Transportation stocks have emerged as an intriguing investment opportunity amid ongoing global supply chain disruptions and shortages.
The pandemic has crippled the international supply chain and companies of all sizes are scrambling to find solutions.
The supply chain crisis is expected to affect this year's holiday shopping season, with shortages of everything from artificial Christmas trees to sporting goods and even turkeys for Thanksgiving.
As a result of these shortages, inflation has reared its ugly head.
"We see supply chain problems as the main drivers for higher prices for new and used cars, auto parts, furniture and other goods," say Tony Roth, chief investment officer, and Luke Tilley, chief economist at Wilmington Trust. However, while there are near-term inflation pressures, they believe the "eventual easing of supply disruptions and improving virus conditions should help soften price pressures as we move into 2022."
Transportation firms are going to be a part of the solution to reduce supply chain disruptions and eventually help bring prices back down to earth.
With that in mind, here are seven transportation stocks that should benefit from an unwinding of the supply chain backlogs. Each is a member of the iShares U.S. Transportation ETF (IYT) – a fund that tracks the performance of companies operating within the transportation sector of the U.S. stock market.
Data as of Oct. 18. Dividend yields are calculated by annualizing the most recent payout and dividing by the share price.
United Parcel Service
- Industry: Integrated freight and logistics
- Market value: $166.4 billion
- Dividend yield: 2.1%
When investors think of United Parcel Service (UPS), they generally picture the big brown shipping vans seen around towns across the U.S. and elsewhere. However, it's not just a courier these days. It has become a logistics company and so much more.
On Sept. 10, UPS announced that it would acquire Roadie, a technology platform that provides local same-day delivery across the U.S.
"UPS customers, including large enterprises, are increasingly looking for local same-day delivery solutions for goods of all types, not traditional packages," UPS' press release stated.
The acquisition provides UPS with a scalable, nationwide same-day local delivery service without taking resources away from its traditional delivery network by using technology to connect merchants and consumers with contract drivers across the country.
In recent years, UPS has faced competitive threats from not only Amazon.com (AMZN), which has taken much of its delivery work in-house, but also e-commerce logistics startups.
To counter these competitive threats, it has implemented a "better, not bigger" strategy that focuses on profitable customers rather than the total number.
The Roadie acquisition should help its strategy and will "open doors for new growth opportunities," according to UPS.
UPS stock has underperformed the broader market in 2021. But with a price-to-forward earnings ratio of 16, this is one of the cheaper transportation stocks out there right now.
- Industry: Railroads
- Market value: $144.8 billion
- Dividend yield: 1.9%
Union Pacific (UNP) and the rest of the railroad companies remain a vital segment of the U.S. transportation network. According to the Association of American Railroads, Union Pacific and the six other Class I railroads – those with at least $505 million in 2019 revenue – account for 68% of all freight rail mileage in the country and 94% of the revenue.
As for Union Pacific, its railroad network covers 23 states and two-thirds of the Western U.S., serving more than 10,000 customers over its 32,200-route miles.
In 2021, the company expects full-year volume growth of 7% over last year, free cash flow – the cash remaining after a company has paid its expenses, interest on debt, taxes and long-term investments to grow its business – of roughly $7 billion and a dividend payout ratio of just 45% of earnings.
In early October, Barclays upgraded Union Pacific from Equalweight to Overweight (the equivalents Hold and Buy, respectively) and lifted its target price by $20 to $260.
"The more recent underperformance has likely been driven by softer rail volume outcomes and the risk of potentially higher U.S. corporate tax rates," analyst Brandon Oglenski said. However, he sees these headwinds for transportation stocks abating and fundamentals improving into next year amid stronger demand for freight shipping.
Oglenski isn't alone in his bullish outlook for UNP. Of the 30 analysts following the stock that are tracked by S&P Global Market Intelligence, 16 say it's a Strong Buy, seven call it a Buy, six believe it's a Hold and only one deems it a Sell.
- Industry: Software - Application
- Market value: $86.7 billion
- Dividend yield: N/A
Ever since Uber Technologies (UBER) went public in May 2019, investors have been waiting for it to make money.
