Transport Weekly Snapshot - Transports Looking To Outperform Broader Peers For The Second Consecutive Year

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Includes: AAL, ALK, AMZN, ATSG, BA, CAI, CNI, DPSGY, EWC, EWW, FCNTX, FDX, GBX, GE, HD, JBHT, JBLU, KSU, LUV, MATX, MRTN, RAIL, RLGT, SNDR, SPY, T, TRN, UPS, VFINX, VLRS, VTI, XPO, XTN
by: James Sands

Summary

The XTN transports index is now up 22 percent; whereas the SPY is up 19.2 percent.

Tax reform policy has been accomplished, now on to infrastructure needs and NAFTA.

Demand trends continue to look good as we head to 2018.

Source: Google Images

As we closed the week on December 22nd, transports have finally taken the lead versus broader indices, by a strong amount. This was partly driven by Friday's news regarding Home Depot's (HD) interest in XPO Logistics (XPO). As an owner of both companies, this would be a great unexpected Christmas present, but it remains to be seen whether it will pan out.

On that note, I would like to wish everyone a Merry Christmas and a great enjoyable time with family and friends. This holiday season is looking more like it will end up generating close to a 3 percent increase in gross domestic product (GDP) for the fourth quarter. With one week remaining, markets are set up for continued growth in 2018.

I manage the Lean Long-Term Growth Portfolio (LLGP). To date, performance stood at 21.1 percent, as highlighted in green. The anomaly for transports indices continues to be the NASDAQ Transportation (^TRAN) index, now up 26.1 percent. Both the NASDAQ (^IXIC) and Fidelity Contrafund (FCNTX) remain strong, up 29.3 and 25 percent, respectively; 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 19.3 to 25.3 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 50th week of 2017, the spread between the SPY and the S&P Transportation ETF (XTN) increased with the SPY down now by 2.3 percentage point. The SPY increased by 50 basis points (bps) to 19.7 percent, while the S&P Transportation ETF increased by 380 bps to 22 percent for 2017.

No more messing around; transports are on track to eclipse the SPY for the second consecutive year. With tax reform in the rear-view window, many large companies, including Boeing (BA), AT&T (T), Kansas City Southern (KSU), and many others already have allocated funds for year-end bonuses, new employees, training programs, and donations. Trickle down will happen in a large manner for industrial and transport industries - this past week, it has already begun.

Rail Operators

Rail operator performance was up for the week, with the only exception being Kansas City Southern. Apparently, the market soured on the $1,000 per employee bonus Kansas City Southern initiated. Seriously, rail stocks are poised for further gains as we head to 2018, recent statements from executives remain positive on overall prospects for next year.

Week 50 of 2017 witnessed the 15th 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 7 percent from last year. The most recent monthly Class I rail traffic report can be found here.

Railcar Manufacturers And Lessors

Railcar manufacturers and lessors were all higher with the exception being FreightCar America (RAIL). Despite being more diversified, Trinity Industries (TRN) recent energy business unit spin-off speaks to the value of the manufacturing and leasing railcar model. This is a primary reason as to why Greenbrier Companies (GBX) is my top pick, similar to container lessors. Diversification has been espoused as positive, but the core drive for growth and stock price performance is more strongly correlated to the prime business units.

I continue to view railcar manufacturers and lessors with some uncertainty over the next couple of years. Recent upbeat perspectives from rail operator executives and Canadian National's (CNI) strong locomotive order from General Electric (GE) are good signs for growth next year. Railcar orders appear to be on the rise, and manufacturing capacity continues to improve.

Truckload Carriers

Truckload carriers were all up for the week, with the only exception being Marten Transport (MRTN). The announcement of Home Depot's interest in XPO Logistics had a positive effect this past Friday on the trucking industry. I continue to see consolidation occurring broadly in transports. While some smaller peers may ultimately get snatched up, investing for acquisitions is not a good strategy. As such, I continue to like larger peers - with XPO being targeted, who is to say that a company like J.B. Hunt Transport (JBHT) or Schneider National (SNDR) could not also become targets.

