Transports Weekly Snapshot - All We Want For Christmas Is Tax Reform

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Includes: AAL, AAWW, ALK, AMZN, ARCB, ATSG, CNI, CSX, DAL, DPSGY, DSKE, EWC, EWW, FCNTX, FDX, GATX, JBLU, KNX, LUV, MATX, MRTN, NSC, RLGT, SAIA, SAVE, SNDR, SPY, TRN, ULH, UNP, UPS, USAK, VFINX, VLRS, VTI, XPO, XTN, YRCW
by: James Sands
Summary

The XTN transports index is now up 18.2 percent, whereas the SPY is up 19.2 percent.

With tax reform looming, transports are looking to improve profits to offset operating cost inflationary pressures.

Retail sales remain solid - demand trends are looking stable as we head to 2018.

The Chinese New Year is expected to keep things rolling into 2018.

Source: Google Images

As we closed the week on December 15th, transports and broader markets were marginally better. Retail sales came out strong; with Christmas only eight days away, the year is coming to a close. For transports, it has been a good one with e-commerce driving record volumes for both seaport and air cargo modes.

Tax reform is expected to lead to a bill for President Trump to sign next week. This bodes well for transports as a primary benefit of increasing profits is to offset operating cost inflationary pressures. While some are focused on perceptions of greedy corporations lining pockets of executives and shareholders, transports are eagerly looking forward to more capital for their asset-intensive businesses.

I manage the Lean Long-Term Growth Portfolio (LLGP). To date, performance stood at 17.8 percent, as highlighted in green. The anomaly for transports indices continues to be the NASDAQ Transportation (^TRAN) index, now up 22.9 percent. Both the NASDAQ (^IXIC) and Fidelity Contrafund (FCNTX) remain strong, up 28.9 and 25 percent; technology continues to be a leading performer for the year.

The Dow Jones (DJT), SPDR S&P 500 ETF (SPY), Vanguard 500 Index (VFINX) and Vanguard Total Stock Market ETF (VTI) were all up 19.2 to 24.7 percent. Mid and small cap indices remain lower, and continue to be weaker after recent tax reform expectations.

YTD 2017 SPY Vs. XTN Index Prices

For 49th week of 2017, the spread between the SPY and the S&P Transportation ETF (XTN) increased with the SPY up by 1 percentage point. The SPY increased by 40-basis points (bps) to 19.2 percent; while the S&P Transportation ETF declined by 20 bps to 18.2 percent for 2017.

After reaching parity with broader markets last week, transports slipped a little bit as the SPY was marginally higher. The retail sales report was out this past week and it was up strongly. Some attributed it to an early Thanksgiving, either way, the economy is improving from both tangible performance and confidence.

Rail Operators

Rail operator performance was mixed for the week, with Union Pacific (UNP), Norfolk Southern (NSC) and Canadian National (CNI) leading the way. This week’s big news occurred on Friday with concerns regarding Hunter Harrison’s health. Saturday’s news of his passing is unfortunate, and I wish all of his family the best during this sad time. Initial news sent CSX’s (CSX) stock price much lower based on execution uncertainty – next week may be volatile.

Week forty-nine of 2017 witnessed the fourteenth consecutive YoY growth trend from week 35’s negative result (only the second negative result for the year). The rate of growth improved from the previous week to 5.2 percent from last year. The most recent monthly Class I rail traffic report can be found here.

Railcar Manufacturers & Lessors

Railcar manufacturers and lessors were all higher with the exception being GATX Corporation (GATX). Rail equipment lessors continue to struggle a little more than other transports equipment lessors. In other recent news, Trinity Industries (TRN) announced that it would spin off its infrastructure related businesses, keeping a focus on railcar leasing, manufacturing and services.

I continue to view railcar manufacturers and lessors with some uncertainty over the next couple of years. But trends do display that it appears a bottom may have occurred sometime from March to June of 2017. Railcar orders appear to be on the rise, and manufacturing capacity continues to improve.

Truckload Carriers

The majority of truckload carriers were down this past week with exceptions being Daseke (DSKE), Knight-Swift Transportation (KNX), Marten Transport (MRTN), Schneider National (SNDR) and Universal Logistics Holdings (ULH). Cleary, performance was mixed between both large and smaller peers. I remain negative on USA Truck (USAK) as the outlier due to weaker comparable metrics despite robust profit growth.