While it's not there yet, the ride-hailing and food delivery company filed a disclosure with the Securities and Exchange Commission (SEC) on Sept. 21 that said it expects to break even on an adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) basis in the third quarter.
That's up from the $100 million loss it expected in previous guidance. It expects to make anywhere from breakeven to a $100 million adjusted EBITDA profit in the fourth quarter.
"With positive adjusted EBITDA in July and August, we believe Uber is now tracking towards adjusted EBITDA breakeven in Q3, well ahead of our prior guidance," said Nelson Chai, chief financial officer of Uber, in the company's SEC filing. "We expect to deliver sequential adjusted EBITDA improvement in Q4, even as we continue to invest in our growth initiatives."
The Wall Street Journal reported that this would be the first time Uber's core operations post a profit since it was founded in 2009.
One key component of this is a balancing of supply-and-demand issues and easing of surge prices, which are the higher ride costs and longer wait times the company has faced during the pandemic due to a smaller number of drivers. CEO Dara Khosrowshahi recently said that it will continue to see surge prices and wait times fall as more drivers return to the platform.
"What we did was, early on we identified our need to bring on more drivers onto the platform. So, in the second quarter, we really leaned into supply, especially in the U.S., to reinvigorate our driver base and grow our driver base in the U.S.," CEO Dara Khosrowshahi told CNBC. He added that the company is now seeing the benefits of that investment.
While Uber's stock has not performed well in 2021, the latest news should positively influence its share price in the remaining months of this year and into 2022. Already, shares are up nearly 24% from their mid-September lows around $38.
Delta Air Lines
- Industry: Airlines
- Market value: $26.4 billion
- Dividend yield: N/A
Delta Air Lines (DAL) recently was named the best North American airline by Skytrax.
The air transportation research firm surveyed more than 13 million customers worldwide about the entire airline experience. The survey lasted almost two years, from September 2019 to July 2021. The top finish put it ahead of Air Canada for the first time in four years.
In September, DAL reported its first quarterly profit since the pandemic without any federal aid. The airline stock also brought in $9.2 billion in revenues in Q3, saying customers were showing a willingness to pay for "premium" seats.
While CEO Ed Bastian warned of the company's ability to stay profitable in the fourth quarter due to rising fuel costs, he expressed confidence "in our path to sustained profitability as we continue to provide best-in-class service to our customers, strengthen preference for our brand, while creating a simpler, more efficient airline."
And Delta sees continued recovery in revenues through the end of the year. "With robust holiday demand and an expected improvement in corporate and international demand, we expect total December quarter revenue to recover to the low 70s percentage relative to 2019," Glen Hauenstein, president of Delta, said.
Additionally, DAL had $151 of operating cash flow and $15.8 billion in liquidity at the end of Q3.
The airline, which is not mandating employees be vaccinated against Covid-19, also reported a roughly 90% vaccination rate in its Q3 results. That's lower than airlines requiring employees to be vaccinated. However, it implemented a $200 monthly healthcare surcharge for unvaccinated employees. Within the first two weeks of announcing the surcharge, 20% of its unvaccinated employees got their shots.
Delta's improving fundamentals and bold moves continue to make the airline one of the better transportation stocks to own over the long haul.
- Industry: Integrated freight and logistics
- Market value: $9.0 billion
- Dividend yield: N/A
It has been a little more than two months since XPO Logistics (XPO), a freight transportation and brokerage provider, completed its spinoff of GXO Logistics (GXO), the company's former contract logistics provider. As a result, XPO shareholders received one share of GXO for every share held in the parent.
XPO first announced the spinoff in December 2020. It made the move so both companies could better focus on their specific strengths while extracting value as pure-play businesses that are more easily understood.
However, XPO Logistics CEO Brad Jacobs first discussed the idea of a spinoff in January 2020.
