Transports Week In Review - Amazon Leads The Charge As Consolidation Gets Back In The Spotlight

|
Includes: AAWW, ALK, AMZN, ARCB, ATSG, CAI, CGI, CMRE, CNI, CP, CSX, CVTI, DPSGY, EWC, EWW, EXPD, FCNTX, FDX, GATX, GBX, HUBG, JBLU, LUV, MATX, MRTN, ODFL, RRTS, SAIA, SNDR, SPY, TRN, UNP, UPS, USAK, VFINX, VLRS, VTI, WAB, XPO, XTN, YRCW
by: James Sands
Summary

The XTN transports index is now up 0.2 percent, whereas SPY is up 8.5 percent.

If the market's reaction to Amazon's deal with Whole Foods is any indication, consolidation may intensify.

XPO also announced that it is back in the hunt for another possible deal; Hub Group is target number one.

I would rather own strong players than hopeful acquisition targets in the event consolidation further materializes.

Source: Google Images

As we closed the week on June 16th, transports had their third consecutive week of solid performance versus broader indices. The trucking market has shown increasing signs of improvement, and I am closely paying attention to these trends. Similar to rail last year, the March/April area may serve as a bottom. All other transport modes continue to witness increasing and/or sustained robust traffic and volume performance.

I manage the Lean Long-Term Growth Portfolio (LLGP). To date, performance stood at 9.6 percent, as highlighted in green. As transport indices remain mostly weaker, the anomaly remains the NASDAQ (^TRAN), up 13.1 percent. Both the NASDAQ (^IXIC) and Fidelity Contrafund (MUTF:FCNTX) remain atop all peers, up 14.3 and 16.3 percent, respectively.

The Dow Jones (DJT), SPDR S&P 500 ETF (NYSEARCA:SPY), Vanguard 500 Index (MUTF:VFINX) and Vanguard Total Stock Market ETF (NYSEARCA:VTI) were all up from 8 to 9 percent. Volatility returned to markets in a big way, especially resulting from the Amazon.com (NASDAQ:AMZN)-Whole Foods Market (WFM) deal.

YTD 2017

For the 23rd week of 2017, the spread between SPY and the S&P Transportation ETF (NYSEARCA:XTN) declined with SPY up by 8.3 percentage points. SPY declined by 40 basis points (bps) to 8.5 percent while the S&P Transportation ETF declined by 10 bps to 0.2 percent for 2017.

Transports performance continues to be more volatile than broader indices, as the peak during the week displays. Reports were out for retail sales and the consumer price index (CPI). Both reports were solid, depicting increasing growth for both retail sales and inflation. The Federal Reserve Bank of Atlanta initially increased the second quarter gross domestic product (GDP) estimate (GDPNow) from 3 to 3.2 percent as a result, but has since reduced the estimate to 2.9 percent. Could this even have been influenced by the Amazon deal?

Rail Operators

Rail operator performance stronger for the week with the only exception being CSX (NYSE:CSX). Investors should take note that both Canadian National (NYSE:CNI) and Kansas City Southern (KSC) have witnessed strong performance over the past couple of weeks. I don't think that either will contest CSX, but I suspect that they will remain atop remaining peers.

Week 23 of 2017 witnessed increased positive results for Class Is based on total traffic carried. All Class I railroads remain positive for the year, which continues to be led by Canadian National's now 11.5 percent improvement (volume gains continue to impress). Investors may want to take a closer look at Union Pacific (NYSE:UNP) and Canadian Pacific (NYSE:CP) as potential options.

Railcar Manufacturers & Lessors

Railcar manufacturers and lessors were mixed for the previous week. Trinity Industries (NYSE:TRN) was up, as were GATX Corporation (NYSE:GATX) and Westinghouse Air Brake Technology (NYSE:WAB). Most railcar manufacturers were lower, led by The Greenbrier Companies' (NYSE:GBX) 120 bp decline.

As the demand for certain commodities increases over the next few years, and as railroad operators increase capex programs, railcar manufacturers are set up to see improving trends. The timing and/or sustainability of these variables remains uncertain.

Truckload Carriers

Truckload carriers remained strong for the third consecutive week, with exceptions being Covenant Transportation (NASDAQ:CVTI), Roadrunner Transportation (NYSE:RRTS) and Schneider National (NYSE:SNDR). Despite the decline for Schneider National, performance to date is still second best at 11.4 percent, behind Marten Transport's (NASDAQ:MRTN) nearly 19 percent gain.