The ELD (electronic logging device) rules go into effect this Monday. Expert opinions remained mixed and varied as to the extent of the impact on the industry. But the combination of a lack of drivers and improved demand, a healthy increase in spot market and contract freight rates could be on the horizon. Inflationary cost pressures for trucking certainly would welcome this.

Less-Than-Truckload Carriers

Less-than-truckload (LTL) carriers followed were all down last week with the lone exception being Saia (SAIA). Saia continues to execute well on opening its Northeast terminals to expand capacity. ArcBest Corporation (ARCB) had a rough week as the company was downgraded earlier in the week due to upcoming labor negotiation uncertainties. While short-term trading strategies may be panning out for both ArcBest and YRC Worldwide (YRCW), I continue to look elsewhere for long-term opportunities.

As a group, there is no denying the success of late. Shipping volumes and pricing both remain favorable for LTL carriers, with expectations for this environment to remain stable into 2018.

Air Freight, Package & Delivery

Air freight, package and delivery companies were mostly flat to modestly lower for the week. It’s a barn-burner between Air Transport Services Group (ATSG) and Deutsche Post DHL Group (OTCPK:DPSGY). I am rooting for DHL Group to come out on top. FedEx Corporation (FDX) has risen back to all-time highs for 2017 as well, with the laggards being Atlas Air Worldwide (AAWW) and United Parcel Service (UPS).

TNT Express challenges aside, tailwinds remain favorable for both DHL Group and FedEx. UPS has recently continued to struggle with demand outstripping capacity, but all parcel/package delivery companies continue to face these challenges during peak shipping seasonality.

Contract Logistics, Forwarding & Brokerage

Contract logistics companies were mostly mixed this past week as parity takes center stage on multiple fronts. All companies are now positive for 2017, with XPO Logistics (XPO) in the lead by far. The decline from Radiant Logistics (RLGT) is where I would expect USA Truck’s reversion to gravitate, as speculation was the core catalyst for both companies performing well this past year.

XPO continues to dominate the competition on multiple fronts. For these reasons, I am excited to see how the company looks to pursue another $8 billion in acquisitions, which will take it to further competitive levels. It is anyone’s guess, but I think we may see some deals over the next few quarters.

Container Shipping Lines, Charter Owners & Container Lessors

For the container shipping industry, last week’s performance was positive across the board. These results were contrary to most other transports, which were either mixed or down. Container lessors got back on track and I do expect to see stronger performance for 2018, albeit not at the same rate as has been the case for 2017.

Charter owners and managers have been beaten up for most of the year, as has been Matson (MATX). As long as global container shipping lines can maintain some pricing discipline and overcapacity issues do not re-emerge in an aggressive manner, this group may be set up for overall positive performance for 2018. I remain cautiously optimistic, but we need to see how supply-demand plays out.

Airlines

Airline stock performance was mostly positive for the third consecutive week with exceptions being JetBlue Airways (JBLU), Spirit Airlines (SAVE) and Vuela Compania de Aviacion (VLRS). Recent results from Alaska Air Group’s (ALK) demand-capacity numbers and Delta Air Lines' (DAL) investor day presentation provided some positive momentum for most airline stocks this past week.

Despite the substantial volatility for airlines this past year, Southwest Airlines (LUV), Delta and American Airlines Group (AAL) all find themselves up near or greater than 10 percent. The other side of the picture is not as pretty with more than half of this peer group down from -5 to -41 percent.

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 forty-ninth week of 2017, total traffic was up 4.3 percent with carload traffic up 3.6 percent, flat; and intermodal traffic up 5.1 percent, up 10 bps. Week forty-nine performance improved from the previous week to 5.2 percent, YoY.

These numbers continue to not be far off from the total traffic originated results of 4.7 percent for the first forty-nine 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 3.4 percent and Canadian traffic was up 10.7 percent, closely tracking the carried rail traffic when combined. Mexico traffic was up 1.6 percent, as improvement remains in positive territory.

Container traffic was up 4.9 percent, which was flat. Domestic intermodal pricing for both eastbound and westbound averages have remained strong of late. Average pricing is up double-digits for both directions from last year. Fuel surcharges remain stronger as a solid contributor with oil prices higher.

Week forty-nine witnessed weekly coal carload traffic at 112,000 carloads carried. This reflected a -0.2 percent decline versus last year, reversing last week’s gain. Grain performance was down, at -1.4 percent versus last year. Similar to coal, weekly growth from this point forward will be choppier; this was the sixteenth consecutive week of negative performance.

