COVID-19 has impacted transportation, with its effects likely to persist for years to come. Despite significant demand for cargo and increasing freight rates, airlines continue to be some of the worst performers in transportation, as high fuel prices, inflation, and other factors disrupt the industry. Despite higher fuel costs and inflation impacts, we believe trucking is an excellent sector given people's needs for staples and goods for everyday living.
As I mentioned in my last article, 3 Best Shipping Stocks to Buy Amid The Global Shipping Crisis, “While the U.S. may see domestic demand curtailed due to a decrease in consumer spending, people still have to eat.” One of the most considerable headwinds facing the trucking and transportation industry is the cost of fuel. While there may be a slowdown in discretionary spending, staple purchases should remain the same or be marginally impacted on a relative basis because people still have to eat, work, and live. Some transport companies are the bloodline and veins for the consumer staples sector, and according to Bascome Majors, Susquehanna International Group research analyst, the road ahead for trucking and logistics is bullish. According to a Seeking Alpha News Article, in a sweeping note, Bascome Majors upgraded transport stocks by stating,
“In early March, we upgraded asset-based truckload carriers [Knight-Swift Transportation Holdings] (NYSE:KNX) and [Schneider National] (SNDR) on our view that a freight recession was already more than priced in…But since then most trucking-related transports continued to underperform as the trade press and Twitter amplified sub-seasonal near-term supply/ demand trucking trends into mainstream macro concerns…For the stocks, we firmly believe this selloff creates attractive risk/reward opportunities in buying transports already priced for a freight recession, particularly after trucking names just delivered their worst performance into a negative spot rate inflection in at least the last decade.”
So while some investors fear the trucking industry, we have selected three top transportation stocks with strong buy quant ratings.
Market Capitalization: $7.62B
Quant Rating: Strong Buy
Quant Sector Ranking (as of 5/18): 43 out of 583
Quant Industry Ranking (as of 5/18): 2 out of 27
One of the largest truckload transportation services companies in North America, Knight-Swift Transportation (KNX), together with its subsidiaries, is dedicated to transporting goods, products, and materials both dry and refrigerated throughout the U.S., Mexico, and Canada. As a top logistics stock focused on regional freight, the carrier is capitalizing on the less-than-truckload (LTL) shipping market, as consumer-driven e-commerce and purchases are increasing the need for LTL.
It is no surprise that Knight-Swift Transportation comes at a reasonable price. With a high demand for truckers to meet the needs of consumer demand in the face of supply-chain issues, KNX comes at a great B valuation.
With an A+ forward PEG ratio at 0.37x indicating how undervalued the company is and a forward P/E ratio of 9.07x, more than 40% below its sector peers, KNX’s share price of $43.18 is a great buy. Although the stock is down 28% year-to-date, now is the time to consider buying the dip, particularly given its momentum and solid growth and profitability metrics.
If our conviction in the financial health and growth prospects of KNX is not enough, Morgan Stanley’s analysts added Knight-Swift to their list of 45 highest conviction stock picks. “We believe KNX's scale and exposure can make them the biggest beneficiary of structural supply headwinds, where our expectations are above cons."
The demand for trucking and transportation continues to grow, as KNX saw its Truckload segment increase revenue 8.8% year-over-year, and continued growth in logistics, intermodal, and their investment in LTL prompted a revenue increase of 142% YoY. Knight-Swift also reported excellent Q1 2022 results, with an EPS of $1.35 beating by $0.09 and revenue of $1.83B beating by nearly 50%, resulting in 20 FY1 Up analyst revisions within the last 90 days. SA Contributor Stephen Simpson highlights in Truckload Rates Are Peaking, But But Knight-Swift May Not Be Unsaddled This Time,
“Knight-Swift's diversification efforts should pay off during this upcoming truckload downturn, cushioning the blow from lower rates as Power Only logistics continues to grow impressively…There are elevated risks holding cyclical companies into downturns, but Knight's valuation looks quite interesting even with a revenue and margin decline in 2023.”
Following the stellar Q1 results, Knight-Swift President and CEO David Jackson stated that the company is arguably the most profitable truckload carrier.
“In addition to the global pandemic that none of us saw coming, our business has transformed rather significantly…particularly the organic LTL growth and the fast-growing services to third-party carriers through Iron Truck services…our revenues come from more diverse sources than ever. Over 40% of revenue comes from non-truckload services, 14% of revenue is multi-year dedicated resulting in only 43% of our total revenues coming from the irregular route truckload service.” -David Jackson
KNX’s Profitability grade is a B+ with Cash from Operations at $1.34B and EBITDA Margin (TTM) of 24.43%. Knight-Swift’s financials and commitment to its shareholders are evidenced through its solid dividend grades and 16 years of consecutive dividend payments and recently declared a $0.12 dividend, in line with its previous, and also announced a $350M stock buyback plan. With the company near multi-year low valuations and strong transportation demand, we believe the ongoing growth in e-commerce and intermodal gives KNX the edge over its competitors. Let’s see what one of its small-cap competitors is offering.
Market Capitalization: $625.93M
Quant Rating: Strong Buy
Quant Sector Ranking (as of 5/18): 18 out of 583
Quant Industry Ranking (as of 5/18): 1 out of 27
P.A.M. Through its subsidiaries, Transportation Services, Inc. (PTSI) transports general commodities and consumer goods, including retail and automotive parts, throughout North America. On a longer-term uptrend, PTSI is experiencing a share price increase over the last year of +84%. Although its YTD stock price is -26.96%, we believe the stock comes at a great cost of under $30/share, and now is the time to capitalize on buying the dip. From a valuation perspective, this is a perfect example of trucking stocks trading like a freight recession is already here. PTSI’s forward P/E ratio is an A at 6.52x, more than 60% below the sector, and PEG (TTM) of 0.04x is nearly 90% below the sector average.
