Transports Week In Review - Transports Are Approaching Parity With Broader Markets

|
Includes: AAWW, ARII, ATSG, CHRW, CNI, CP, CPI, CSX, DAL, ECHO, EWC, EWW, FCNTX, FWRD, GATX, GBX, GDP, GWR, JBHT, KSU, LTL, MATX, MRTN, NSC, ODFL, RLGT, SAIA, SPY, UAL, UBER, UNP, VFINX, VTI, XTN, YRCW
by: James Sands

Summary

The XTN transports index is now up 6.1 percent, whereas the SPY is up 9.9 percent.

Second-quarter expectations for improving conditions are one of the drivers for recent increased stock prices.

Economic and industry indicators remain inconsistent and choppy for the trucking industry.

If sentiment improves, transports may witness further stock price increases in the near term.

Source: Google Images

As we closed the week on July 14th, transports witnessed continued robust positive performance. The trucking industry has remained strong, but still mixed, especially for truckload peers. Transports industries have all benefited from the recent positive momentum.

Based on improving demand indicators for the trucking industry, experts were expecting a potential reduction in the total business inventory to sales ratio. However, May’s results ended up showing a marginal increase. Additionally, retails sales and the consumer price index ((NYSEARCA:CPI)) both came in a little soft. Despite this, markets pushed higher as the focus shifted towards earnings.

I manage the Lean Long-Term Growth Portfolio (LLGP). To date, performance stood at 11.1 percent, as highlighted in green. Transport indices have sustained the recent recovery, but the anomaly remains the NASDAQ Transportation (^TRAN) index, now up 17.7 percent. Both the NASDAQ (^IXIC) and Fidelity Contrafund (FCNTX) remain strong, up 17.3 and 19.1 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 9.5 to 10 percent. Transports are now up at the highest level for the year, as we head full-swing into earnings.

YTD 2017

For 27th week of 2017, the spread between the SPY and the SPDR S&P Transportation ETF (XTN) declined, with the SPY up by 3.8 percentage points. The SPY improved by 160 basis points (bps) to 9.9 percent, while the S&P Transportation ETF improved by 180 bps to 6.1 percent for 2017.

Transports continued the strong momentum they have seen since late June: the XTN index is up 1,290 bps over the past couple of months. This past week set a high for the year, with the transports index breaking above the 6 percent level. Positive performance has been broad-based across multiple industries.

Rail Operators

Rail operator performance was positive for the week, with the only exception being Genesee & Wyoming (GWR). CSX (CSX), Canadian Pacific (CP), Union Pacific (UNP) and Kansas City Southern (KSU) will all be reporting this upcoming week. Norfolk Southern (NSC) and Canadian National (CNI) will be reporting the following week, with Genesee & Wyoming up the week after.

Week 27 of 2017 witnessed increased results for most 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 11.8 percent improvement. The second-quarter rail traffic was strong collectively, so expectations are positive. The most recent monthly Class I rail traffic report can be found here.

Railcar Manufacturers & Lessors

Railcar manufacturers and lessors were all weaker for the week, marking the second consecutive week of contrasting performance versus rail operators. The Greenbrier Companies (GBX) and American Railcar Industries (ARII) continue to lead the recent weakness over the past couple of weeks. Greenbrier’s drop has placed the company at the lowest level since March. Next week only GATX Corporation (GATX) will be reporting, with most other companies following the week after.

I don’t see any justification for the extent of the selling that has recently hit railcar manufacturers. I view the recent downtrend as a result of uncertainty as to where the bottom will eventually be. After Greenbrier’s results, the market appears to be bettering against upcoming results.

Truckload Carriers

Truckload carriers were mostly up down during the week, as performance was highly mixed across the board. The trucking industry remains susceptible to mixed and/or in some cases, volatile performance. This is because monthly data continues to be choppy. J.B. Hunt Transport (JBHT) and Marten Transport (MRTN) will be reporting this upcoming week, with all other peers reporting the following few weeks.

