- Transportation companies handle the logistics of moving goods to customers…and dividends to investors’ doors.
- The e-commerce shopping boom is a growth area for package delivery entities.
- These businesses represent an opportunity for investors wanting to add an “air delivery & freight services/trucking” component to portfolios.
- 5 key challenges face the industry.
It's nice when publicly-traded companies do the bull work, while investors wait for returns. Transportation companies handle the logistics of moving goods to customers…and dividends to investors' doors.
Part of the criteria for choosing these 5 companies was market capitalization of more than $1 billion and a history of dividend payments of approximately 10 years or more. I also chose these companies for the following reasons:
My Canadian selection, TransForce, Inc. is a North American leader in the transportation and logistics industry. Canadian Shipper magazine noted in April 2014 that in a report published by IBISWorld titled, "Tank and Refrigeration Trucking in Canada", IBISWorld said there was a small portion of consolidation in the marketplace over the previous 5 years. The Canadian Shipper article said that as per IBISWorld's figures, "TransForce Inc. has 5.7% of the market share, followed by TransX Group of Companies with an estimated 1.8% and Mullen Group with less than 1% of the market."
Pertaining to J.B. Hunt Transport Services, I chose the company because The Journal of Commerce Magazine (JOC) (joc.com) ranked the company 3rd in its list of "Top 50 Trucking Companies - 2013." I also chose J.B. Hunt because 2013 was the best year in its ﬁnancial history.
Furthermore, I selected Knight Transportation, Inc. because JOC also ranked this company in the aforementioned list, ranking them at number 24. In addition, I chose J.B. Hunt because of its focus on building its non-asset based businesses, and controlling its operating costs to advance profitability.
I chose FedEx Corporation and United Parcel Service, Inc. (NYSE:UPS) because these two companies are premier parcel shippers worldwide. Supply Chain magazine ranks FedEx and UPS in its list of "Top 10 Shipping Companies." Regarding FedEx it said, "Only Delta Air Lines owns a larger civil aircraft fleet in the world, helping make FedEx Corporation a top-three shipping company worldwide." Regarding UPS, Supply Chain said, "UPS reportedly delivers more than 15 million packages a day to 6.1 million customers in more than 220 countries and territories worldwide."
Here are the 5 companies to consider:
TransForce, Inc. (TSX:TFI) (OTC Markets: OTCQX:TFIFF), in Canada, has its courier brands: Canpar, Loomis, ICS. TransForce operates package delivery, trucking, logistics, and waste management services. The company has been active on the acquisition front.
In February 2013, TransForce completed the acquisition of Velocity Express. Velocity provides customized, same-day regional delivery solutions. It provides an extended range of services in delivering any size packages. This acquisition augments TransForce's capabilities in the same-day North American package and courier market.
The company also acquired E. L. Farmer last year. E. L. Farmer provides pipe storage and hauling services for Texas' oilfield industry. The expectation is that this acquisition will generate yearly revenues of approximately $70 million.
On January 1, 2014, TransForce completed the acquisition of Clarke Transport, Inc. and Clarke Road Transport, Inc. These are highly-recognized brand names in the Canadian transportation industry. Clarke Transport operates in the LTL (Less-Than-Truckload) segment. Clarke Road Transport operates in the TL (Truck Load -Full) segment. In March, TransForce completed its acquisition of Vitran Corp. Vitran is a top Canadian LTL transportation company.
In 2013, 70% of TransForce's revenue came from Canada and 30% from the U.S. TransForce produced $225 million of free cash flow in 2013. For Q1 2014, TransForce's total revenue increased to $770.5 million (up 2.8%). The company generated free cash flow of $35.1 million in Q1 2014. This represents an increase from $20.5 million the year prior.
TransForce is working to be more of an asset-light operation. In 2013, it closed a number of terminals. In addition, it disposed of excess equipment. The increase in its Q1 2014 free cash flow was in part because of proceeds from the sale of assets (totaling $32.8 million).
TransForce's current quarterly dividend is $0.145 per share.
2. J.B. Hunt Transport Services
J.B. Hunt Transport Services, Inc. (NASDAQ: JBHT) is one of the largest transportation logistics companies in North America. The company generated more than $830 million in EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) in 2013. Its 2013 total consolidated operating revenues were $5.6 billion. This represented a 10.5% increase over 2012, and was mainly because of increased load volume.
For Q1 2014, its total operating revenue was $1.41 billion, versus $1.29 billion for the Q1 2013 (up 9%). Its operating income for Q1 totaled $117 million in comparison to $125 million for Q1 2013. The company indicated that the operating income decrease was chiefly because of increased costs experienced to recover from rail service disruptions and weather effects.
