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Gloomy Near-Term Outlook for Air Freight & Cargo Stocks

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The Zacks Transportation - Air Freight and Cargo industry includes players that provide air delivery and freight services. Most companies in the space are involved in offering specialized transportation and logistics services.

Apart from operating a ground fleet of multiple vehicles, some of these companies maintain an air fleet. They also offer air transportation services for passengers and cargo. Some companies also render their services to entities that outsource air cargo lift requirements.

Let’s take a look at the industry’s three major themes:

  • Rapid growth in e-commerce — the method of buying and selling goods and services via a software platform — driven by the advancement of relevant technologies is a huge positive for sector participants. The growth story is expected to continue as evident from the projection of United Parcel Service (UPS - Free Report) , one of the dominant players of this industry. This Atlanta-based company expects cross-border e-commerce volume to grow 28% in the 2019-2021 period. Additionally, sound balance sheet of most sector participants represents a tailwind. Their strong cash position is enabling them to engage in shareholder-friendly activities. Robust free cash flow generation support the possibility of a dividend hike going forward.
  • Major industry players have significant exposure to China’s economy, which is not in good shape. The prolonged trade war between the United States and China is not doing any good to the global economy. In fact, FedEx (FDX - Free Report) reported lower-than-expected earnings per share and revenues in first-quarter fiscal 2020 (ended Aug 31, 2019). Simultaneously, the company trimmed its fiscal 2020 earnings view anticipating lower revenues from the aforementioned headwind. Moreover, technological failures like the TNT Express cyberattack at FedEx in 2017 have the potential to cripple operations.
     
  • With leading industry players investing significantly to upgrade their facilities following a surge in e-commerce demand, their bottom lines are being stressed by escalated capital expenditures. For instance, UPS’ capital expenditures (adjusted) were $6.6 billion in 2018, bulk of which was directed toward new technology, aircraft and automated capacity. This reflects a massive increase from 2016 levels, when the company’s capital expenditures were nearly $3 billion. In the first half of 2019 itself, UPS made capital investments worth $2.9 billion. Furthermore, competition is likely to intensify in the space with Amazon.com (AMZN - Free Report) looking to expand its logistics network.

Zacks Industry Rank Indicates Dull Prospects

The six-member Zacks air freight and cargo industry, housed within the broader Zacks Transportation sector, currently carries a Zacks Industry Rank #174. This rank places it in the bottom 32% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates lackluster near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential. Over the past year, the industry’s earnings estimate for 2019 has declined 15.4%.

Despite the bleak near-term prospects of the industry, we will present a few stocks that investors can buy or retain given their growth prospects. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.

Industry Lags Sector & S&P 500

The Zacks Airfreight & Cargo industry has lagged both the broader Transportation sector and the Zacks S&P 500 composite over the past year.

Over this period, the industry has declined 16% compared with the broader sector’s depreciation of 10.9% and the S&P 500 Index’s rise of 1.3%.
 

One-Year Price Performance

 

Industry’s Current Valuation
 

On the basis of the trailing 12-month EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation and amortization), which is a commonly used multiple for valuing transportation stocks, the industry is currently trading at 8.94X compared with the S&P 500’s 11.01X. It is higher than the sector’s EV/EBITDA ratio of 7.43X.

Over the past five years, the industry has traded as high as 12.99X, as low as 8.57X and at the median of 10.06X.

Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio

 

Bottom Line

Even though the uptick in online shopping is encouraging for industry players, we believe that players in the Zacks Transportation Air Freight and Cargo industry will struggle in the short term mainly due to increased capital expenses and global trade slowdown due to the U.S.-China trade war.


There are only two top-ranked stocks in the space currently. We have also mentioned a stock from the industry, which we believe investors should retain in their portfolio, as it carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
 

Radiant Logistics (RLGT - Free Report) , sporting a Zacks Rank #1, operates as a third-party logistics company. It provides multi-modal transportation and logistics services. The Zacks Consensus Estimate for current-year EPS has been revised 4% upward over the past 30 days.
 

Price and Consensus: RLGT

Air Transport Services Group (ATSG - Free Report) , carrying a Zacks Rank #2 (Buy), is headquartered in Wilmington, OH. The company provides air cargo transportation and related services to domestic and foreign air carriers, and other companies that outsource their air cargo lift requirements. The Zacks Consensus Estimate for current-year EPS has been revised 0.8% upward over the past 60 days.
 

Price and Consensus: ATSG


 

Based in Atlanta, UPS is the world's largest express carrier and package delivery company. UPS carries a Zacks Rank #3. The Zacks Consensus Estimate for current-year EPS has been revised upward to the tune of 1 cent over the past seven days.
 

Price and Consensus: UPS

 

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