Source: Google Images
As we closed the week on October 13th, transports sustained their positive momentum. However, J.B. Hunt Transport (JBHT) was one of the first major freight companies to report, and results were lower than expected. This led to a broad decline in performance this past Friday, as the market attempted to digest implications.
Last week, the retail sales report and consumer price index (CPI) were published. Both reports were positive as the economy continues to see sustained consumption and moderate inflation. Some may be critical of these numbers, but biased perspectives for self-fulfilling interests are of no value for investors looking for where the economy is headed; especially for transports.
I manage the Lean Long-Term Growth Portfolio (LLGP). To date, performance stood at 12.1 percent, as highlighted in green. Transports have broken through double-digit performance. The anomaly remains the NASDAQ Transportation (^TRAN) index, now up 18.3 percent. Both the NASDAQ (^IXIC) and Fidelity Contrafund (FCNTX) remain strong, up 22.7 and 25.9 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 14 to 15.7 percent. Mid- and small-cap indices remain slightly lower. Transports continue to lag broader markets, but performance is much closer.
YTD 2017 SPY Vs. XTN Index Prices
For 40th week of 2017, the spread between the SPY and the S&P Transportation ETF (XTN) increased with the SPY up by 2.1 percentage points. The SPY increased by 30-basis points (bps) to 14.1 percent; while the S&P Transportation ETF also increased by 10-bps to 12 percent for 2017.
After nearly hitting parity the previous week, transports have remained more volatile versus broader markets. Friday's weakness was partly driven by J.B. Hunt's third quarter results, which underwhelmed. Truck pricing continues to surge though so expectations for transports to continue to improve remains.
Rail operator performance was marginally positive for the week with exceptions being Union Pacific (UNP) and Genesee & Wyoming (GWR). Canadian Pacific (CP) rallied strongly as the company received an analyst upgrade during the week. Analysts continue to select who they prefer within this group. My top picks remain Canadian National (CNI) and Kansas City Southern (KSU), which are both battling for second place behind CSX (CSX).
Week forty of 2017 witnessed a fifth consecutive YoY growth trend from week 35's only second negative result for the year. The rate of improvement was robust and the fastest pace since before Hurricane Harvey. The most recent monthly Class I rail traffic report can be found here.
Railcar Manufacturers and Lessors
Railcar manufacturers and lessors were mostly down with exceptions being Greenbrier Companies (GBX) and GATX Corporation (GATX). Both Trinity Industries (TRN) and Greenbrier have rallied strongly since mid-September. Similar to the trucking industry, FreightCar America (RAIL) has been the top performer, and is the smallest peer.
Analyst estimates have been increasing for Greenbrier and Trinity Industries, but have been declining for American Railcars (ARII). Expectations have also been on the decline for GATX Corp. and Westinghouse Air Brake Technologies (WAB). While not typically the way it works, separation between the two groups has occurred as railcar manufacturers have been positive.
Truckload carriers were mostly down for the week, with exceptions again being smaller peers. Covenant Transportation (CVTI), P.A.M. Transportation (PTSI), Universal Logistics Holdings (ULH) and USA Truck (USAK) all bucked the trend for weekly declines. The major impact on the industry was J.B. Hunt's weaker results than expected. This was largely due to natural disaster and one-time acquisition costs.
Truck pricing remains a catalyst to drive profits and correspondingly, stock prices higher. J.B. Hunt's results and impact should not last long as companies reporting with greater exposure to truckload demand may be singing a different tune. Ironically, J.B. Hunt and others with exposure to intermodal and contract logistics will likely follow suit.
Less-than-truckload (LTL) carriers were also down for the week, with the exception being Forward Air (FWRD). Aside from Forward Air and Old Dominion Freight Lines (ODFL), this group was hit rather hard from the previous week. The market has already factored for moderate rate increases and robust volume growth. YRC Worldwide (YRCW) has had such inconsistent financial performance that the stock will remain volatile.