J.B. Hunt's segments are Truck (JBT), Intermodal (JBI), Dedicated Contract Services (DCS), and Integrated Capacity Solutions (ICS). For 2014 and beyond, the company is looking to reduce the overall age of its fleet. Therefore, its plan is to invest nearly 75% of its projected cash ﬂow to aid growth and escalate replacement activity. As of December 31, 2013, the average age of its combined tractor ﬂeet was 2.7 years. Its containers averaged 4.7 years. Its trailers averaged 10.3 years.
J.B. Hunt's company-owned tractor and truck ﬂeet consisted of 10,453 units as of December 31, 2013. The company had approximately 1,313 independent contractors who operate their own tractors but transport freight in its trailing equipment.
In April, J.B. Hunt's Board declared the regular quarterly dividend on its common stock of $0.20 per common share.
3. Knight Transportation
Knight Transportation, Inc. (NYSE:KNX) (TSX:KNV) provides multiple truckload transportation services. It uses a nationwide network of service centers in the United States. This network serves customers across North America.
Part of the company's growth strategy involves improving asset productivity. Knight is concentrating on improving revenue generation from its tractors and trailers. It believes it can accomplish this goal, without compromising safety, through increased miles driven and increased rate per mile.
In Q1 2014, net income increased 25.6% year-over-year to $19.1 million. Its operating income increased 22.3% year-over-year to $31.3 million. In Q1, the company earned $0.23 per diluted share in comparison to $0.19 from the prior year. For Q1 2014, Knight's operating income in its trucking businesses grew 25.3%. Its revenue, excluding trucking fuel surcharge, increased 2.6%.
In an April 2014 earnings call, Kevin Knight, Chairman/CEO said, "Our internal initiatives centered around increasing our revenue per tractor, growing our brokerage non-asset based business profitably and optimizing our network for efficiency has resulted in a 100 basis point improvement in our trailing-12-months return on invested capital since the third quarter of 2013."
In 2013, Knight Transportation operated an average of 3,537 company-owned tractors. These had an average age of 1.9 years. In addition, as of December 31, 2013, it had under contract 452 tractors owned and operated by independent contractors. Knight operated an average of 9,406 trailers in 2013. In 2013, its net income per diluted share rose 7.6%, to $0.86 from $0.80.
The company works to maintain a diversified customer base. In 2013, no single customer represented more than 4% of revenue. Therefore, it's not beholden to one or a few customers for its revenue.
In May, Knight Transportation's Board declared a quarterly cash dividend of $0.06 per share of common stock.
FedEx Corporation (NYSE:FDX) is advancing growth via online shopping. In 2007, the company first offered FedEx SameDay® City. It was recently enhanced in 15 United States metropolitan areas. FedEx SameDay® City's commitment is to local delivery within hours. The projection is that the increase in U.S. online spending by 2017 will be 42%, to $371 billion.
FedEx is working to make staff functions and processes more efficient. It is also working to modernize its air fleet, expand service offerings, transform its U.S. domestic network and improve international profits. In the U.S., the company is closing and calibrating regional and district facilities. It is also streamlining pickup and delivery operations.
The company has annual revenues of approximately $45 billion. Approximately 80% of its FedEx Freight customers use both its Priority and Economy services via a single distinctive pickup-and-delivery network.
For 3Q 2014 (ended February 28, 2014) FedEx had revenue of $11.3 billion. This was up 3% from $11.0 billion in 2013. Its operating income was $641 million, an increase of 9% from $589 million the year prior. Its net income was $378 million. This represented an increase of 5% from the prior year's $361 million.
FedEx is working to develop and grow its African network and service offerings. In May 2014, it announced that its subsidiary, FedEx Express, completed the acquisition of Supaswift businesses in South Africa and Botswana, Malawi, Mozambique, Namibia, Swaziland and Zambia. Supaswift launched South Africa operations in 1990. Supaswift merged in 2005 with MyExpress (PTY) Ltd., which had been offering FedEx Express international services in Southern Africa since 1991.
Frederick W. Smith, Chairman, President and CEO of FedEx, said recently, "Southern Africa is a key region for us. The region offers tremendous opportunities for both local and international customers to access new markets and increase market share."
In February 2014, FedEx's Board of Directors declared a quarterly cash dividend of $0.15 per share on its common stock.
