going to really help in the beginning of the year as we're still sort of tied up.

And then the back half of the year as we anticipate the fluidity increasing across the rail network, that should help not only with their turn times for their assets, but also it should bring some of their costs down. So we like Hub Group as number one.

Number two, we like Canadian Pacific on the railroad side. CP is in the process of trying to buy Kansas City Southern. And if you look at the three things that have sort of held back Kansas City Southern's top line, it's intermodal, it's automotive, and it's refined products. Now, refined products is a temporary shift to trucking. The laws of economies of scale dictate that that's probably not a long term event. It'll find its way back to the railroads on the automotive side. It's a chip issue, it's the broader supply chain. And our chip analysts are telling us that by '23, we should be OK.

And on the intermodal side, it's a little bit different at KSU. They're a major port in Mexico, they serve Lazaro Cardenas. That's being impacted by a teacher strike. So they're actually sitting on the rail lines into the port. So it's pretty tough to get in and out and you can't run your trains. We think by the time CP takes over, these three things that have been holding back the top line will be alleviated for them.

And the last one I want to highlight is more of a trucking call, and it's a little bit of an infrastructure play as well. So, clearly, we've had some problems hiring truckers lately. I've been around the trucking industry almost 30 years, and I've never quite seen it this bad. However, you have one, DASEKE, DSKE, they are 100% flatbed, the most exposure to the flatbed industry.

Now, the infrastructure bill that I referenced, it's about $1.2 trillion. And all these projects that are going to flow in are going to do two things. Number one, they're going to steal from the truck driving market, right? So we're going to have these guys going to the construction market, swinging a hammer rather than driving a truck and getting home every night. But at the same time, we're going to require more drivers to haul some of this freight that's being used in the construction project. So, we like Daseke for their exposure to that.

JULIE HYMAN: This is really interesting stuff, Jason. And I want to have you back, perhaps, next month as we maybe start to get over that first hump of Thanksgiving that you were talking about. Jason Seidl at Cowen.

JASON SEIDL: Fingers crossed.

JULIE HYMAN: Thanks so much. Yes. Appreciate your time this morning.