"XPO is the 7th best-performing stock of the last decade on the Fortune 500, based on Bloomberg market data. The share price has increased more than tenfold since our investment in 2011," Jacobs stated in a press release exploring strategic alternatives. "Still, we continue to trade at well below the sum of our parts and at a significant discount to our pure-play peers."
Jacobs first invested $150 million in Express-1 Expedited Solutions in 2011. Through 17 acquisitions, including the $3-billion purchase of Con-way Inc. in 2015, he grew XPO to the business it is today.
The problem was investors didn't appreciate what Jacobs had accomplished through all his M&A moves.
"[Jacobs] acquired a lot of companies and created a lot of synergies," trucking consultant Satish Jindel told TransportDive.com just ahead of the spinoff. "The market did not fully appreciate all of the units combined." But he believes the separation of GXO will pay off in the long run.
As two pure-play businesses, the market ought to value both transportation stocks more appropriately in the future. That's excellent news if you're a shareholder.
- Industry: Marine shipping
- Market value: $3.5 billion
- Dividend yield: 1.5%
Matson (MATX) operates two businesses: Ocean Transportation and Logistics.
The Hawaii-based company's Ocean Transportation segment dates back to 1882. It provides freight transportation services to Hawaii, Alaska, Guam and other small islands in Micronesia. In addition, it operates expedited services from China to California and shipping services to Japan and other islands in the South Pacific.
Its Logistics business got its start in 1987. The asset-light business provides logistics services to customers across North America. In the second quarter ended June 30, Ocean Transportation accounted for 78% of its overall revenue and 94% of its operating income.
The company's second-quarter results – revenue increased 67% year-over-year to $875 million, while net income jumped 395% to $162.5 million – were driven by strong results from its CLX and CLX+ services to and from China.
Matson has been one of the best transportation stocks to own in 2021. Year-to-date, its total return is 45.5%, more than double the S&P 500 (.SPX). Its three-year annualized total return of 33% is also impressive, and runs 13 percentage points higher than the entire U.S. market.
When investing in Matson, one thing to consider is that the company – along with many other shipping stocks – has benefited from higher rates during the pandemic.
Pre-COVID, it cost approximately $1,500 to ship a 40-foot container from China to California. As recently as September, the cost was $15,000 for the same container. As we enter the final quarter of the calendar year, shipping rates are expected to fall considerably as this is the traditional off-season for shipping freight.
However, in the trailing 12 months ended June 30, Matson had free cash flow of $280 million for a free cash flow yield of 8%, suggesting it still has some room to run.
Atlas Air Worldwide
- Industry: Airports and air services
- Market value: $2.3 billion
- Dividend yield: N/A
Atlas Air Worldwide (AAWW) outsources aircraft and aviation operating services for other companies, which is why it is on this list of top transportation stocks.
For example, it recently signed a new long-term agreement with FedEx (FDX) that provides two 747-400 cargo aircraft full-time to the delivery company with a crew, maintenance and insurance, commonly referred to as ACMI in the industry.
"We are pleased to grow our long-term relationship with FedEx," Atlas Air Worldwide CEO John W. Dietrich said in a press release announcing the deal. "This agreement reflects the continued strong demand for airfreight capacity, particularly in the express and e-commerce markets."
The company also has a multi-year agreement with FedEx that provides at least five aircraft during its peak season in the fourth quarter.
In addition to its ACMI business, AAWW also provides CMI (crew, maintenance and insurance) services, cargo charters and cargo leasing solutions through its fleet of 747, 777, 767 and 737 aircraft.
The company has two reportable operating segments: Airline Operations and Dry Leasing. Its revenues increased 20% year-over-year to $990.4 million in the second quarter, with an operating profit of $160.1 million, 33% higher than the year earlier. In addition, the company is benefiting from the reintroduction of four 747s and one 777 rreighter back into service in 2020.
Due to COVID-19, AAWW isn't providing full-year guidance. However, it does expect healthy growth both on the top- and bottom-lines in the third quarter.
Of the seven analysts covering AAWW stock tracked by S&P Global Market Intelligence, four rate it at Strong Buy and one says Buy. The remaining two have it at Hold.
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