I expect both Saia (SAIA) and Old Dominion to remain atop this group. Saia is going to end up being the dominant performer over the past couple of years as the company continues to expand its services in the Northeast. Investors should keep in mind that there are larger consolidated freight companies that have strong exposure to LTL.
Air Freight, Package and Delivery
Air freight, package and delivery companies were mixed, with air cargo lessors being down, and package delivery peers being up for the week. Deutsche Post DHL Group (OTCPK:DPSGY) continues to outperform both FedEx Corporation (FDX) and United Parcel Service (UPS). FedEx was negative this past Friday from J.B. Hunt's results - FedEx is the largest LTL service provider in North America.
Air cargo indicators remain highly robust and bode well for all three global package and delivery companies. DHL Group's supply chain segment is a global force in addition to air cargo. Air cargo lessors should also benefit from increasing demand, but investors need to pay attention to margins for the sake of growth.
Contract Logistics, Forwarding and Brokerage
Contract logistics companies were mostly up for the week with exceptions being Expeditors International (EXPD) and Hub Group (HUBG). Hub Group's decline was driven by J.B. Hunt's third quarter results. Hub Group has faced many of the same challenges as J.B. Hunt's intermodal segment. Interestingly, CH Robinson Worldwide (CHRW) had a stable week, despite the company's recent struggles due to increasing purchased transportation costs.
I suspect that this group may see some pressure from the cost side, similar to J.B. Hunt. But the next few quarters holds promise, especially if pricing momentum can be sustained. Hub Group is becoming an increasingly interesting potential acquisition target. With intermodal facing stronger competition and inflationary costs, consolidation makes sense.
Container Shipping Lines, Charter Owners and Container Lessors
For the container shipping industry, last week's performance was mixed across the board. Container lessors remain untouchable from any other transports industry. Charter owners and managers have shown some life, but overall remain depressed. Matson (MATX) continues to trade around $27.50 to $28 per share as the company has rebounded from speculation earlier in the year regarding competition in the Hawaii market.
Can container lessors keep it going, and for some, can this momentum take companies back to previous highs. This question is interesting as despite the strong run-up, a company like Textainer Holdings Group (TGH) is still far from stock price highs over the past five years. Investors need to keep a close eye on global container demand.
Airline stock performance for the week was mostly positive with exceptions being Spirit Airlines (SAVE) and Controladora Vuela Compania de Aviacion (VLRS). Airlines have had a rough go of it, during the second half of 2017, but sentiments have improved over the past few weeks. Unfortunately, Spirit and Controladora Vuela have been left out of this uptrend.
Airline stocks have been severely discounted in a short period of time. I like this group's chances of getting back some, if not all of the momentum from earlier in the year.
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 and Intermodal Units Carried
Through the fortieth week of 2017, total traffic was up 4.6 percent with carload traffic up 4.5 percent, down 10-bps; and intermodal traffic up 4.8 percent, up 10-bps. Week forty performance accelerated from the previous week.
These numbers continue to not be far off from the total traffic originated results of 5.1 percent for the first forty weeks of 2017 for North America rail traffic, published by the Association of American Railroads (NYSE:AAR) data. Investors should remember that total traffic carried includes both originated and received carloads and intermodal units. Additionally, U.S. traffic was up 3.7 percent and Canadian traffic was up 11.3 percent, closely tracking the carried rail traffic when combined. Mexico traffic was up 0.6 percent, as improvement remains in positive territory.
Container traffic was up 4.8 percent, up 20-bps. Domestic intermodal pricing for both eastbound and westbound averages remain positive from last year, despite the higher comparable. Fuel surcharges, although a lag, remain poised to increase as diesel prices have stayed higher after both hurricanes.
Week 40 witnessed weekly coal carload traffic at 112,000 carloads carried. This reflected a -2.4 percent decline versus last year, the fourth consecutive decline. Grain performance was down, at -5.6 percent versus last year. Similar to coal, weekly growth from this point forward will be choppier; this was the seventh consecutive week of negative performance.
