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Transports Week In Review – Pattern For Transports Underperforming Broader Market Indices Continues

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Source: Google Images

As we closed the week on February 24th, markets have remained positive for the year.

Source: Yahoo! Finance and personal database

I manage the Lean Long-Term Growth Portfolio (LLGP). To date, performance has been adequate versus the benchmark comparison at nearly five percent, highlighted in green. The NASDAQ Transportation (^TRAN), NASDAQ (IXIC) and Fidelity Contrafund (MUTF:FCNTX) have remained in the lead up eight to nine percent, highlighted in blue. Many other indices were up close to or above five percent.

The shift that has occurred leaving transports behind broader market performance is a good thing for investors looking to add companies from transport industries. I continue to view most transport companies as overvalued or at inadequate margins of safety based on risks.

Fundamentals for freight industries are tracking well at the start of the year. Rail operators, container shipping carries, air cargo, among others have witnessed either increasing volumes and stable pricing or both.

YTD 2017

Source: Yahoo! Finance

For the seventh week of 2017, the spread between the S&P 500 ETF (NYSEARCA:SPY) and the S&P Transportation ETF (NYSEARCA:XTN) widened with the S&P 500 ETF up by 3.3 percentage points. The S&P 500 ETF improved by 70 basis points (bps) to 5.9 percent, while the S&P Transportation ETF declined by 70 bps to 2.6 percent for 2017.

For transport company indicators, declines were broad-based with the only exception being CH Robinson Worldwide (NASDAQ:CHRW). Seaspan Corporation (NYSE:SSW) continues to struggle and Swift Transportation (NYSE:SWFT) has also witnessed market performance challenges. Based on last year’s broad-based transports rally, a selective approach is warranted for 2017.

Macro-economic indicators continue to sustain positive momentum. Oil prices remain above the $50 per barrel level; the rig count also continues to rise. Select oil stocks have performed well with recent earnings announcements as well. Unemployment rates remain low, and GDP growth is expected to rise for 2017. Barring the unforeseen, these indicators could continue to pan out as evidenced by transport demand and more stable pricing.

Rail Operators

Source: Yahoo! Finance

All rail operators displayed declining performance for this past week, with the exception being Kansas City Southern (NYSE:KSU). Kansas City Southern has witnessed a 300-bps improvement since February 10th. Most rail operators were down only marginally for the week; all remain positive for the year.

Week seven of 2017 witnessed further improvement for Class I total traffic carried; carloads improved further and as did intermodal. For the year, CSX and Norfolk Southern continue to lead the pack, followed by Genesee & Wyoming (NYSE:GWR) and Canadian National (NYSE:CNI). I like Canadian National over Union Pacific, and I still believe that Canadian Pacific and Kansas City Southern offer the highest upside potential at current levels.

Railcar Manufacturers & Lessors

Source: Yahoo! Finance

Most railcar manufacturers and lessors followed suit with regard to rail operator declines, with the exception being American Railcar Industries (NASDAQ:ARII). American Railcar Industries had a similar reaction to The Greenbrier Companies (NYSE:GBX) in response to the company’s earnings beat. Westinghouse Air Brake Technologies (NYSE:WAB) unfortunately had the opposite reaction.

I continue to view most of the railcar manufacturers and lessor peer group as overvalued. For railcar manufacturers in particular, it could still take a couple years before things pick up from an order perspective. Concurrently, another down-cycle could soon follow.

Truckload Carriers

Source: Yahoo! Finance

Most truckload carriers were lower for the week. On the year, only one company has performed greater than double-digits in Celadon Group (NYSE:CGI). Marten Transport (NASDAQ:MRTN) is the second-best performer at just below five percent. Major laggards for the year include Roadrunner Transportation (NYSE:RRTS), P.A.M. Transportation (NASDAQ:PTSI), Universal Logistics Holdings (NASDAQ:ULH) and Swift Transportation.

Swift Transportation is a little surprising, especially as the market is expected to tighten later in the year. Based on the risk profiles of smaller peers and the current valuation level for larger players, investors should await the IPO for Schneider National (Pending:SNDR).

Less-Than-Truckload Carriers

Source: Yahoo! Finance

Most less-than-truckload (NYSEARCA:LTL) carriers were marginally lower this past week. Both ArcBest Corporation (NASDAQ:ARCB) and YRC Worldwide (NASDAQ:YRCW) were laggards displaying much stronger negative performance. Ironically, these two have the highest exposure to unionized labor.

