Transports Weekly Snapshot - Year-End Review

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Includes: AAL, AAWW, ALK, ARCB, ARII, ATSG, CAI, CGI, CHRW, CMRE, CNI, CP, CSX, CVTI, DAC, DAL, DPSGY, DSKE, ECHO, ELD, ESEA, EWC, EWW, EXPD, FCNTX, FDX, FWRD, GATX, GBX, GDP, GSL, GWR, HD, HTLD, HUBG, JBHT, JBLU, KNX, KSU, LSTR, LUV, MATX, MRTN, NSC, ODFL, PTSI, R, RAIL, RLGT, RRTS, SAIA, SAVE, SFL, SNDR, SPY, SSW, TGH, TRN, TRTN, UAL, ULH, UNP, UPS, USAK, VFINX, VLRS, VTI, WAB, WERN, XPO, XTN, YRCW
by: James Sands

Summary

The XTN transports finished 2017 up 20.7 percent, whereas SPY finished up 19.4 percent.

Transports are poised to see further gains in 2018 stemming from tax reform and sustained economic growth.

Further consolidation within all transports sectors remains a possibility next year; my immediate focus is on XPO and Hub Group.

We will continue to track whether transports can notch a third consecutive besting of SPY in 2018.

Source: Google Images

As we closed the last week of 2017 on December 29th, transports outperformed broader indices for the second consecutive year. This was despite a party-pooper trading Friday just before the celebration of the new year. Expectations are for the fourth quarter's gross domestic product (GDP) growth to be at or above 3 percent for the third consecutive quarter; something that has not been accomplished in a while.

As a core driver of GDP growth, transports have shown no signs of slowing to a degree that would suggest a contraction and/or recession from a supply and demand stance. This type of expectation is spread across transport modes for both passenger and freight sectors. As long as demand for the movement of people and goods continues to grow (even at a slower pace), the economy will continue to exceed previous year performance.

I manage the Lean Long-Term Growth Portfolio (LLGP). For 2017, performance ended up at 21.5 percent, as highlighted in green. The anomaly for transports throughout the year was the NASDAQ Transportation (^TRAN) index, which finished at 24.9 percent. Both the NASDAQ (^IXIC) and Fidelity Contrafund (FCNTX) finished at 28.2 and 24.4 percent, respectively; technology was 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) all finished from 19 to 25.1 percent. Mid and small cap indices finished lower, setting up for an interesting 2018.

YTD 2017 SPY Vs. XTN Index Prices

For 52nd week of 2017, the spread between SPY and the S&P Transportation ETF (XTN) decreased with SPY down now by 1.3 percentage point. SPY declined by 30 basis points (bps) to 19.4 percent while the S&P Transportation ETF declined by 130 bps to 20.7 percent for 2017.

It was a wild ride for 2017, but transports pulled off their second consecutive outperformance of SPY, led by strong gains in November and December. For the first time in a while, all freight modes have witnessed improving demand and supply conditions. These conditions are expected to continue to expand during 2018, with the potential for spot market and contract pricing to increase as capacity tightens. For these reasons among others, 2018 may be another banner year for transports.

Rail Operators

For 2017, the top performing rail operator stocks were as follows: CSX (CSX) up over 53 percent, Norfolk Southern (NSC) up over 34 percent, Union Pacific (UNP) up over 29 percent, and Canadian Pacific (CP) up 28 percent. Kansas City Southern (KSU) and Canadian National (CNI) were up 24 and over 22 percent, respectively, while Genesee & Wyoming (GWR) was up over 13 percent. Where we are today, I continue to like Kansas City Southern and Canadian National as top picks for 2018, especially as the former displayed the strongest weakness amongst peers to finish the year. I am long both, but so far have lagged leading peers.

Week fifty-one of 2017 witnessed the sixteenth 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 11 percent from last year. The most recent monthly Class I rail traffic report can be found here.