Although the three- and six-month price performances are not ideal, as current sentiment is extremely fearful, the A+ momentum grade is attractive given the long view of this stock, especially when looking at 9M and 1-year price-performance significantly outperforming the sector median.
Where many trucking and transportation companies tend to have high fixed costs and use a lot of fuel linked directly to the price of oil, high fixed costs require strict operating controls. PTSI has an excellent business model and prioritizes costs. Although the company operates in one key segment, its revenue streams are diverse, including 76.9% truckload services and 23.1% brokerage, logistics, and sales services.
What’s most interesting about PTSI is its revenue surge over the last few years due to pricing. Seeking Alpha Marketplace Author Daniel Jones writes,
“Between 2017 and 2020, sales generated by P.A.M. Transportation Services moved around in a very narrow range of between $437.8 million and $533.3 million. In 2020, sales came in at $486.8 million. But then, in 2021, revenue jumped, climbing to $707.1 million. Interestingly, this came even as the number of miles the company's trucks traveled decreased, falling from 193.48 million to 182.91 million. Where the company made up for this was in pricing and the number of loads that its trucks took. In 2021, as an example, the company generated $2.35 in revenue per mile traveled. That was up from the $1.75 achieved one year earlier. The number of loads for the company increased by 2.1%, climbing from 349,803 to 357,090. As a result of all of this, the revenue that the company generated per truck per week jumped, climbing by 30.2% from $3,317 to $4,320.”
P.A.M.’s strategy has enabled the company to beat earnings estimates over the last couple of quarters, including the most recent EPS of $1.18 beat by $0.39 and revenue of $219.4M beat by 47.4% year-over-year. Notably, the stock holds an A+ grade for its forward EPS growth rate at 67.8% compared to just 17.5% for the sector. While some concerns surround the company, given its size and focus primarily on auto parts delivery, the company remains valued well above its similar competitors, maintains an excellent operating ratio, and has excellent fundamentals. This stock is a strong buy.
Market Capitalization: $18.18B
Quant Rating: Strong Buy
Quant Sector Ranking (as of 5/18): 64 out of 583
Quant Industry Ranking (as of 5/18): 6 out of 27
Operating in five diversified segments, J.B. Hunt Transport Services, Inc. (JBHT), one of the largest transportation companies, is selling off this year amid supply chain constraints and fear of slower economic growth. There seems to be a total disconnect from investor sentiment compared to actual results and analyst forward revenue and earnings estimates. Where some investors fear the stock price’s decline, we see this as a buying opportunity, especially given the company's excellent Q1 earnings growth with the top-line rising 33.25% year-over-year and a 61% surge in operating income. The company’s recent results are a testament to its solid overall fundamentals, growth, and profitability.
Offering supply chain support, logistics solutions, delivery services, intermodal, dry-van, refrigerated transportation, excellent growth, and overall pricing strength has resulted in better-operating margins. Strong demand that includes retailer restocking serves as a tailwind for JBHT. The company's solid earnings with an EPS of $2.29 beat by $0.35 plus revenue beat resulted in 21 analyst upward revisions in the last 90 days.
With high demand, especially in intermodal contracts via Class I railroads, JBHT saw an increase in contract rate gains, allowing the company to pass along inflation costs, especially given its solid partnership with BNSF Railway. Although the company’s valuation is not ideal, margins are up, and J.B. Hunt’s free cash flow and EBITDA are rising.
Despite the backlog of goods jammed in ports affecting shipping and companies like JBHT, now is an excellent time to buy if you’re looking for a long-term investment. As Seeking Alpha Contributor Leo Nelissen writes,
“JBHT is finally breaking out of a very long sideways trend. Between 2014 and 2020, EBITDA growth was extremely sluggish as the company ramped up investments in its business and because economic growth wasn't great after 2018. Now, the company is coming back roaring. EBITDA is expected to continue its upwards trajectory, resulting in $2.1 billion in 2024 EBITDA. This move is supported by higher (expected) EBITDA margins and stronger free cash flow. Next year, the company might do $560 million in free cash flow.”
Steep drawdowns scare many investors, and the way the markets are performing adds uncertainty. Because the risk may be worth the reward, consider lower-priced companies, especially when they possess the collective characteristics of businesses that stand to benefit. Consider our top three transportation stocks.
The markets are in flux, and economic uncertainty is creating investor fear. No doubt, stock prices year-to-date reflect the risk of recession in these stocks. For transportation stocks, the core risk is a recession. With that in mind, both recent earnings and forward analysts' earnings estimates are stating the opposite. Some logistics stocks are excellent buys, and all three of our transportation picks, KNX, PTSI, and JBHT, are ripe for the picking after selling off amid investor fears of a recession. The stocks possess solid operating ratios, high demand for transport services, and excellent growth and profitability. All three stocks have forward revenue growth above 15% and forward EPS growth rates above 20%. Likewise, the combined growth rate and P/E in the form of the PEG ratios show the stocks trading at more than a 52% discount to the sector.
With recession prospects at hand, our stocks stand to benefit from the need for consumer staples and e-commerce that requires delivery of products, even during hard times, when discretionary spending, travel, and shipping fall. Consider our three stock picks, rated strong buys by your quant ratings.
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.