YRC Worldwide continues to be a risky bet with short-term upside potential. I continue to not see much value in the LTL market for investors, especially for those looking for a good entry or add for the long-term.

Air Freight, Package & Delivery

Source: Yahoo! Finance

Air freight, package and delivery companies were mixed for the week. Atlas Air Worldwide (NASDAQ:AAWW) was up strongly as the company beat earnings estimates. Deutsche Post DHL Group (OTCPK:DPSGY) was up marginally, while others were down. United Parcel Service (NYSE:UPS) has not done much since the company witnessed a decline post-earnings.

As Amazon.com (NASDAQ:AMZN) continues to grow its air cargo capacity through lessors, there will likely be opportunistic times to take positions. I am more interested in Atlas Air Worldwide due to its scale, as I am not sure Air Transport Group (NASDAQ:ATSG) will merit a higher P/E multiple in the near-term. I continue to believe that FedEx Corporation (NYSE:FDX) is compelling to own, especially below the $190 per share level.

Contract Logistics, Forwarding & Brokerage

Source: Yahoo! Finance

Most contract logistics companies were up for the week, led by Radiant Logistics (NYSEMKT:RLGT). What a difference an earnings report makes as Radiant Logistics has gone from being down as much as eight percent, to now up over 42 percent. No news has surfaced, but investors may be speculating on the company being acquired. Contrarily, Echo Global Logistics (NASDAQ:ECHO) has reached its low-point for the year, down over nine percent.

I continue to like XPO Logistics (NYSEMKT:XPO) out of this group. The company did get display some strength past the $50 per share level as expected after earnings. But there has been some weakness and inconsistency holding above this level.

Container Shipping Lines, Charter Owners & Container Lessors

Source: Yahoo! Finance

The container shipping companies continue to be the most volatile industry for transports. Swings were very strong and mostly to the downside for the week. This was led by Textainer Group Holdings (NYSE:TGH), CAI International (NYSE:CAI) and Euroseas (NASDAQ:ESEA) with the largest percentage point declines. Next in line were Triton International (NYSE:TRTN) and Seaspan.

Despite all the optimism for 2017 in the container shipping industry, there are still structural issues related to capacity. Average spot market rates continue to perform strongly versus last year. Hopefully further results from the new vessel sharing agreements which will begin services this spring, will shed new light on supply and demand.

Airlines

Source: Yahoo! Finance

Airline stocks are beginning to display a divergent pattern between winners, the middle-of-the-road and laggards. Most notable has been the negative performance for Controladora Vuela Compania de Aviaion (NYSE:VLRS). As of mid-February, the company had recovered almost to break-even, but now finds itself down 22 percent, a new low for the year. For the week, performance declined by 12.7 percentage points, a contrast to positive broader Mexico index results for the week.

The primary threat to airline operations for 2017 continues to be the possibility of increasing oil prices leading to higher jet fuel costs. Air traffic travel continues to be positive for most airlines as recent announcements have been provided. Timing of fare hikes, unionized labor and protests at airports remain other challenges.

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

Source: Class I websites and personal database, carload and intermodal units carried

Through the seventh week of 2017, total traffic was up 2.6 percent with carload traffic up 4.2 percent, a 60-bps improvement; and intermodal traffic up 0.8 percent, a 100-bps improvement. Week seven performance has displayed sustained improvement, building from the previous weeks.

These numbers continue to be not far off from the total traffic originated results of 2.7 percent for the first seven weeks of 2017, published by the Association of American Railroads (NYSE:AAR). Investors should remember that total traffic carried includes both originated and received carloads and intermodal units.

Container traffic was up 0.9 percent, a 100-bps improvement. Since the peak shipping season for the Chinese New Year has come to an end, average container spot market rates have declined over the past few weeks. But year-over-year (YOY), performance continues to remain strong for most trade lanes. The DAT-Weekly dry van spot rate average has declined to four percent in late February versus last year. Intermodal rates will likely mirror these trends.

Week four witnessed weekly coal carload traffic at 113,000 carloads carried. This reflected a 17.4 percent increase versus last year. Coal is expected to be much stronger than in 2016. Grain performance was up five percent versus last year.