Railcar Manufacturers & Lessors

For 2017, the top performing railcar manufacturers and lessors were as follows: Trinity Industries (NYSE:TRN) 35.5 percent, Greenbrier Companies (NYSE:GBX) 28.9 percent and FreightCar America (NASDAQ:RAIL) 14.4 percent. GATX Corporation (NYSE:GATX) finished up 0.9 percent, while both Westinghouse Air Brake Technologies (NYSE:WAB) and American Railcar Industries (NASDAQ:ARII) were down -1.9 and -8.1 percent respectively. With the positive outlook expressed by rail operator executives, the next year or two could end up being positive.

The recent investment by Canadian National into its locomotive fleet is a very good sign, especially if other Class Is follow suite for rail equipment. As I have expressed before, when it comes to railcar manufacturers, Greenbrier is my top pick moving forward due to its recent market share gains and global expansion. I am long, and content with the company's second place finish behind Trinity.

Truckload Carriers

For 2017, top performing truckload carriers were plentiful including USA Truck (NASDAQ:USAK) 108.2 percent, Schneider National (NYSE:SNDR) 50.3 percent, Covenant Transportation (NASDAQ:CVTI) 48.6 percent, Universal Logistics Holdings (NASDAQ:ULH) 45.3 percent, Marten Transport (NASDAQ:MRTN) 45.2 percent, Werner Enterprises (NASDAQ:WERN) 43.4 percent and Daseke (NASDAQ:DSKE) 41.8 percent. Other notable performers included P.A.M. Transportation (NASDAQ:PTSI) 33.9 percent, Knight-Swift Transportation (NYSE:KNX) 32.3 percent, Landstar System (NASDAQ:LSTR) 22 percent, J.B. Hunt Transport (NASDAQ:JBHT) 18.5 percent, Heartland Express (NASDAQ:HTLD) 14.6 percent and Ryder System (NYSE:R) 13.1 percent.

Laggards included Celadon Group (NYSE:CGI) and Roadrunner Transportation (NYSE:RRTS) at -10.3 and -25.8 percent respectively. The theme for 2017 clearly was for smaller peers outperforming larger counterparts. While I disagree with the market's performance, I do expect the trucking industry to continue to catch tailwinds from sustained demand and constrained supply. For consolidation hopes, not all smaller peers are equal, so I wouldn't assume only this group. For 2018, I continue to like larger peers and am exposed to both Schneider and J.B. Hunt for both truckload and intermodal opportunities.

Less-Than-Truckload Carriers

For 2017, less-than-truckload (LTL) carrier performance was as follows; Saia (SAIA) 60.2 percent, Old Dominion Freight Line (ODFL) 53.3 percent, ArcBest Corporation (ARCB) 29.3 percent, Forward Air (FWRD) 21.2 percent and YRC Worldwide (YRCW) 8.3 percent. Much of the same demand and supply opportunities for truckload peers similarly will be there for LTL carriers. The added improving industrial sectors and e-commerce tailwinds also provide opportunities.

For 2018, I continue to believe that both Saia and Old Dominion will be leaders. I took profits from my position in Old Dominion a while back, and it was a mistake. I will consider re-entering a position in the event a pullback occurs next year.

Air Freight, Package & Delivery

For 2017, air freight, package and delivery company performance was as follows; Deutsche Post DHL Group (OTCPK:DPSGY) 45.3 percent, Air Transport Services Group (ATSG) 45 percent, FedEx Corporation (FDX) 34 percent, Atlas Air Worldwide (AAWW) 12.5 percent and United Parcel Service (UPS) 3.9 percent. I am very content with the performance of both DHL Group and FedEx as I own both companies.

While growth opportunities are there for air cargo lessors, it will be interesting to see how margin and leverage evolve over time. I am not a long-term believer that Amazon (NASDAQ:AMZN) will not place greater pressure on contracts over time. On the flip side, if things work out well, consolidation could be in the cards. Speculation is strong at the moment, and has been in the past regarding the company's thirst to invest in transportation. I continue to like both DHL Group and FedEx as leading performers for 2018.

