Transportation and logistics companies have generally been perceived a cyclical stocks—even early cyclical—by investors, and in general investors have gone from being bullish in the industry as a whole in the last three years to now being fairly bearish on the industry. Freight transportation and passenger transportation stocks have been underperforming the broader indices, as investors have been concerned about negative year-over-year volume comparisons at the railroads and a softening of the tightness of the supply/demand balance in truckload and less than truckload.
The underlying domestic economy has been slow-growing, at about 2% per year, and the strong dollar has hurt some companies that would have relied on transportation services. Some analysts are even cautious on the space, saying the cyclical nature of freight transportation is sensitive to the current slow-growth rates globally and domestically, which have been decelerating. Some analysts, however, say that even if the economy is growing slowly at home and internationally, logistics companies still have the capacity to grow earnings in a sluggish economy as transportation providers cut rates.
But not all analysts agree, some saying that asset-based segments are expected to perform better than asset-light parts of the industry, even saying the cyclical nature of asset-based segments can prove positive, especially as they have exposure to consolidation opportunities, especially on the truckload side. Some analysts, however, think the sector as a whole is risky, saying that even though investor sentiment is low, it still doesn’t account for some of the risks in the sector.
Dividing the industry in type of transportation, some analysts think railroads have been doing strong for the past 10 to 15 years, but things have now become much more more uncertain, and it’s this uncertainty about pricing power that is hurting the segment. When it comes to airlines, some analysts are concerned they have added too much capacity. Tank barge as an industry is shrinking, which should help companies involved in this type of transportation thanks to legislation such as the Jones Act. Driver shortage is still severe for truckers, and some say maybe driverless trucks could be a solution for the distant future. E-commerce is growing, which analysts think could help parcel and other companies tied to e-commerce.
Full report available HERE.
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