The focus moving forward will be on retail sales and industrial production. Both are strong core drivers for freight activity. Intermodal is an area that I have become highly exposed to as I believe that it will be one of the most important service offerings over the long term. Technology may thwart the competitive landscape between trucking and rail somewhat, but intermodal networks relying on both modes will likely remain over the long term.

Less-Than-Truckload Carriers

Less-than-truckload (LTL) carriers followed were all up this past week, following truckload peers higher. The LTL market is much more consolidated versus the truckload sector, so further consolidation is not necessarily at the forefront as much. Still, anything could happen as we all know.

E-commerce trends will continue to be a boon for LTL providers. As orders adjust and smaller facilities are relied upon to deliver goods to a more diverse shipment customer base, LTL is looking to become more appealing. The traditional distribution center supply chain model is changing rapidly.

Air Freight, Package, And Delivery

Air freight, package, and delivery companies were all up for the week, with the exception being Air Transport Services Group (ATSG). I have been a proponent this year more so with Deutsche Post DHL Group (OTCPK:DPSGY) and FedEx Corporation (FDX) as compared to Air Transport and other leasing peers. While Amazon's (AMZN) focus on the leasing model has its benefits for air cargo lessors, Amazon's focus on lower prices will put pressure on contract negotiations. Over the long term, this is not highly positive.

I have been pretty right-on for the most part - especially with DHL Group, which now has taken the lead as the top performer for the year. FedEx's recent results were strong, and management is looking at the upcoming year with more positive expectations. I like FedEx's business diversity as a leading in package delivery and the number one LTL provider by tonnage.

Contract Logistics, Forwarding, And Brokerage

Contract logistics companies were all up for the week, with the only exception being Radiant Logistics (RLGT). I find irony in this as XPO was propelled higher this past Friday due to disclosed discussions with Home Depot regarding a deal. Radiant's only reason for being up this year (big earlier in the year) was from analysts promoting the stock due to consolidation expectations. While any deal with XPO may not materialize, we can all agree that one company is truly a better candidate than the other.

I have owned XPO since June of 2016, taking some profits and adding to the position opportunistically. The success of the company at integrating its large deals is a testament to Bradley Jacobs' vision and team. No news has yet to add any further information on Friday's Home Depot tidbit. I do expect some consolidation in this sector.

Container Shipping Lines, Charter Owners, And Container Lessors

For the container shipping industry, last week's performance was mixed with some charter owners and managers doing well, while container lessors were off. Some investors may be a little nervous regarding the slide for container lessors, but I view it mostly related to profit-taking. And why not, especially for CAI International (CAI) being up greater than 300 percent earlier in the year.

Matson (MATX), while still down greater than 14 percent for the year, has gotten back above the $30 level. Near- and long-term prospects still remain favorable, and a price greater than $40 could be in the cards soon. The return to lower freight rates for the year may switch for the upcoming Chinese New Year.

Airlines

Airline stock performance was mostly positive for the fourth consecutive week with the exception being Vuela Compania de Aviacion (VLRS), ouch. The airline industry continues to see improving expectations from analysts. This has led to the recent positive trend over the past month.

What a year for investors with Southwest Airlines (LUV); I am just hopeful that most did not panic-sell with volatility issues. Delta and American Airlines Group (AAL) have also had very strong years. JetBlue Airways (JBLU) has also now turned positive. While integration and pilot challenges have surfaced this year, I expect to see Alaska Air (ALK) in a much better position soon.

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. And Canada Class I Rail Traffic - Carloads And Intermodal Units Carried

Through the 50th week of 2017, total traffic was up 4.4 percent with carload traffic up 3.7 percent, a 10 bps increase; and intermodal traffic up 5.1 percent, flat. Week 50 performance improved from the previous week to 7 percent, YoY.

These numbers continue to not be far off from the total traffic originated results of 4.8 percent for the first 50 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 10.8 percent, closely tracking the carried rail traffic when combined. Mexico traffic was up 1.7 percent, as improvement remains in positive territory.

