Benzinga
Transport stock analysts; Transition to spending on non-threatening services
Some optimistic reports this week highlight the reasons for favoring the advancement of transport stocks. The outlook demands that favorable freight fundamentals around demand, utilization and prices remain in place for the foreseeable future. Consumer demand is unlikely to decline anytime soon UBS transportation analyst (NYSE: UBS) Tom Wadewitz said he sees a “perfect storm” for freight demand, pointing to constrained capacity, stock rebuilding and a steady flow of money of stimulus. “The combination of strong spending on goods and low retail inventory levels is expected to support freight demand in 2021,” says the report. Your company’s economy team sees spending on goods as “well-sustained” during the second quarter of 2022, even as consumer spending on services begins to rise. Many transportation experts have speculated that, as the economy reopens more broadly, spending will shift from durable goods that require cargo transportation to services that don’t. The company’s forecast for spending on real estate predicts an increase of 9% year-over-year in the first quarter, 13% in the second quarter and a one-digit percentage increase in the second half of 2021 and the first half of 2022. Ravi Shanker, Morgan Stanley (NYSE: MS), said in a report to clients that the return on spending on services “is unlikely to delay the cycle.” He believes that a reopened economy can support consumer spending on goods and services. “We believe that this concern is largely exaggerated. While spending on services clearly has more room to grow to recover (given the downturn in 2020), a robust consumer balance sheet means that this is not a zero-sum game – spending on goods do not need to decrease for service spending to increase due to a surplus savings of ~ $ 2.3 trillion on the consumer balance sheet, “said Shanker, Morgan Stanley’s economic team is forecasting a 9% year-over-year increase in service spending in 2021, together with a 6% increase in spending on goods. The forecast for next year is promising, although the compositions become more difficult. The company expects spending on services to increase 8% in 2022, with spending on goods increasing 3%. Shanker pointed out that many of the “services that will have higher expenditures also need goods to carry out / support them”. In addition, if mass inoculations do not occur by the end of the summer, spending on events and experiments may not materially interrupt freight demand in 2021. The end of summer until the beginning of autumn is traditionally the time when consumers buy products again. Inventory replenishment keeping freight volumes elevated Outbound bidding volumes fell in February, as severe winter storms drastically impacted service at most transport providers. At the end of the month, shipments recovered. The volumes are now above the levels seen before the network outages. Graphic: (SONAR: OTVI.USA). To learn more about SONAR FreightWaves, click here. Although retailers’ inventories improved during the fourth fiscal quarter ended in January, many large chains are still in a supply replenishment mode, as sales growth continues to outpace inventory additions. Morgan Stanley’s January carrier survey showed that net inventories were at the lowest level, while the need for replenishment was at the highest level in the research’s 15-year history. Although February results have yet to arrive, Shanker said that, due to the weather, he doubted that there would be any improvement in February. The need for refueling is high, but it is likely to increase as supply chains acquire more goods than in previous cycles, to avoid future supply shocks, such as those that occurred last year. The change in inventory strategy is expected to add up to 10% of additional delivery to many senders. Even with bad weather in February, which kept consumers at home and supported the e-commerce service channels, retail sales fell only 3% sequentially in the month. Compared to 2020, sales grew by 6.3%, with the three-month period ended in February 6% higher than in the previous year. In fact, retail sales have increased year on year in every month since June. The National Retail Federation’s calculation of core retail sales, which excludes car dealerships, gas stations and restaurants, grew 8.9% year-on-year on average for the period from December to February on an unadjusted basis. The group is asking retail sales to increase from 6.5% to 8.2% this year, with container imports at major ports rising 23.3% year-over-year in the first half of 2021. Rates go up, but TL investors are frightened by the lack of truck capacity (rejections of carrier proposals remain high) and extremely high demand, spot rates have continued to rise. The year-on-year difference in spot rates has recently increased, as