Transports Week In Review - Transports Break Through Key Technical Level

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Includes: AAWW, ALK, ARCB, ARII, ATSG, CGI, CHRW, CMRE, CSX, CVTI, DSKE, ELD, EWC, EWW, FCNTX, FDX, FWRD, GBX, GSL, GWR, HTLD, HUBG, KSU, LTL, LUV, MATX, MRTN, ODFL, ONE, SAIA, SNDR, SPY, UNP, UPS, USAK, VFINX, VLRS, VTI, XPO, XTN, YRCW
by: James Sands

Summary

The XTN transports index is now up 4.3 percent, whereas the SPY is up 8.3 percent.

The robust performance for transports since mid-May continues.

Catalysts moving forward include a reduction in inventories to sales and a tightening trucking market.

Long-term investors should remain focused on stronger companies, but a broad-based transports rally is imminent if catalysts materialize.

Source: Google Images

As we closed the week on July 7th, transports witnessed continued positive performance. The trucking industry has witnessed very strong movements upward, led by both large and some smaller peers. Many larger peers still remain depressed, so further upside potential is achievable.

During the second half of 2017, different transport modes will be mixed depending upon supply and demand balances. I expect air cargo and trucking to be some of the stronger performers during this time, but all modes will be set up for success in the event the economy’s growth improves.

I manage the Lean Long-Term Growth Portfolio (LLGP). To date, performance stood at 9.7 percent, as highlighted in green. Transport indices have begun to recover of late, but the anomaly remains the NASDAQ Transportation (^TRAN) index, now up 16.6 percent. Both the NASDAQ (^IXIC) and Fidelity Contrafund (FCNTX) remain strong, up 14.3 and 16.4 percent.

The Dow Jones (DJT), SPDR S&P 500 ETF (SPY), Vanguard 500 Index (VFINX), and Vanguard Total Stock Market ETF (VTI) were all up 8 to 8.5 percent. Transports have broken through the key 4 percent level for only the third time this year.

YTD 2017

For the midyear point of 2017, the spread between the SPY and the S&P Transportation ETF (XTN) declined with the SPY up by 4 percentage points. The SPY improved by 10 basis points (bps) to 8.3 percent, while the S&P Transportation ETF improved by 150 bps to 4.3 percent for 2017.

Transports performance continues to be more volatile than broader indices, with the XTN index up 1,110 bps over the past month and three weeks. This past week marks only the third time in 2017 that transports have been up greater than 4 percent. The trucking industry has witnessed strong performance as indications from May and June suggest an improving environment.

Rail Operators

Rail operator performance was mostly positive for the week, with exceptions being Union Pacific (UNP) and Kansas City Southern (KSU). Earnings reports will be coming in the next week and a half or so, with the initial reporting companies to watch being CSX (CSX), Union Pacific, and Kansas City Southern. Expectations are for an acceleration of earnings results from the first quarter. Union Pacific and Genesee & Wyoming (GWR) have lagged peer double-digit performance.

Week 26 of 2017 witnessed increased results for most Class I's based on total traffic carried. All Class I railroads remain positive for the year, which continues to be led by Canadian National’s now 11.8 percent improvement, a 20 bps increase. The most recent monthly Class I rail traffic report can be found here.

Railcar Manufacturers and Lessors

Railcar manufacturers and lessors were all weaker for the week, unlike rail operator peers. Negative performance was led by The Greenbrier Companies (GBX) and American Railcar Industries (ARII). Greenbrier has witnessed strong profit taking after its earnings report, in line with American Railcar's decline on Friday. Railcar manufacturers may witness volatility as some uncertainties remain for finding the bottom of the down-cycle. Greenbrier is a solid buy on dips below the $44 per share level.

As the demand for certain commodities increases over the next few years and as railroad operators sustain and/or increase capex programs, railcar manufacturers are set up to see improving trends. The deviation from railcar operators should be monitored, as well as rail traffic trends through 2018.

Truckload Carriers

Truckload carriers were mostly up during the week, with most of the weakness remaining in smaller peers. This included Celadon Group (CGI), Covenant Transportation (CVTI), Marten Transport (MRTN), and USA Truck (USAK). Schneider National (SNDR) was also lower, and Daseke (DSKE) witnessed another weekly surge higher as the company executed another acquisition deal. Heartland Express (HTLD) was also buoyed higher by its recent merger announcement.