The total business inventory to sales ratio was a bit of a letdown as it increased rather than declined. This result may be partly explained by the substantial increase in imports across most all regions in the U.S.

Less-Than-Truckload Carriers

Less-than-truckload ((NYSEARCA:LTL)) carriers were all up for the week, led by strong results from YRC Worldwide (YRCW). Saia (SAIA), Old Dominion Freight Lines (ODFL) and Forward Air (FWRD) continue to outperform other peers. The market has once again become more positive on YRC Worldwide as we approach earnings; it has typically been a 50/50-coin flip as to what will happen afterward. All companies will be reporting the week after this upcoming week, with YRC Worldwide reporting the following week.

Truck pricing, including LTL freight rates, have picked up - as usual given seasonality - with LTL continuing to be a top performer through mid-July. The contrasting strength for LTL versus truckload peers is an indication that expectations for freight rates driving growth is higher.

Air Freight, Package & Delivery

Air freight, package and delivery companies were all up for the week, with strong performance displayed by the majority. Air Transport Services Group (ATSG) led the way this week, followed by Atlas Air Worldwide (AAWW). Earnings are anticipated to occur over the next few weeks.

The rally in air cargo lessors makes sense as markets are likely increasing expectations for earnings results due to the continued positive shifts in e-commerce demand. However, investors will need to pay close attention to the impact on margins, as they may witness some pressure as this transition continues to evolve.

Contract Logistics, Forwarding & Brokerage

Contract logistics companies were mixed for the week, with Echo Global Logistics (ECHO) and Radiant Logistics (RLGT) losing ground. C.H. Robinson Worldwide (CHRW) will be the first logistics peer to report next week. All other peers will be reporting over the next few weeks.

Larger peers have witnessed improving positive momentum heading into earnings, as overall sentiment for transports has shifted. For asset light companies, it will be interesting to see whether or not their margins will be able to improve as freight demand is expected to pick up. For 2017, it is not likely that newer technology competitors like Uber (UBER) Freight will make much of dent in the market.

Container Shipping Lines, Charter Owners & Container Lessors

For the container shipping industry, weekly performance for companies with exposure was higher with the only exception being Matson (MATX). Matson looks like it will stay range-bound somewhere from $29 to $31 per share. With earnings out a couple weeks from now, any solid beat could propel the stock higher.

The prospects have continued to improve for container shipping lines, which may be translating to charter owners and managers. But more likely is the fact that investors are bidding companies up based on leverage risk/reward potential. Container lessors remain leading transports performers, and unless a major shift occurs derailing the industry, this will likely remain the case.

Airlines

Airline stock performance for the week was mixed, likely a result from Delta Air Lines' (DAL) earnings and revenue miss. Airlines have broadly improved for the year, with most being at or near their best performance. United Continental Holdings (UAL) will be the next airline to report next week, with the remainder the following week.

I continue to like Alaska Air, but must made admit that I will be focused in on margins and cost. Overall, the long-term potential remains solid, but we need to pay attention for 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 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 27th week of 2017, total traffic remained up 5.3 percent, with carload traffic up 6.6 percent, down 20 bps, and intermodal traffic up 3.9 percent flat. Week 27 performance remained solid.

These numbers continue to not be far off from the total traffic originated results of 5.6 percent for the first 27 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 4.4 percent and Canadian traffic was up 11.6 percent, closely tracking the carried rail traffic when combined. Mexico traffic was down at -1.6 percent, as improvement has continued.

Container traffic was up 3.9 percent, being flat. Domestic intermodal pricing for both eastbound and westbound averages have remained positive. Based upon improving container traffic and stable and/or moderately improving pricing, intermodal may be poised for success.

Week 27 witnessed weekly coal carload traffic at 100,000 carloads carried. This reflected a 2.6 percent increase versus last year. Coal was much stronger during the first half of the year, than in 2016, but the second half will likely be a different story. Grain performance was down, at -9.2 percent versus last year. Similar to coal, weekly growth from this point forward will be choppier.