Container traffic was up 5 percent, a 10 bps increase. Domestic intermodal pricing for both eastbound and westbound averages has 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 50 witnessed weekly coal carload traffic at 110,000 carloads carried. This reflected a -1.3 percent decline versus last year, the second consecutive decline. Grain performance was down, at -3.4 percent versus last year. Similar to coal, weekly growth from this point forward will be choppier; this was the 17th consecutive week of negative performance.

Motor vehicles and equipment carload traffic performance was up 1.1 percent versus last year; the fourth consecutive week of positive performance. Chemicals were up 9.1 percent, petroleum products were up 13 percent, the 11th consecutive week of positive performance, and crushed stone, gravel and sand remained on a roll, up 38.1 percent.

Trucking Industry

Source: DAT Solutions, DAT Trendlines

When focusing on the freight rate environment, dry van performance continues to jump out substantially versus flatbed and reefer services. The November Cass Freight Index has shown a very robust increase in year-over-year (YoY) shipments and expenditures. This has been reflective through strong demand outpacing supply for trucking, air, and rail modes.

Diesel prices were up 14.8 percent versus last year as of December 18th, a 190 bps decline from the previous week. Spot market pricing remained up strongly. For the week through December 16th, spot market loads were up 2.4 percent from the previous week, while capacity was down -7.5 percent. Dry van, flatbed, and reefer rates were all more muted from the previous week.

Air Cargo

FedEx reported financial numbers for the company's second fiscal year 2018 quarter. High-level numbers were excellent beating analyst estimates for revenue and earnings handily. Even better was the company's optimism moving forward into 2018 as the stock price surged through the $250 level. Both FedEx and United Parcel Service (UPS) will continue to benefit from greater increases in e-commerce growth. Amazon has looked to other capacity suppliers, but Amazon is not the only e-commerce game in town, especially over the long term.

This is not surprising as air cargo tonnage has continued to grow at double digits YoY for a while now. The other aspect for FedEx was the company's focus on TNT Express and cyber security moving forward. Impacts were not as bad as the worst-case scenario suggested. As long as consumer demand remains stable and e-commerce continues to grow, air cargo will sustain its performance, although 2018 may see a deceleration in growth.

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). 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 just below 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 23 percent for North Europe and the Mediterranean with strong weakness of late. Trans-Atlantic rates remained modestly positive for eastbound and marginally down for westbound services.

As 2017 provided a very strong recovery for global container shippers, the focus for 2018 will continue to be on supply and demand. Investors should note that for a successful environment to be in place, stability is going to need to occur. Marginal declines and/or increases will be met with positive results. The other factor to consider are the lease agreements in place with a variety of lessors as worsening overcapacity could once again challenge these rates as well.

North America Seaports

November as stated last week is looking for another strong positive month for 2017. It will be the 16th out of the previous 18, and the 10th consecutive month of positive results. Despite negative sentiments from the U.S. administration on trade, growth in 2017 has thrived as the global economy has improved.

For the three primary regions in the U.S., competition will continue to stem around automation and how quickly loads are picked up/dropped off at terminals. The wrench in all of this will continue to be labor unions, which will continue to challenge automation and impact turn times. 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 420 bps for the week. The index is now underperforming the iShares MSCI Canada ETF (EWC). The Mexico index is now up 9.5 percent for the year versus the 11.5 percent result for the Canadian index; which reflected a 60 bps increase.

Negotiation and an ultimate decision for the North America Free Trade Agreement (NAFTA) is going to fall into 2018. As the recent decline in the Mexico index has indicated, confidence for NAFTA to continue with a deal between all three countries is waning. As tax reform has been accomplished by the U.S. administration, confidence going into 2018 is high. I am looking for continued volatility surrounding NAFTA with no new deal in sight.

Summary

Transports have taken the leader versus broader index peers. If this holds over the next four trading days, this will be the second consecutive year that this will have occurred. With a strengthening global economy, transports should continue to be a leading sector moving forward.

While all signs point to 2018 and beyond remaining robust and/or stable, we all know that nothing lasts forever. If markets can continue to grow and remain positive, the chances that an unforeseen event leads to a correction will increase. Geopolitical tensions may end up being the next negative catalyst.

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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