The focus for the trucking industry is on improving load and pricing trends. Some experts still expect a tightening truck market later this year and into 2018 based on the electronic logging device (ELD) rules taking effect this December.

Less-Than-Truckload Carriers

Less-than-truckload (LTL) carriers were all up for the week, with strong performance across the board. Saia (SAIA), Old Dominion Freight Lines (ODFL), and Forward Air (FWRD) continue to outperform other peers. But as has been the case over the past several years, ArcBest Corporation (ARCB) and YRC Worldwide (YRCW) have yielded opportunities for speculators and traders.

Truck pricing, including LTL freight rates, has picked up as is the case for seasonality, with LTL leading the pack through early-July. FedEx Corporation (FDX) is the earliest LTL company to report, all others, including United Parcel Service (UPS), will be reporting later in the month.

Air Freight, Package, and Delivery

Air freight, package, and delivery companies were mostly up for the week, with the only exception being UPS. Atlas Air Worldwide (AAWW) led the way with a nearly 6 percentage point increase. Air Transport Services Group (ATSG) also regained some momentum, with FedEx only marginally higher.

I continue to view Atlas Air as the better investment versus Air Transport. Since mid-May, Atlas Air is up 19.5 percent while Air Transport was down -3.2 percent. Air Transport has been the laggard of this peer group since mid-May. I still see further upside potential for Atlas Air of 10 to 18 percent over the next year and a half, while Air Transport’s upside is potentially at around 10 percent for the same period.

Contract Logistics, Forwarding, and Brokerage

Contract logistics companies were mixed for the week, with C.H. Robinson Worldwide (CHRW), Hub Group (HUBG), and XPO Logistics (XPO) being marginally lower. The improving trucking industry should benefit both Hub Group and XPO Logistics, investors may wish to be a little more cautious on CH Robinson as new regulations take effect.

I continue to like both Hub Group and XPO as top long-term performers out of this group. XPO continues to fire well on all cylinders as its business keeps growing, notably for e-commerce and intermodal. Hub Group is likely to get back on track later this year into next year.

Container Shipping Lines, Charter Owners, and Container Lessors

For the container shipping industry, weekly performance for companies with exposure was mostly lower with exceptions being Matson (MATX) and Global Ship Lease (GSL). Matson’s stock price recovered from its recent lows for the year. The market remains uncertain of the challenges facing the company’s core trade lanes. Alaska continues to struggle; Hawaii’s growth is declining and new competition has entered the Trans-Pacific.

Aside from container lessors and Costamare (CMRE), charter owners and managers have not witnessed corresponding market growth as the container shipping industry looks to return to profitable levels. Only investors with strong risk appetites should be considering any of these companies.

Airlines

Airline stock performance for the week was very strong, or shall we say, it took off. If the first few months of the year were any indication, Alaska Air Group (ALK) may witness increasing performance from today’s level. Controladora Vuela Compania de Aviacion (VLRS) has broken through a key technical level as the company is at its highest point for the year. Southwest Airlines (LUV) is shaping up to be an excellent pick for 2017.

I continue to like Alaska Air, but must admit, the choice was between that and Southwest (clearly not the best choice was made). The long-term potential remains solid, but we need to pay attention to rising labor costs, not just for Alaska Air but for all airlines.

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 20-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. and Canada Class I Rail Traffic – Carloads and Intermodal Units Carried

Through the 26th week of 2017, total traffic remained up 5.4 percent with carload traffic up 6.8 percent, down 10 bps, and intermodal traffic up 3.9 percent, a 10-bps improvement. Week 26 performance remained solid.

These numbers continue to not be far off from the total traffic originated results of 5.7 percent for the first 26 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 4.5 percent, and Canadian traffic was up 11.8 percent, closely tracking the carried rail traffic when combined. Mexico traffic was down at -1.4 percent as improvement has continued.

Container traffic was up 3.9 percent, a 10-bps improvement. Domestic intermodal pricing for both eastbound and westbound averages has remained positive and/or improved through late-June. The improvement has translated to stronger rail operator operating revenues, with traffic stronger for all Class I's, with the exception remaining Kansas City Southern – performance has improved over the past three consecutive weeks.

Week 26 witnessed weekly coal carload traffic at 110,000 carloads carried. This reflected an 8.5 percent increase versus last year. Coal continues to remain much stronger than in 2016, but weekly growth continues to slow. Grain performance was up 4.2 percent versus last year. Similar to coal, weekly growth has slowed.