Motor vehicles and equipment carload traffic performance was down -0.5 percent versus last year. Chemicals were up 2.3 percent, petroleum products were down at -11.3 percent and crushed stone, gravel and sand remained on a roll, up 40.3 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, temperature-controlled and heavy haul up by double digits. LTL has increased strongly up double digits as well, while dry van has remained solid and specialized has finally gotten back to positive performance from late-March.

The May and June American Trucking Association (ATA) and Cass Freight Index indicators have pointed towards increasing volume demand, which correlates to the upturn in pricing. But over the previous couple of years on a monthly basis, performance has been very choppy. Indicators, including the total business inventory to sales ratio, retail sales and CPI, all were fairly soft in May/June. Gross domestic product ((NYSEMKT:GDP)) will be the next important measure to see.

Air Cargo

Keeping with strong global air cargo demand, London Heathrow airport’s cargo volumes were up 13 percent in June from last year. Through the first half of the year, air cargo volume was up 9 percent. The strongest regional growth driver for the performance was Latin America, which grew nearly 40 percent; North America continues to be the leading market share, geographically. Europe’s largest air cargo airport, Frankfurt, grew nearly 5 percent in June from last year, and the same through the midpoint of the year.

Unlike certain North America carload commodities for rail operators, both container shipping and air cargo traffic appear to be on pace for a very strong 2017, with not much slowing evident. This bodes well for logistics and air freight and package delivery companies, justifying the increasing stock prices leading into earnings.

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), the Shanghai to West Coast average spot rate has declined for the first time in 2017; to the East Coast, average spot rates have remained up strongly, near 20 percent. Asia to Europe average spot rates have remained positive YoY, while trans-Atlantic trade has been down close to -10 percent for both directions.

The remainder of 2017 will be a very interesting time. Last year, the Hanjin Shipping bankruptcy led to increasing average spot rates. This year, consolidation has continued to reduce the number of major global container shipping lines, new alliances have taken form, and the Panama Canal has allowed more access through different trade routes. It remains to be seen how supply and demand will shift from here.

North America Seaports

Despite strong container TEU traffic, some could look at the above chart and suggest that the trend is in decline. Early numbers from seaports already reporting June performance suggests that there may be at a minimum sustained result. It would not be surprising to see an acceleration in June from May either. Case in point: the Port of Long Beach witnessed total TEU traffic growth of 9 percent in June, YoY, versus the lower 3 percent performance last month.

A primary concern leading into the peak shipping season is availability of chassis. On the West Coast, the sentiment seems to be that there will be no substantial delay impacts from the chassis supply/location. As larger ships continue to call North America seaports, major high-demand locations like San Pedro, New York/New Jersey and others will need to manage equipment.

North America Cross-Border Trade

The iShares MSCI Mexico Capped ETF (EWW) was up by 660 bps. The index continues to outperform the iShares MSCI Canada ETF (EWC). The Mexico index is now up 29.7 percent for the year versus the 5.4 percent result for the Canadian index, which was a 310 bps increase.

It is pretty impressive to see the Mexico index up nearly 30 percent. The Canadian index got an injection shot of confidence as the Canadian Central Bank rose interest rates; this is a key technical level that has been crossed. The North America Trade Agreement (NAFTA) renegotiation still remains as a likely soft negotiation.

Summary

Transports continue to climb higher, but we did not get the best results this past week for total business inventories to sales ratio, retail sales and CPI monthly performance. Nonetheless, markets are eagerly looking towards second-quarter earnings reports.

Without any substantial improvement in the trucking industry based on indicators, it could be a mixed report, but if there are any more positive expectations for the upcoming quarters, we could still see broad improvement for stock prices. Most other transports are poised for further increases, based on the same possible sentiment; we’ll just have to wait and see.

Disclosure: I am/we are long KSU, CNI, GBX, JBHT, ODFL, MATX, ALK.

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.

About this article:

Expand
Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500.
Tagged: Financial Advisors, Industry News
Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here