5. United Parcel Service
United Parcel Service, Inc. had operating profit for Q1 2014 of $1.5 billion. This represented a decrease of $106 million from the 2013 adjusted results. The company noted that "unusually harsh weather weighed on operating profit by approximately $200 million, due to increased expenses and slower revenue growth."
Significant for United Parcel Service is that average daily shipments in the United States increased 4.2%. The chief reason was large e-commerce shippers using lightweight deferred shipping solutions. The e-commerce shopping boom is a growth area for package delivery entities. The company's balanced portfolio of offerings includes U.S. Domestic, International, and Supply Chain & Freight.
For Q1 2014, UPS produced $1.9 billion in free cash flow. It paid dividends of $596 million. This represented an increase of 8.1% per share over 2013.
UPS currently serves over 220 countries and territories. In 2013, it acquired a Vietnam joint venture company and is the first foreign-owned carrier in the country. For 2014, UPS has planned an additional $500M in network enhancements. These enhancements include hub modernization (sort automation and job simplification), facility expansions, and legacy building retro-fits.
For 2014, the company's outlook includes profit growth of 12-14% in its International operations.
In May, UPS's Board approved a regular quarterly dividend of $0.67 per share on all outstanding Class A and Class B shares. The Board increased the regular quarterly dividend by 8.1% to the current level of $0.67 per share earlier this year.
5 industry challenges these companies face:
1. Driver recruitment and federal government regulations
The need for first-rate drivers is a continuing need in the industry. Some trucking/transportation companies are offering signing bonuses for certain trucking jobs.
Knight Transportation earlier said the capability to find and hold onto qualified driving associates would be vital in 2014. The company said regarding this issue, "We recognize that the recruitment, training, and retention of a professional driver workforce, which is one of our most valuable assets, are essential to our continued growth and meeting the service requirements of our customers."
CNN Money reported in June 2013, "Trucking companies have already been facing a labor shortage for years. New federal regulations may make it worse. New rules, set to go into effect July 1, will mean truckers cannot drive more than 70 hours in 7 days. Truckers had been allowed to drive 82 hours under the former rules."
Companies have to adhere to complicated and strict aviation, employment, environmental, labor, security, transportation, employment and additional government laws and regulations domestically as well as internationally.
2. Rising fuel costs
Volatile and rising fuel costs are an ongoing challenge to the industry. KPBS TV in San Diego, California noted in 2011 that CNK Trucking's Christopher Northrup said people should pay attention to the cost of diesel, "Everything that you buy, everything, is loaded on a truck and is eventually delivered either to a grocery store a warehouse, to a Costco, to a Home Depot, everything comes in a truck. Everything."
These fuel expenses are increasing the operating costs for companies. As Tupper Hull, Vice President of Communications for the Western States Petroleum Association said, "Diesel is very much an indicator of economic activity. More so than gasoline. Diesel is what moves goods and commodities around the globe."
TransForce's Chairman, President and CEO, Alain Bédard, said regarding Q1 2014 results, "TransForce's first-quarter results were affected by more severe winter weather this year compared to last. This factor and persistent softness in certain key sectors of the North American economy explain most of the EBIT decline in the Package and Courier (P&C) and Less-than-Truckload (LTL) segments."
4. Some dependence on third parties to operate
J.B. Hunt Transport Services' business division uses railroads in carrying out its transportation services. It provides most of these services via contractual relationships with railways. Most of the company's business moves on the Norfolk Southern and Burlington Northern Santa Fe railways. J.B. Hunt noted in its 2013 Annual Report, "The inability to utilize one or more of these railroads could have a material adverse effect on our business and operating results."
5. Costs of replacing and maintaining fleets
Regarding the truckload industry, it is capital intensive. Companies that wish to maintain modern fleets to better serve its' customer bases necessitates them spending considerable amounts each year, or at the very least every few years.
Pertaining to aircraft operations, FedEx is concentrating on replacing older, less efficient aircraft as part of its fleet modernization program. This program is reducing its operating costs. In FY 2013, the company made a decision to permanently retire or speed up retirement of close to 90 aircraft. Companies make the capital expenditures in the hope that modernization will result in efficiency, and in the long-term, greater profits.
These businesses represent an opportunity for investors wanting to add an "air delivery & freight services/trucking" component to portfolios. For diversification, it's worth performing some due diligence on these 5 companies. Consider the need for these services, especially in the ecommerce era, while counterbalancing the 5 challenges the industry faces in the 21st century.
Editor's Note: This article discusses one or more securities that do not trade on a major exchange. Please be aware of the risks associated with these stocks.