Motor vehicles and equipment carload traffic performance was down two percent versus last year. Chemicals were up four percent, petroleum products were flat and crushed stone, gravel and sand was up 28.5 percent. Petroleum products were up sequentially from the previous week.

Trucking Industry

Source: Cass Information Systems, Cass Freight Index

Judging from recent earnings reports from truckload and LTL carriers, there is optimism for 2017. But despite a more positive outlook than what occurred during late 2015 and through 2016, there are still uncertainties.

Tonnage and shipments varied throughout the year. Overall, growth was positive for tonnage during 2016, but the lack of a consistent positive trend has made it difficult to gauge and/or have much confidence in the industry’s direction. Nonetheless, there have been strong performers from the volume side, most notably JB Hunt Transport (NASDAQ:JBHT).

Expectations are for the market to tighten, especially during the second half of the year. This is anticipated to lead to an uptick in contract renegotiation earlier in the year as beneficial cargo owners (BCOs) look to lock in lower rates and avoid any spot market gyrations. But this remains to be seen.

Air Cargo

Source: U.S. Dept. of Transportation, Bureau of Transportation Statistics, Air Cargo Summary Data

Air cargo carriers have espoused similar sentiments as what was mentioned for truckload and LTL carriers. Despite a highly robust fourth quarter led by e-commerce, some air cargo carriers are still hesitant to provide fully transparent outlooks as they believe that there is still not enough demand for better visibility.

As is the case in the container shipping industry, structural issues remain with capacity still outpacing demand. Carriers continue to be focused on expanding capacity to compete in providing the greatest flexibility for customer needs, especially just-in-time e-commerce deliveries.

Container Shipping Lines

Source: Alphaliner – Top 100 Operated Fleets as Per February 25, 2017

Average spot market container pricing has begun to decline through February. Despite weekly declines, on a YOY basis, average spot market freight rates continue to be up substantially with some still attaining triple-digit results. For Asia-Europe pricing increased from the previous week. Vessel owners and charterers are doing all that they can to keep rates up for upcoming contract negotiations. With some of the lowest spot market pricing occurring during June of last year, this trend may continue until 2016’s peak shipping season.

The big event that is soon-approaching is the new vessel sharing agreements which have formed THE Alliance and the Ocean Alliance. These new alliances are anticipated to begin serving their port rotations this spring. There are mixed opinion currently out regarding how this will shape up. Some believe that it could lead to better average spot market pricing stability, while others think that the Trans-Pacific trade lane could be ripe for a price war.

North America Seaports

Source: North America seaport websites and personal database

Everyone wants to talk about the Panama Canal and East Coast waterborne trade shifting from the West Coast as a result. But as Hunter Harrison is potentially about to take the helm for CSX (NYSE:CSX), some have expressed concerns regarding the impact to shippers. As the East Coast is looking to get an early negotiation for its unionized seaport labor, any further complication for intermodal rail rates and/or service changes could add complication.

Many seaports across coasts are up strong to start 2017. The Asia to West Coast trade lane may end up being one of the most watched areas. THE Alliance and the Ocean Alliance will both have larger market shares than Maersk and Mediterranean Shipping Company (NYSEARCA:MSC). If either of these alliances learn from Maersk’s strategies during 2016, there could soon be a battle for market supremacy at the expense of profits.

North America Cross-Border Trade

Source: Yahoo! Finance

The iShares MSCI Mexico Capped (NYSEARCA:EWW) witnessed a positive week versus the iShares MSCI Canada ETF (NYSEARCA:EWC). The Mexico index is back up over six percent for the year versus the four percent results for the Canadian index.

The saga continues regarding a border adjustment tax between the U.S. and Mexico. Retail stocks have traded on a whim based upon this news. This week, many companies with significant exposure to Mexico were all over the place. The erratic behavior is a signal that volatility will continue.

Summary

Broader markets have continued to increase the lead over transports. As markets continue to move higher during 2017, transport indices underperforming this trend continues to validate the theory that most transport companies may be overvalued. The key focus for 2017 will be the pace of GDP growth.

Initially for 2017, freight volumes have displayed signs of improvement, while pricing has been maintained. Capacity has been managed judiciously to start the year, investors should continue to monitor how transports perform relative to broader indices and remain selective.

Disclosure: I am/we are long AMZN, CNI, FDX, JBHT, KSU, 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.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.



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