Source: Google Images
As we closed the week on August 11th, transports finally got in a positive week, albeit it was only marginal. Demand indicators continue to suggest that most freight industries are improving. There are some concerns for certain manufacturing areas, such as automobiles, but consumers may shift any lost dollars to other goods and services.
The Consumer Price Index [CPI] report was out this past Friday. The numbers were not great as the month-over-month (m/m) numbers declined marginally. For the year and for all items, inflation is up 1.4 percent through July. There were some positives including food at home and food away from home. Energy weighed on results.
Inflation remains low as evidenced by the CPI, but transports have been a different story. Both carriers and asset light providers have witnessed inflationary pressures reducing margins. With freight demand in most industries now increasing, expectations are for improved pricing in the near term.
I manage the Lean Long-Term Growth Portfolio (LLGP). To date, performance stood at 10 percent, as highlighted in green. Transports finally got back on track with a positive week. The anomaly remains the NASDAQ Transportation (^TRAN) index, now up 9.8 percent. Both the NASDAQ (^IXIC) and Fidelity Contrafund (FCNTX) remain strong, up 16.2 and 19 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 8.5 to 10.5 percent. Mid- and small-cap indices continue to lag larger capitalization and broader diversified peers. Transports, for the most part, have also underperformed.
YTD 2017 SPY Vs. XTN Index Prices
For the 31st week of 2017, the spread between the SPY and the S&P Transportation ETF (XTN) declined with the SPY up by 7.1 percentage points. The SPY declined by 150-basis points (bps) to 9.2 percent, while the S&P Transportation ETF improved by 20 bps to 2.1 percent for 2017.
After three consecutive weekly declines, transports got back on track, just barely as Friday’s rally pushed indices higher. I continue to see demand indicators positively for multiple freight industries. Even though volatility increased this week, the lows set this past May could still serve as a bottom for the year.
Rail operator performance was mostly positive for the week with exceptions being Canadian Pacific (CP) and Genesee & Wyoming (GWR). Despite declines for some major commodities in the second half of 2017, I still see rail peers poised to move higher. Financially, this industry should see continued growth from last year.
Week thirty-one of 2017 witnessed increased results for most Class Is based on total traffic carried. The rate of improvement from the previous year was mixed, but declines once again were strongest for carload traffic. The most recent monthly Class I rail traffic report can be found here.
Railcar Manufacturers & Lessors
Railcar manufacturers and lessors were mostly negative for the week with exceptions being Trinity Industries (TRN) and The Greenbrier Companies (GBX). This group really continues to be mixed driven by each quarter’s results. This is also likely being impacted by the uncertainties surrounding the unknown timing of a bottom for railcar manufacturers.
American Railcar Industries (ARII) continues to underperform this peer group. With the surrounding uncertainty, it is not easy to know when the next level-up will occur. Long term, I like Greenbrier, but any one company could see a similar spike like FreightCar America (RAIL), or Westinghouse Air Brake Technologies (WAB) in the short term.
Truckload carriers were mostly down during the week, but some larger peer did witness positive performance. There was more of a clear distinction between larger peers being positive, and smaller companies being down for the week. JB Hunt Transport Services (JBHT) received an analyst upgrade, pushing the stock higher. Other larger peers with positive performance included Knight Transportation (KNX), Ryder System (R), Swift Transportation (SWFT) and Werner Enterprises.
Smaller peers witnessing declines included Celadon Group (CGI), Daseke (DSKE), Marten Transport (MRTN), P.A.M. Transportation (PTSI), Roadrunner Transportation (RRTS) and USA Truck (USAK). Some larger peers continue to have the edge through stronger organic growth potential. Capacity is expected to tighten over the next 12 to 18 months.
Less-than-truckload [LTL] carriers were either flat or marginally lower, with the exception being Saia (SAIA). The rally for both ArcBest Corporation (ARCB) and YRC Worldwide (YRCW) has been very strong since mid-May. The past couple of weeks have seen a modest pullback.
Seasonal rates since late-March have continued to accelerate for LTL carriers as we are in the midst of the peak shipping season. Seasonal performance during this period has continued to outperform most truckload services with exceptions being flat bed and temperature-controlled.
Air Freight, Package & Delivery
Air freight, package and delivery companies were down for the week with the exception being Deutsche Post DHL Group (OTCPK:DPSGY). Air Transport Services Group (ATSG) and Atlas Air Worldwide (AAWW) led the week’s decline. This was driven by Air Transport’s earnings report and market volatility. DHL Group witnessed solid earnings results keeping the company’s strong momentum going.
DHL Group still has some room to run. FedEx Corporation (FDX) has displayed increasing weakness since the TNT Express operational issues from the cyber-attack. FedEx will be much more dependent upon the upcoming quarterly report. The stock is not investable until clarity is provided.
Contract Logistics, Forwarding & Brokerage
Contract logistics companies were down for the week with exceptions being Hub Group (HUBG) and Radiant Logistics (RLGT). XPO Logistics’ (XPO) gradual downtrend has continued. I like the stock near or below the $55 per share level, as I added to my position this past Thursday. Expeditors International (EXPD) witnessed strong declines during the week, despite beating earnings estimates. Non-asset owning companies are struggling from a margin perspective.
I view the logistics industry as the last leg to see a return to margin expansion. This should occur following an improved trucking industry. As much of the different freight modes are interdependent on one another, it is no surprise that some are benefiting at another’s expense.
Container Shipping Lines, Charter Owners & Container Lessors
For the container shipping industry, weekly performance for companies with exposure was negative. Even container lessors were negative for the week, a rarity. All year, it has been evident that the turnaround for the container shipping industry has benefited container lessors, but not vessel charter owners and managers. Matson (MATX) as a vessel operator for both Jones Act and international trade has struggled all year, despite modestly improving prospects.