I continue to remain skeptical of smaller peers, notably Celadon Group (NYSE:CGI), Roadrunner Transportation and USA Truck (NASDAQ:USAK). These types of companies have been espoused as acquisition targets, yet they do not offer a lot to much larger peers. I remain focused on top quality names with scale.

Less-Than-Truckload Carriers

Less-than-truckload (LTL) carriers were contrastingly lower for the week versus truckload peers, apart from Old Dominion Freight Line (NASDAQ:ODFL) which was flat. LTL pure play carriers have had a nice few weeks despite this past week's weakness. In some instances, recent top performers including Old Dominion and Saia (NASDAQ:SAIA) may have witnessed some profit taking. The same case could be made for ArcBest Corporation (NASDAQ:ARCB) and YRC Worldwide (NASDAQ:YRCW).

I remain positive for the LTL industry, with a continued bias towards non-union operators including Forward Air, Old Dominion Freight Line and Saia. Similar to truckload peers, expectations remain optimistic for the second half of the year.

Air Freight, Package & Delivery

Air freight, package and delivery companies were mostly up for the week, with the exceptions being air cargo lessors, including Atlas Air Worldwide (NASDAQ:AAWW) and Air Transport Services Group (NASDAQ:ATSG). Air Transport has dropped by nearly 11 percentage points since late May while Atlas Air has increased by 4.5 percentage points.

Package delivery companies including FedEx Corporation (NYSE:FDX), Deutsche Post DHL Group (OTCPK:DPSGY) and United Parcel Service (NYSE:UPS) have caught some momentum over the past couple of weeks. FedEx will report earnings this upcoming week, so momentum is likely tied to positive expectations.

Contract Logistics, Forwarding & Brokerage

Contract logistics companies were up strongly for the week. On Friday, XPO Logistics (NYSEMKT:XPO) announced that is back in the fray looking for another acquisition target. Hub Group (NASDAQ:HUBG) did perk up today a little more once this news was disclosed.

I would not be surprised if a deal between the two surfaced, as Hub Group is a blend of asset light and owned assets like XPO. Hub Group has also faced some weakness of late from intermodal pricing pressures, placing a lower enterprise valuation. Expeditors International (NASDAQ:EXPD) also showed some positive momentum through the week and is now up nearly 8 percent.

Container Shipping Lines, Charter Owners & Container Lessors

For the container shipping industry, weekly performance was mixed across the board. Container lessors continue to be the strongest performers despite CAI International (NYSE:CAI) being down for the week. Vessel charter owners and managers all continue to struggle with the lone exception being Costamare (NYSE:CMRE).

All peers in this group remain highly volatile. I expect this to continue as overcapacity issues in the container shipping industry are still prevalent. Matson's (NYSE:MATX) woes continue to be impacted by most operating segments. However, things may begin to turn around later in the year.

Airlines

Airline stock performance for the week was mostly lower with exceptions including JetBlue Airways (NASDAQ:JBLU), Southwest Airlines (NYSE:LUV) and Controladora Vuela Compania de Aviacion (NYSE:VLRS). The story for this group continues to be a constant: traffic numbers keep clocking in well, energy prices remain stable and/or lower, but increasing labor costs remain as a possible headwind.

I continue to like Alaska Air Group (NYSE:ALK) as it has continued to lag most of its peers since mid-March. The company has gained some momentum of late, but also has announced lower expected earnings from increasing labor costs.

Demand Trends

Key demand-based indicators that are monitored include Class I rail traffic, trucking industry tonnage, shipments, and loads, air cargo tonnage, container shipping line twenty-foot equivalent units, TEUs, North America seaport TEUs, shipping lane port calls, North America cross-border trade, and freight rates for most of these indicators.

U.S. & Canada Class I Rail Traffic - Carloads & Intermodal Units Carried

Through the 23rd week of 2017, total traffic was up 5.4 percent with carload traffic up 7.1 percent, flat performance, and intermodal traffic up 3.5 percent, a 10 bp improvement. Week 23 performance remained robust.

These numbers continue to not be far off from the total traffic originated results of 5.6 percent for the first 23 weeks of 2017 for North America rail traffic, published by the Association of American Railroads (AAR) data. Investors should remember that total traffic carried includes both originated and received carloads and intermodal units. Additionally, U.S. traffic was up 4.6 percent and Canadian traffic was up 11.3 percent, closely tracking the carried rail traffic when combined. Mexico traffic was down at -1.8 percent.