the contractual bidding season progresses. Recent indications from TL operators suggest that contractual rates are being reset higher than previously issued two-digit high-to-low forecasts. Graphic: (SONAR: OTRI.USA) Graphic: (SONAR: TSTOPVRPM.USA). To learn more about FreightWaves SONAR, click here. Shanker said it scared some investors. “While investors in most other sectors would like record new rates, the transportation of investors / analysts has started another round of concern about whether the cycle has peaked.” He said that many investors throw in the towel in the TL trade as soon as spot rates reach new highs or truck orders increase. Both have already happened. Rates crossed the 2018 record eight months ago and are currently hitting a new high. Truck orders increased at the end of last year, but have declined since then. Shanker said the recent climatic disturbance, which coincided with a seasonal increase in freight, probably means that “the spot rate remains high for a while”. He likened the event to hurricanes around the high season in 2017, which had the added noise of a mandatory electronic recording device later that year. In addition, while the addition of new capacity was expected to threaten the fundamentals of a restricted TL market, original equipment manufacturers are likely to face production delays again in 2021 due to a shortage of raw materials and semiconductors. Has the current shipping cycle increased the standardized EPS to TLs? Shanker believes that normalized earnings per share have been reset higher for TLs, which is not reflected in current stock prices. “TLs are being traded at the highest discount compared to the S&P 500, although they are normally traded at the highest premium,” he added. The current cycle has resulted in a “structural tightening of supply”, which means that gains are expected to be greater over the freight cycle than in the past. He drew attention specifically to Knight-Swift Transportation (NYSE: KNX), which he believes has normalized the mid-cycle EPS to $ 3 per share now, against the roughly $ 2 per share currently quoted in the stock. Shanker has an “overweight” rating on all TL companies he covers, as he is the only group outside the transport market with a discount over historical valuation multiples. The driver is a barrier to the growth of the TL volume. Wadewitz believes that TL operators will have the most difficult times to increase volumes. The number of drivers shrank by 200,000 last year, as drivers fearful of hiring COVID were left out, driver schools operated at half capacity and Drug & Alcohol Clearinghouse pushed operators away. Wadewitz said that carriers with more exposure to irregular routes – Heartland Express (NASDAQ: HTLD) and Knight-Swift – will have more difficulties than carriers with more dedicated exposure or carriers with less than a truck. He believes that a restricted driver market and rising fuel costs favor modes such as rail, LTL and intermodal. The distribution of cost savings between intermodal transport and the truck seems to be leveling off after falling since the highs at the end of the year. High TL rates, driver cost inflation and diesel prices, which increased sequentially each week in the first quarter, support an ever-widening gap between intermodal and truck costs. Chart: (SONAR: IMCSIF.USA & IMCSI1.USA) – The intermodal contract savings index shows the percentage of freight savings via intermodal versus dry van contract rates in identical source-destination pairs. The blue shaded area displays the final settlement, while the green line shows the initial report. To learn more about SONAR FreightWaves, click here. “In a restricted driver market, we are more optimistic about the volume growth for LTL, intermodal and railways, while truck brokers are also expected to see a high volume and revenue. Driver restrictions are likely to make it harder for names focused on truck loads increase volumes, “said Wadewitz. He is calling for intermodal rail volumes to increase in the double-digit percentage range in the first half of this year, decreasing to the average single-digit range in the second half, as comparisons become more formidable. The forecast for volumes for the second half may be better than expected if the inventory replenishment cycle is extended, he added. Wadewitz said that “the freight and price scenarios are favorable for most transport”, but drew special attention to some names. He likes “clear visibility for strong volume growth” for Canadian Pacific (NYSE: CP) and Old Dominion Freight Line (NASDAQ: ODFL) and “leverage for strong LTL and brokerage conditions” at XPO Logistics (NYSE: XPO), although tracks and LTLs are trading 20% to 30% above the five-year price / earnings multiple. Click for more FreightWaves articles by Todd Maiden. 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