As market volatility increased over a couple days last week, container lessors showed how sensitive they can be. Due to the continued heavy container traffic at North America seaports, I do not see a slowdown in container lessor performance for 2017.
Airline stock performance for the week was negative as sentiment remains cautious and market volatility made it easier to revert back to selling. Airline stocks continue to lag most all other transport peers. Some concerns may be growing regarding supply-demand growth in the near term.
I continue to like Alaska Air Group (ALK) and Southwest Airlines (LUV) as top considerations. I like how both companies prudently manage their assets and financials. Keeping an eye on increasing labor and other costs will be key.
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 thirty-first week of 2017, total traffic remained up 5.1 percent with carload traffic up 5.8 percent, down 10 bps; and intermodal traffic up 4.4 percent, up 10 bps. Week thirty-one performance remained solid, although it declined from the yearly average for the fourth consecutive week.
These numbers continue to not be far off from the total traffic originated results of 5.4 percent for the first thirty-one 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 4.2 percent and Canadian traffic was up 11.5 percent, closely tracking the carried rail traffic when combined. Mexico traffic was down at -0.3 percent, as improvement has continued.
Container traffic was up 4.4 percent, up 10 bps. Through early-July, domestic intermodal pricing for both eastbound and westbound averages have improved being up 9 to 10 percent versus last year. Fuel surcharges have been a big part of improved pricing, core pricing has been up modestly.
Week thirty-one witnessed weekly coal carload traffic at 116,000 carloads carried. This reflected a 3.6 percent increase versus last year. Week thirty-one reflected a return to positive performance. Grain performance was down, at -17.9 percent versus last year. Similar to coal, weekly growth from this point forward will be choppier; this was the fifth consecutive week of negative performance.
Motor vehicles and equipment carload traffic performance was down -4.7 percent versus last year - the fourth consecutive drop from previous performance levels. Chemicals were up 5.6 percent, petroleum products were down at -9.4 percent and crushed stone, gravel and sand remained on a roll, up 24.8 percent.
Source: Cass Information Systems, Cass Freight Index
As of early-August, dry van trucking industry spot rate averages remained robust versus last year’s performance, with results up 10 percent. Seasonal performance has remained strong led by temperature-controlled, flatbed, heavy haul and LTL. While still positive, specialized and dry van have witnessed less robust results over the past five months.
Freight rate activity appears to have picked up in July and early-August, as rates have remained at or above double digits during this time, when compared to last year. Recent analyst upgrades have focused more on larger peers, especially as we approach the electronic logging device [ELD] mandate later in the year.
Both global and U.S.-based tons enplaned increased further as of May. The benefit of reviewing this lagging data indicator is the breakout of air carriers and air cargo lessors. Through May, U.S. air cargo carries witnessed 10 percent domestic growth, and 5 percent international growth. During this period, Atlas Air has witnessed stronger overall performance for cargo revenue tons enplaned versus Air Transport. United Parcel Service (UPS) has outperformed FedEx, mostly driven by domestic performance.
Switching back to cargo traffic growth, London Heathrow airport witnessed an all-time high in July and a 10 percent rate of growth versus last year. A large factor for the robust growth has been the increase in American Airlines Group (AAL) traffic from North America, including connecting trucking service investments. East Asia traffic was also up strongly.
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). But the last week of July did display a significant uptick with the peak-shipping season approaching. Since then, rates have declined marginally.
Year over year (YoY), the Shanghai to West Coast average spot rate was up over 30 percent; to the East Coast, average spot rates were up greater than 45 percent. Asia to Europe average spot rates were up greater than 20 percent. The trans-Atlantic trade also remained mixed, with outbound to Europe up close to 20 percent.
Recent concerns have surfaced that large global container shipping lines may be enticed to purchase larger vessels as demand has picked up. Recent discussions have revolved around CMA CGM potentially purchased close to ten new vessels with TEU capacities greater than 20,000. Any shift back to a faster increasing supply could undermine recent stability.
North America Seaports
After a return to accelerated growth in the month of June, West Coast seaports which have reported July numbers have witnessed record results. The seaports of Los Angeles and Long Beach both witnessed strong double-digit performance, while Oakland saw stable single-digit results. All three are strong indications that July could witness further acceleration and/or stable growth from last year.
While the container business has been much more robust this year, automobile imports and exports have garnered some attention lately. Leading West Coast seaports have had to deal with increasing challenges to their supply chains stemming from a need for increasing capacity.
North America Cross-Border Trade
The iShares MSCI Mexico Capped ETF (EWW) was down by 100 bps for the week. The index continues to outperform the iShares MSCI Canada ETF (EWC). The Mexico index is now up 27.4 percent for the year versus the 4.1 percent result for the Canadian index, which was a 210-bps decline.
The Trump administration has consistently stated that a North America Free Trade Agreement (NAFTA) renegotiation is focused on reducing trade deficits. It still is not clear whether this can be accomplished through increasing exports and/or decreasing imports. Either way, the administration will likely take a marginal improvement as a win.
The good news is that transports got back on track this week with positive results. I view the volatility increase solely resulting from the geopolitical tensions between the U.S. and North Korea. The market will likely continue to experience selling patterns on fear-driven events like last week.
Air cargo and container traffic continue to push higher witnessing all-time highs in some cases on a monthly basis. Rail traffic has peaked but is still near the midpoint for single-digit growth. The trucking industry has witnessed stronger pricing in June and July. Logistics carriers will likely be the last benefactor over the next few quarters as demand remains stable.
Disclosure: I am/we are long GBX, JBHT, DSKE, DPSGY, FDX, HUBG, XPO, 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.
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