Motor vehicles and equipment carload traffic performance was down -6.3 percent versus last year; the thirteenth consecutive drop from previous performance levels. Chemicals were up 2.5 percent, petroleum products were up 7.8 percent and crushed stone, gravel and sand remained on a roll, up 22 percent.
Source: Cass Information Systems, Cass Freight Index
Based on what we saw from J.B. Hunt, it will be important to see how truckload pure plays perform. J.B. Hunt's woes have been largely attributed to increasing intermodal operating costs. With less reliance on purchased transportation for truckload pure plays, there should be signs of stronger performance. On the flip side, companies with strong exposure to intermodal and/or contract logistics should still see improving conditions over the next few quarters.
Diesel prices declined but remained up 13.5 percent versus last year as of Oct. 9, a 3.5 percentage point decline from the previous week. Spot market pricing remained up big a weekly basis. For the week through Oct. 7, spot market loads were up over 115 percent YoY, while capacity was down at nearly -8 percent. Dry van, flatbed and reefer rates were up from 17 to 22 percent from last year.
The most recent data for revenue tons enplaned as provided some interesting information. Positive growth YoY has remained on a tear since November of last year. U.S. carrier performance is up approximately 10.3 percent through July. Atlas Air Worldwide (AAWW) has substantially outperformed Air Transport Services Group (ATSG), up 26 percent. After being lower earlier in the year, FedEx has now eclipsed UPS.
Air cargo is not showing any signs in slowing based on tonnage volumes across the globe. Air cargo lessors have seen higher volume performance than air freight and package delivery companies. This trend should continue through the remainder of the year.
Container Shipping Lines
Source: Alphaliner - Top 100 Operated Fleets
Pricing for spot market container rates have remained in a downtrend since the peak in mid-January, per the Shanghai Containerized Freight Index (SCFI). As we continue to October, the comparable baseline will remain much higher for the remainder of the year.
YoY, Trans-Pacific freight rates have declined further to around -30 percent for shipments from Shanghai to the West and East coasts. Asia to Europe rates have been mixed down 9 percent and up 15 percent for North Europe and the Mediterranean.
Falling rates are not due to lack of demand. Rather it is a result of a substantial influx of capacity. Global shipping lines continue to display undisciplined practices when it comes to supply and demand. This makes for a tenuous environment despite strong results during the first half of the year.
North America Seaports
Initial results for the West Coast were highly mixed with Long Beach and Los Angeles seeing 28 and 2 percent TEU traffic growth in September. With the surge in container traffic from Class I rails on the East Coast, expectations for sustained robust growth is likely.
Just as North America TEU demand has been robust at nearly 9 percent, Japan's container trade for fiscal year 2017 has been revised upward to 2.7 percent. The most recent monthly North America seaport TEU report is located here.
North America Cross-Border Trade
The iShares MSCI Mexico Capped (EWW) was down by 330-bps for the week. The index continues to outperform the iShares MSCI Canada ETF (EWC). The Mexico index is now up 18.5 percent for the year versus the 11.9 percent result for the Canadian index; which reflected a 120-bps increase. The Canadian index continues to witness its strongest positive trend for the year, steadily inching towards its Mexican peer.
North America Free Trade Agreement (NAFTA) renegotiation has been unsuccessful to date. Mexico's broader index has seen its worst performance since just after President Trump was elected. There will be more volatility ahead into next year as a new president will be elected in Mexico. The longer it takes for things to happen, the more uncertainty for the markets.
J.B. Hunt got transports off on the wrong foot this past Friday. Major indicators have still displayed very robust freight demand in the third quarter. As a result, I expect to see positive reports for truckload peers and air freight and package delivery companies. Less certainty remains for intermodal and contract logistics, but the outlook over the next few quarters is positive.
The retail sales report was solid, and inflation numbers came in good as well. Month-to-month inflation has only been negative once during 2017 through September. With three months left to go, 2017 is shaping up to be the strongest inflationary growth year out of the previous four.
Disclosure: I am/we are long JBHT, CNI, KSU, GBX, FDX, HUBG, MATX, DPSGY. 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.