Motor vehicles and equipment carload traffic performance was down -1.4 percent versus last year. Chemicals were up 5.9 percent, petroleum products were down at -8.7 percent, and crushed stone, gravel, and sand remained on a roll, up 27.2 percent.

Trucking Industry

Source: Cass Information Systems, Cass Freight Index

Trucking industry spot market average rates have remained up around the mid-single digits versus last year. Seasonal performance has remained strong with flatbed, dry van, and heavy haul up by double-digits. LTL has increased strongly up double digits, while temperature-controlled and specialized has remained the most volatile fluctuating between positive and negative performance from late-March.

The May tonnage index from the American Trucking Association (ATA) reported robust growth in May, a significant reversal from the previous three reports. Tonnage actually hauled was up strongly; this was similar from the FTR Trucking Conditions Index. Both indices reflect contractual pricing. Trucking stocks have rallied strongly since mid-May, with 50 percent of public peers now positive.

Air Cargo

Air cargo demand continues to be on fire for 2017. This has been especially true for demand in the Asia Pacific region. The region has witnessed a year-to-date growth rate of nearly 15 percent. General cargo has been the core driver, and the view is that global demand remains solid as the inventory sales ratio has fallen, leading to the need to restock components and finished goods.

For the month of May, global air cargo traffic was up nearly 13 percent. The only region not to post double-digit growth was Latin American, with Europe being the leading performer. For FedEx and UPS, the majority of exposure has been to the Atlantic and Pacific trade lanes, but Latin America was still positive during the first quarter from a cargo revenue ton enplaned perspective.

Container Shipping Lines

Source: Alphaliner – Top 100 Operated Fleets

Pricing for spot market container rates has remained in a downtrend since the peak in mid-January, per the Shanghai Containerized Freight Index (SCFI). Year over year (YoY), both the Shanghai to West and East coasts freight rates have remained strongly positive. Asia to Europe has been mixed, with Northern Europe marginally positive and Mediterranean and Rotterdam being marginally down. The Trans-Atlantic remains moderately lower.

A lot of activity is picking up with more capacity coming online in the Trans-Pacific trade lane. One example of this is the Tokyo One Network Express (ONE) joint venture, to begin operations in April of 2018. The joint venture reflects the sixth largest container line shipping entity with 250 ships and a capacity of 1.4 million TEUs. Increasing capacity from other carriers, whether new or old, is a direct result of the Hanjin Shipping bankruptcy, which temporarily reduced capacity. As larger peers like Maersk and others have picked up the slack and witnessed strong volume gains, capacity may begin to increase once again.

North America Seaports

The month of May has sustained the strong momentum for seaport traffic growth, with a 6.3 percent increase from last year for top North America seaports. As the initial data displayed, growth was not as robust across all regions as it had been the previous stronger months. Both Canada and Mexico have continued to witness strong performance, while larger seaports in the U.S., including Los Angeles, Long Beach, and New York/New Jersey witnessed a slow-down in growth.

In some instances, there have been strong changes with respect to new vessel sharing alliances (VSAs), the seaports of Seattle and Tacoma being the most notable. The upcoming year will serve as a better measure to incorporate the new Panama Canal locks and VSAs, although a new one is now on the way from Tokyo.

North America Cross-Border Trade

The iShares MSCI Mexico Capped (EWW) was up by 40 bps. The index continues to outperform the iShares MSCI Canada ETF (EWC). The Mexico index is now up 23.1 percent for the year versus the 2.3 percent result for the Canadian index - which was flat versus last week.

I continue to remain optimistically positive that a more subdued North America Trade Agreement (NAFTA) renegotiation will be taking place. All indicators for international trade point to a solid year for 2017. For Mexico, new presidential candidates will become clear later this fall, with the elections occurring next year. Similar to the “Trump effect”, there could be an increase in volatility.

Summary

Transports have broken through a key technical level for the third time this year. With the potential for lower inventories as a contributor to tightened trucking capacity, and the upcoming ELD mandate, a push towards parity with the SPY could be on the near-term horizon.

Transports indices have recovered strongly in line with individual public companies. While select companies remain the focus for long-term investment success, transports will likely witness broad performance improvement if second-half catalysts truly materialize.

Disclosure: I am/we are long CNI, KSU, GBX, DSKE, JBHT, ODFL, FDX, DPSGY, XPO, ALK, SNDR, HUBG.

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.

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