Contract Logistics, Forwarding & Brokerage

For 2017, contract logistics company performance was as follows: XPO Logistics (XPO) 112.2 percent, Expeditors International (EXPD), 22.1 percent, C.H. Robinson Worldwide (CHRW) 21.6 percent, Radiant Logistics (RLGT) 17.9 percent, Echo Global Logistics (ECHO) 11.8 percent and Hub Group (HUBG) 9.5 percent. I own both XPO and Hub Group and will continue to do so for the foreseeable future.

The recent information that became public regarding Home Depot's (HD) interest in XPO has taken the stock to a new level. The stock was headed this direction regardless. I expect that consolidation will happen at some point, who and by whom remains to be seen. Irrespective of consolidation, both XPO and Hub Group are my picks for 2018.

Container Shipping Lines, Charter Owners & Container Lessors

For 2017, the container shipping industry peer leading performance was as follows: CAI International (CAI) 226.6 percent, Textainer Group Holdings (TGH) 188.6 percent and Triton International (TRTN) 137 percent. Clearly, container lessors were the top performers, not only for container shipping industry peers but also for transports overall. Only USA Truck and XPO were remotely close.

Charter owners and managers were mixed for the year, with leading performers as follows: Costamare (CMRE) 4.7 percent, Ship Finance International (SFL) 4.4 percent and Euroseas (ESEA) 0.6 percent. Laggards included Global Ship Lease (GSL) at -22.7 percent, Seaspan Corporation (SSW) at -23.6 percent and Danaos Corporation (DAC) at -45.3 percent. Matson (MATX) finished the year at -15.7 percent. For 2018, I like container lessors to push higher and Matson's prospects.

Airlines

For 2017, airline stock leading performance was as follows: Southwest Airlines (LUV) 31.3 percent, Delta Air Lines (DAL) 13.8 percent and American Airlines Group (AAL) 11.4 percent. Laggards included JetBlue Airways (JBLU) at -0.4 percent, United Continental Holdings (UAL) at -7.5 percent, Alaska Air Group (ALK) at -17.2 percent, Spirit Airlines (SAVE) at -22.5 percent and Vuela Compania de Aviacion (VLRS) at -46.7 percent. It truly was night and day performance between peers.

As we head into 2018, I continue to like both Southwest and Alaska. These have been top performers for both service and stock price appreciation recently. While optimism is felt across the industry, investors should keep an eye on rising labor costs and energy prices.

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 fifty-first week of 2017, total traffic was up 4.5 percent with carload traffic up 3.8 percent, a 10 bps increase, and intermodal traffic up 5.3 percent, a 20 bps increase. Week fifty-one performance improved from the previous week to 11 percent, YoY.

These numbers continue to not be far off from the total traffic originated results of 4.9 percent for the first fifty-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 3.6 percent and Canadian traffic was up 10.9 percent, closely tracking the carried rail traffic when combined. Mexico traffic was up 1.9 percent, as improvement remains in positive territory.

Container traffic was up 5.1 percent, a 10 bps increase. 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 fifty-one witnessed weekly coal carload traffic at 111,000 carloads carried. This reflected a 5.6 percent increase versus last year, reversing two consecutive weeks of decline. Grain performance was up, at 1.5 percent versus last year. Similar to coal, weekly growth from this point forward will be choppier; however, this positive result broke seventeen consecutive weeks of negative performance.

Motor vehicles and equipment carload traffic performance was up 0.7 percent versus last year, the fifth consecutive week of positive performance. Chemicals were up 3.1 percent, petroleum products were up 22.7 percent, the twelfth consecutive week of positive performance, and crushed stone, gravel and sand remained on a roll, up 65.9 percent.