Container traffic was up 3.6 percent, a 20 bp improvement. Domestic intermodal pricing for both eastbound and westbound averages have remained positive and/or improved as of late-May. The improvement has translated to stronger rail operator operating revenues; traffic has been stronger for all Class Is, with the exception remaining Kansas City Southern.

Week 23 witnessed weekly coal carload traffic at 108,000 carloads carried. This reflected a 13 percent increase versus last year. Coal continues to remain much stronger than in 2016. Grain performance was up 8.9 percent versus last year.

Motor vehicles and equipment carload traffic performance was up 2.6 percent versus last year. Chemicals were up 4.1 percent, petroleum products were down at -2.2 percent, and crushed stone, gravel and sand remained on a roll, up 32.1 percent.

Trucking Industry

Source: Cass Information Systems, Cass Freight Index

Trucking industry spot market average rates have remained up from 5 to 7 percent versus last year, with a return to 6 percent in early-June. Seasonal performance has remained strong with flatbed, temperature-controlled, heavy haul and LTL pricing up double digits. Dry van has been solid, but specialized has declined.

Trucking industry stocks have rebounded over the past few weeks as pricing has improved. The upcoming electronic logging device (ELD) federal mandate will also be soon approaching. Both May truck orders and April used-truck sales have also displayed improvement.

Air Cargo

Despite the seasonal uptick in March, air cargo revenue tons were only up just below 2 percent for U.S. carriers from last year, the slowest rate for 2017. Global performance was very strong, up over 8 percent.

The strongest growth performance has continued to be generated from air cargo lessors including Atlas Air and Air Transport for domestic performance. Both FedEx and UPS have witnessed stronger performance outside of the U.S, but growth has been sustained domestically as well. We'll get to see the FedEx's next quarterly results next week; if the trends continue, expectations for air cargo should be for lower U.S. performance, and solid growth overall.

Container Shipping Lines

Source: Alphaliner - Top 100 Operated Fleets

Pricing for spot market container rates has declined in June, per the Shanghai Containerized Freight Index (SCFI), for eastbound trade in the Trans-Pacific lane. Additionally, there has been reluctance to sustain general rate increases in other trade lanes. Both eastbound trade from Asia to Europe and transatlantic trade have been lower.

The global container shipping line industry is still dealing with overcapacity issues. There have been strong performers, including Maersk (OTCPK:AMKBY) and Hapag-Lloyd (OTCPK:HPGLY), but not all shipping line carriers are all profiting. Additionally, the strength of freight rates and extent of a further peak shipping season remains uncertain.

North America Seaports

North America seaport TEU traffic has been nothing short of robust for the first four months of 2017. For May and early June, Class I rail container traffic has continued to incrementally improve, suggesting that seaport TEU traffic will continue to remain positive.

While there is much continued debate regarding diversion across seaport regions, overall each respective region has sustained robust positive growth. The East Coast has remained a very competitive geography between rail and trucking, whereas the West Coast has continued to have higher proportional shipments via rail. Those thinking a holistic shift in shipments to substantially overbalance one area may end up being disappointed.

North America Cross-Border Trade

The iShares MSCI Mexico Capped ETF (NYSEARCA:EWW) was up by 250 bps, improving further from last week's gain. The index continues to outperform the iShares MSCI Canada ETF (NYSEARCA:EWC). The Mexico index is now up 23.9 percent for the year versus the 1.5 percent result for the Canadian index - an increase of 10 bps.

There has not been a lot of talk regarding the North America Trade Agreement (NAFTA). Pretty much a lot of hot air has been wasted by speculation and nonfactual reporting. This has hindered investors as many individual companies have witnessed very strong gains as business has continued to grow.

Summary

The key focus in the near term is consolidation. XPO's reinvigorated interest in another deal has piqued my interest. I am never shy about going out on a limb, so I am going to stand by my Hub Group article considering the company as an acquisition target. I think it fits very well into XPO's existing services and dense shipping lanes.

The other point is the negativity, which is gaining more momentum as to the economy. I find more published information becoming less accurate and more sensational. Investors need to really pay attention to demand drivers and indicators either directly themselves or via sources they trust.

Disclosure: I am/we are long ALK, AMZN, CNI, DPSGY, FDX, GBX, HUBG, MATX, ODFL, SNDR, XPO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.