Motor vehicles and equipment carload traffic performance was up 0.8 percent versus last year, the third consecutive week of positive performance. Chemicals were up 5.6 percent, petroleum products were up 22.2 percent, the tenth consecutive week of positive performance, and crushed stone, gravel and sand remained on a roll, up 24 percent.

Trucking Industry

Source: DAT Solutions, DAT Trendlines

With 2017 mostly in the bag, the question on investor minds is where to find the best value for 2018. While I’m not perfectly there yet to make my detailed breakdown, I am leaning towards larger peers, especially those with strong exposure to intermodal. I really do believe that at some point, the markets will recognize that smaller peers are mostly lagging both top- and bottom-line trends versus those with scale. Momentum will continue to generate the herd mentality, but long-term the goal is to find and invest in the winners.

Diesel prices were up 16.7 percent versus last year as of December 11th, a 90-bps decline from the previous week. Spot market pricing remained up strongly. For the week through December 9th, spot market loads were up over 96 percent YoY in November, while capacity was down -1.5 percent. Dry van, flatbed and reefer rates were all up over 20 percent from last year for November.

Air Cargo

As air cargo performance continues to see highly robust reported results, lagging indicators substantiate these trends. Monthly revenue tons enplaned have risen at a rapid pace both globally and domestically throughout 2017. Both global and U.S. statistics through September 2017 were up around 11 percent from the previous year.

Both Air Transport and Atlas Air continue to see substantial growth driven by e-commerce, namely Amazon’s (AMZN) leasing contracts. Both companies have witnessed cargo revenue tons enplaned around 47 percent higher from last year; with Atlas Air’s total through September being over 33 percent greater than Air Transport. Internationally, the story has been mixed with Atlas Air seeing strong positive growth, while Air Transport has been negative. Both FedEx and UPS have witnessed solid growth, with FedEx benefiting from the TNT Express added international volume, and UPS seeing stronger domestic performance.

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 head to January 2018, the comparable baseline will remain much higher for the remainder of the year.

YoY, Trans-Pacific freight rates have remained down greater than 25 percent for shipments from Shanghai to the West and East coasts. These current numbers have improved somewhat from November lows. Asia to Europe rates have declined by greater than 20 percent for North Europe and the Mediterranean with strong weakness of late. Trans-Atlantic rates remained modestly positive for both eastbound and westbound service.

The strength in spot market rates this past week have been attributed to initial preparations for the Chinese New Year. With the strength in TEU volumes for 2017, there are a couple of questions that come to mind. First, will global container liners look to grow capacity greater than what is already planned? Second, will demand be sufficient for increasing capacity? We will need to see how these dynamics play out.

North America Seaports

Early results for the West Coast look highly positive for the month of November TEUs with the seaports of Los Angeles and Long Beach up 5 and 15 percent from last year. Whether or not this type of performance is consistent for the East and Gulf coasts remains to be seen. Charleston was down nearly 7 percent, while Savannah was up just below 3 percent.

APM Terminals, a unit of Maersk Shipping (OTCPK:AMKBY), had some recent information out which was critical of U.S. seaports. Criticisms related to peak volumes and ship dwell times, among other factors. These arguments are not just focused on automation, but overall use of terminal space from chassis supplies, to customs services. 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 10 bps for the week. The index continues to outperform the iShares MSCI Canada ETF (EWC). The Mexico index is now up 13.7 percent for the year versus the 10.9 percent result for the Canadian index, which reflected a 50-bps decline.

The North America Free Trade Agreement (NAFTA) continues to create pessimistic perceptions. Nonetheless, most companies with strong exposure to NAFTA have not wavered during the positive stock market performance during 2017. At this point, only a NAFTA withdrawal would hit these companies, but long-term, the potential for recovery and sustained positive performance would still be a possibility. Markets and supply chains are adept at adjusting as needed to thrive.

Summary

Transports marginally underperformed broader markets this past week. Tax reform looms large next week, and I expect further highs leading up to and following a final bill passed and ready for President Trump’s signature. Stranger things have happened, so a stalled bill and a government shutdown before Christmas would be the extreme opposite for next week’s expectations.

Transports will benefit strongly from a reduction in corporate taxes to 21 percent beginning next year. While most assume that these profits will line the pockets of executives and shareholders, for transports, it will help to offset inflationary operating cost pressures impacting multiple industries.

Disclosure: I am/we are long ALK, CNI, DPSGY, FDX, GBX, HUBG, JBHT, KSU, MATX, SNDR, TRTN, 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.

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