Transport stocks continue to wait for a turnaround
US transport companies and their investors are wondering how long they will have to wait for better days. US transport companies and their investors are wondering how long they will have to wait for better days.
The sector is gearing up for a fourth-quarter earnings cavalcade that is expected to reflect the full sweep of the US recession — falling freight volumes and, for truckers, falling prices.
"Unlike past quarters, we have chosen not to write detailed earnings preview notes for each of our transport sectors with updates on pricing, volume and fuel trends," Ed Wolfe of Wolfe Research wrote in a note to clients. "Rather, we believe it is well understood that freight came to a halt to finish out 2008, and combined with harsh winter weather across the US the final few weeks of the year, we believe all of the transports are set to report EPS misses."
Last year's predicted recovery in US economic fortunes that has not come true — on the contrary, the economy is worse off now than a year ago — meaning transport stocks have a long wait in store.
As in recent quarters, the trucking sector is expected to continue suffering the most, but package delivery companies – especially bellwethers United Parcel Service Inc and FedEx Corp – are also hurting.
And a growing number of analysts are questioning US railroads' ability to weather the storm and maintain their pricing power in the face of steep drops in freight volume.
"We believe the top question on investors' minds entering this earnings season is not about volume growth, but rather, the sustainability of pricing in the face of deflationary cost pressure and rapidly deteriorating demand," Goldman Sachs analyst David Feinberg wrote in a client note. "While the railroads themselves are confident in their 2009 pricing power, we have been more cautious, taking a wait and see approach to judge where contract prices were set during (the fourth quarter) when volume growth rapidly deteriorated."
The long haul
The US trucking sector has been struggling with slackening demand since the third quarter of 2006, with companies forced to lower prices to land contracts.
According to a survey of North American truck companies conducted by UBS, 84 percent of respondents said the fourth quarter of 2008 was worse than in the same period in 2007.
"We believe conditions that truckers face will remain difficult given a still slumping US economy and weak freight environment," UBS said in its report on the survey.
Lee Klaskow, an analyst at Longbow Research, said that for truckers, "the outlook, unfortunately, is still pretty grim."
He said larger publicly traded, long-haul truckers like Knight Transportation Inc and Heartland Express Inc have low debt and are better placed to weather the storm.
But less-than-truckload companies like YRC Worldwide Inc – which consolidate smaller loads into a single truck and are asset-intensive as they use facilities nationwide – should see margins squeezed further, Klaskow said.
UPS and FedEx have also suffered as a result of the weakening economy, with more customers choosing slower, cheaper services provided by the two package giants rather than the higher-margin express products. Both are seen benefiting from the recently announced exit of Deutsche Post AG unit DHL from the US market — the company will halt its US domestic service on January 30 — but only up to a point.
"While we see material long-term benefits for FedEx and UPS from DHL's ongoing withdrawal from the US domestic market, our sense is that the current soft economy will overwhelm these benefits near-term," Wachovia analyst Justin Yagerman said in a note.
