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Clipped Wings and Broken Wheels

By James A. Anderson When dot-com hype was at its height, they were called the home-delivery crew of e-commerce, the wheels and wings of the New Economy. But in the wake of the dot-com bust and sagging growth, there's another fitting name for airfreight and trucking companies: Duds.

During the first quarter of this year, the sector has been almost as big a disappointment as the rest of the stock market. As of Apr. 12, airfreight stocks were off 3.5% for the year, tumbling a full 8.5% in the previous 13 weeks alone. Truckers have hit just as rough a stretch: They're off 5.9% so far in 2001 and have sunk 8.7% over the past 13 weeks. By comparison, the Standard & Poor's 500-stock index is off 10.2% for the past 13 weeks.

There's another word for the delivery business: cyclical. Package handlers generally prosper when the economy expands and usually snooze when things slow down. And as is true with all cyclical sectors, the time to buy is when the sector is delivering bad news, because that's when stocks tend to be their cheapest. And if you believe the economy is in store for a recovery in the second half of 2001, it's time to pay attention.

TOO ROSY? The first part of that scenario has indeed come to pass -- the airfreight and trucking companies have delivered as much gloom as any cyclical investor could ever want. Throughout the first quarter, there has been news aplenty about how the feeble economy has cut into the industry's revenues. One by one, management for such outfits as FedEx (FDX), UPS (UPS), Roadway Express (ROAD), and Yellow Corp. (YELL), to name just a few, have opened up teleconference lines and sheepishly let the world know that the number of packages they're moving is down. And as long as they were on the record, they were sure to point out that Wall Street's view of their profits might indeed be too optimistic.

Things don't appear to be getting better anytime soon. Package volumes and tonnage are down year-to-year, and indications are that most operators won't see much growth -- if any -- in 2001. UPS might log a 2% increase this year, but that's nothing compared to the mid-teen annual increases it saw a few years ago. At the end of its fiscal third quarter in February, Federal Express said the number of packages it whisked across North America dropped just 1% year-over-year, but by the time of its annual analyst meeting on Apr. 6, the overnight delivery company said that drop-off had increased to 4.4%.

"We're not only seeing slow volumes, we're also seeing a modal shift," says ING Barings analyst Doug Rockel. "In some cases, people and businesses are opting away from airfreight to save money. In other cases, they're switching from 10:30 next-day-guaranteed service to 3 p.m. shipments to cut costs."

ROAD HAZARDS. Trucking is no better off. Roadway Express saw revenues drop 4% in its quarter ended Mar. 24 compared to the same period a year ago. In a Mar. 19 news release, Yellow Corp. said a sleepy economy would probably cut 10% off the tonnage the firm hauled in the first quarter of the year. And in general, truckers face a number of road hazards, including higher fuel prices. Also, labor costs have risen, including a 2.6% annual wage hike for the Teamsters that kicks in later this month.

Not surprisingly, a good many investors are already betting on a rebound by some of the group's biggest names. That's why at its close of $54.21 on Apr. 12, UPS may have been down 7.5% for the year, but it still managed to keep its stock price at a strapping 22 times estimated 2001 earnings of $2.45 a share. Federal Express, having closed at $39.80 on Friday, was down 0.4% so far this year but still commands a price-to-earnings multiple of 14.3% based on a consensus earnings estimate of $2.78 a share for its 2002 fiscal year.

But ING Baring's Rockel thinks those prices are still too high, especially for stocks with potential downside. "These are great companies, and they're sure to come back strong when the economy gets going," he says. "Still, they're cyclical and I'd be willing to pay one times earnings growth -- say a multiple in the 12 or so range for either of those companies. At current levels, however, these stocks just don't have any room for error."

QUICKER PICKER-UPPER. Should you be convinced that the economy is ready to roar back, you might opt for Federal Express, the cheaper of the two big-name franchises. Deutsche Banc Alex Brown analyst Susan Donofrio thinks the company will be a direct beneficiary of any improvement in the economy. "During past economic slowdowns, it appears that the company's stock price has been either stagnant or down when gross domestic product growth decelerates," she points out. "Once GDP starts to rebound, however, FedEx' stock price tends to outperform the market."

S&P analyst Stephen Klein says that's not all that could work in FedEx' favor. The company's efforts to boost its presence in Europe are paying off. Toss in the inroads in Asia and the company expects revenues to grow 7% during this fiscal year ending in May, 2001, and 10% in 2002, provided the U.S. economy is righted. Nine of the 17 analysts who cover FedEx rate the stock a strong buy or buy, and Wall Street consensus estimates look for FedEx' earnings to grow an average of 12.5% annually over the next five years, according to Zacks Investment Research. Deutsche Banc's Donofrio thinks FedEx could reach $50 a share over the next 12 months.

A value play that might be worth considering is CNF Inc. (CNF), a Palo Alto, Calif., company that operates the Emery airfreight franchise and three regional trucking concerns. ING's Rockel says Emery -- the source for about 47% of CNF's revenues -- is bound to take a hit this year. But CNF has a couple of things going for it. For one, its shares are cheap: They're selling at 11 times his 2001 earnings estimates. Second, the company should be in for a big boost after announcing a joint venture with General Motors Corp. (GM). CNF will handle the auto maker's $6 billion is shipping. And 7 of the 13 analysts who follow CNF rate the stock a strong buy or buy. Wall Street analysts look for the company to grow earnings at an average 12.5% annual clip over the next five years, reports Zacks. ING's Rockel thinks the stock, which closed last Thursday at $29.22 a share, could reach $40 in the next 12 months.

There's no clear-cut mutual-fund play on airfreight and trucking, although you might want to consider Fidelity's Select Transportation portfolio (FSRFX). The fund provides plenty of exposure to UPS and FedEx, which constitute 3.3% and 2.7% of its assets, according to Morningstar Inc.'s latest data, dated Aug. 31, 2000. In addition, investors get a slice of everything from railroads and airlines to aerospace manufacturers. The eclectic mix has paid off year-to-date with a 3.3% return at the market's Apr. 13 close. Last year, the fund posted a 17.8% total return, and it has averaged 10.6% annually over the past three years, compared with 3.5% for the S&P 500.

The delivery business is durable, and it's certain to come back once the economy's path is righted. And if you think that's going to happen sooner rather than later, it might be time to look at what those companies could deliver down the road. Anderson teaches journalism at the City University of New York. Follow his twice-monthly Sector Scope column, only on BW Online

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