Trucking Industry

Source: DAT Solutions, DAT Trendlines

All indicators have been stable and strong for the trucking industry. Class 8 sales and trailer equipment sales have remained steady. Overall shipment demand has increased which has been reflected in spot market and contract pricing increases. Driver shortages and the electronic logging device (ELD) mandate are expected to further tighten capacity. Shippers have begun to anticipate rising freight costs; intermodal carriage will benefit in-line as these trends continue for the trucking industry.

Diesel prices were up 14.3 percent versus last year as of December 25th, a 50 bps decline from the previous week. Spot market pricing remained up strongly. For the week through December 23rd, spot market loads were up 9.7 percent from the previous week, while capacity was down -19 percent. Dry van, flatbed and reefer rates were all modestly higher from previous week.

Air Cargo

Air cargo expectations for 2018 are similar to that of the trucking industry; expectations are highly positive. The core difference is that air cargo demand began showing signs of improvement a bit earlier than truck carriers. As recent as December, shippers are finding it difficult to find space for freight shipment needs by air. The ability for carriers to turn down customers is a clear indication of demand outstripping capacity. This environment is anticipated to continue into 2018.

Investors should keep in mind that a substantial majority of air cargo shipments are driven by time sensitivity. As air shipments are much more expensive than sea and land, shippers attempt to use cheaper means as much as possible. With the increase in e-commerce orders, the ripple effect of just-in-time and supply chain needs to meet quicker deliveries has led to increasing dependencies on airfreight. This has created a new paradigm for air cargo long-term growth adjustments.

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 just below 22 percent for shipments from Shanghai to the West and East coasts. These current numbers have improved strongly from November lows. Asia to Europe rates have declined by greater than 25 percent for North Europe and the Mediterranean with strong weakness of late. Trans-Atlantic rates remained positive for both eastbound and westbound services, more so for eastbound shipments.

Last week's statement remains the same as we approach 2018. 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 ended the month up 4.5 percent from 2016's numbers. While this performance was a decline from most of 2017, it was relatively strong as November of 2016 saw an 8.1 percent increase. November's 2017 results were the lowest positive performance for the year. Results were more mixed with West and Gulf coasts outperforming East Coast peers.

As larger container ships continue to push economies of scale, the focus will move more and more towards the land side of the equation. For seaports, this will translate to container dwell times, truck turn times, chassis capacity and on-dock rail access. 2017 has seen very strong TEU growth and the trend for growth is expected to continue in 2018. The most recent monthly North America seaport TEU report is located here.

North America Cross-Border Trade

The iShares MSCI Mexico Capped (EWW) finished the year up 12.1 percent, while the iShares MSCI Canada ETF (EWC) finished 2017 up 13.3 percent. For most of 2017, the Mexico index strongly outperformed its Canadian peer. However, as the North America Free Trade Agreement (NAFTA) rounds of discussions have stalled, the tables turned as current U.S. administration government's stance has had a more publicly negative tone with Mexico.

Performances for companies that I own with exposure to Mexico have had varying degrees of performance as the year has come to an end. For me, this signals that there is still no clear indication as to what will happen to NAFTA in 2018. There are other core topics including infrastructure, healthcare, and other welfare programs which will take center stage as well. It remains to be seen whether NAFTA will remain for the long-term.

Summary

My expectations are for transports to notch a third consecutive year for outperforming SPY. GDP growth looks to be stable to moderately increasing, all major freight indicators continue to show growth, executive management teams are all expecting positive momentum to continue. The primary risk to lead to a correction in my opinion is either temporary from inflation, or more impactful for unknown geopolitical uncertainties. Despite my optimism, there is never an easy and/or perfectly transparent future.

In addition to transports, I expect energy, commodities and retail to show positive signs as well. Technology had a very strong 2017, but I do expect some rotation shifts to occur as other sectors begin to experience new tailwinds. E-commerce will continue to evolve, and as Amazon has mirrored and/or literally copied traditional retail models, I suspect that the opposite will begin to take greater form. Overall, things initially look positive for 2018 - but as we have witnessed a long bull market, investors may be served well to temper buying activity and maintain adequate cash reserves.

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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