Stock performance in the transportation sector has been very uneven, reflecting the varying fortunes of particular industries within the sector. The median year-to-date stock price has declined for all industries in the Zacks' transportation universe, as shown below, and compares to a 39.5% stock decrease for the S&P 500.
Shipping (55.6)%
Airlines (52.1)%
Equip & Leasing (37.2)%
Air Freight (36.1)%
Railroads (23.9)%
Trucking (19.1)%
Among the hardest hit have been the airlines -- whose performance has been hobbled by recent high oil prices -- and shipping, where spot rates have plummeted from recent historical highs and are near 22-year lows. We believe there are a number of countervailing factors that will affect the transportation sector within the coming months:
* Volume weakness -- as the global recession takes hold, we expect volumes to weaken from current levels as fewer businesses ship goods, whether by air, sea, rail, or road, and fewer individuals decide to travel, which will hurt airlines.
* Waning pricing power -- to date, pricing has been fairly solid, particularly in those industries that are able to pass through rising fuel costs through fuel surcharges, such as railroads and trucking. Airlines have managed to add revenues through surcharges for second bags and other items. However, as the recession takes hold, we expect revenues to come under pressure, due to competitive pressures as companies fight for a share of a smaller pie.
* Falling fuel prices fall -- declining fuel prices, a significant line item on income statements for many transportation companies, should help alleviate cost pressures; on the negative side, this will hurt revenues as fuel surcharge revenue recedes.
In the past few days, several companies have reduced earnings guidance, noting more rapid and greater deterioration than previously expected. FedEx Corporation (FDX) stated that declining demand from significantly weaker global economic conditions in the second half of the year would overwhelm the benefits of falling fuel prices and the departure of DHL from the U.S. domestic package market. Con-way Inc. (CNW) noted that decelerating volumes in the less-than-truckload (LTL) market, combined with pricing pressures and lower fuel surcharges, have significantly curtailed expectations for 2008 earnings. This has played havoc with stock prices with one-day price declines of 14.5% for FDX and 13.9% for CNW.
Moreover, a number of companies in the dry bulk shipping industry have cut dividends to conserve capital. We would not be surprised to see companies in other industries cut payouts as the global recession takes hold.
OPPORTUNITIES
Going forward, we believe that investors will focus on safety and security and believe that large-cap companies with global brand-name recognition will provide some downside protection in a declining market. In this category, we would place United Parcel Service, Inc. (UPS), the world's largest express carrier and package delivery company. Another name we like is CSX Corporation (CSX), a major railroad that operates in 23 eastern states, which we believe is undervalued relative to its growth prospects.
WEAKNESSES
We would avoid companies that are in very volatile industries, such as shipping and airlines, even though shares are pretty beaten up. Stock prices in these industries can display enormous gains and losses on a frequent basis and are not for the faint of heart.
Ann Heffron, CFA is a senior analyst covering the transportation sector for Zacks Equity Research.
