Companies transporting holiday merchandise may outperform the stock market as a rise in consumer spending indicates seasonal shopping may be better than forecast.
Retailers were cautious when they placed orders this summer amid concerns the economy was “falling apart” and headed for a double-dip recession, said David Ross, a Baltimore-based transportation analyst at Stifel Nicolaus & Co. Even though September retail sales rose the most in seven months, shares of trucking and airfreight companies still reflect pessimistic forecasts, he said.
“There is a greater chance of a positive holiday-shopping surprise than a negative one,” said Ross, who maintains “buy” ratings on United Parcel Service Inc. (UPS) and Old Dominion Freight Line Inc. (ODFL) If retailers are caught short after under-ordering, the peak shipping period -- typically July through September -- will occur later, he said.
The Bloomberg U.S. Asset-Heavy Trucking Index -- which includes Werner Enterprises Inc. (WERN) and Con-way Inc. (CNW) -- fell 26 percent between July 21, 2010, and Sept. 22, 2011, while the Russell 2000 Index rose 5 percent, Bloomberg data show. The Bloomberg U.S. Integrated Transportation Index -- made up of UPS and FedEx Corp. (FDX) -- fell 2 percent in the same period, compared with the Standard & Poor’s 500 Index gain of 6 percent.
Transportation companies are tied to consumers because they deliver goods to retailers, said Michael A. Gayed, chief investment strategist at Pension Partners LLC. With demand beginning to improve, “investors may revise up their expectations for holiday sales,” which could cause “a V-shaped reversal in the relative performance of trucking stocks, like we saw in early 2008,” said Gayed, whose New York firm oversees $140 million in assets.
The trucking index has increased 19 percent since September 22, compared with 8 percent for the Russell 2000. The index consisting of FedEx and UPS has risen 13 percent, while the S&P is up 8 percent. Transport stocks will outperform even more as Christmas-spending forecasts improve, because investors “are still discounting recession-like conditions,” Gayed said.
A holiday rush seems more likely following the 1.1 percent rise in September retail sales, the most since February, said Ryan Sweet, a senior economist at Moody’s Analytics Inc. in West Chester, Pennsylvania. Employers also added 103,000 workers in September, the Labor Department said, more than the median forecast of 60,000 in a Bloomberg News survey of economists.
“During the third quarter, the economy outperformed expectations and the consumer played an important role in that,” Sweet said, adding that Americans “remain relatively resilient.”
U.S. gross domestic product climbed at a 1.3 percent annual rate in the second quarter, after almost stalling with a 0.4 percent gain in January-March, Commerce Department data showed. GDP will rise 1.7 percent this year and 2 percent in 2012, according to the median estimates of economists surveyed by Bloomberg News. Third-quarter GDP data is scheduled to be released Oct. 27.
Lower gasoline prices are providing households with some relief. Since peaking at $3.99 a gallon in May, the average price of regular unleaded has fallen 13 percent to $3.47, according to Heathrow, Florida-based AAA, the largest U.S. motoring organization. This may spur spending, explaining why “consumers are heading into the holiday-shopping season with decent momentum,” Sweet said.
Best Black Friday
Retailers may have their best Black Friday in history, said C. Britt Beemer, chairman of America’s Research Group in Charleston, South Carolina. About 54 percent of households plan to shop the day after Thanksgiving, according to the consulting company’s survey of 1,000 consumers. Never in its 25 years of collecting the data has the share reached 50 percent, he said.
While companies are likely to roll out deals to lure customers on one of the busiest shopping days of the year, some may have kept supplies of holiday merchandise too lean to accommodate what could be a “super aggressive Black Friday,” Beemer said.
The ratio of retail inventories to sales was 1.34 in August, near the all-time low of 1.33 in January through April of this year, data from the U.S. Census Bureau show.
Declines in the inbound-container volume at both the Los Angeles and Long Beach ports indicate retailers have been bracing for a less-than-stellar holiday season, said Kevin Sterling, an analyst with BB&T Capital Markets in Richmond, Virginia.
Imports fell 4 percent in September from a year earlier, after dropping 9.4 percent in August and 2.3 percent in July, Bloomberg data show.
“The window is quickly closing for Christmas freight delivered via ocean,” Sterling wrote in an Oct. 19 report. “Even a small increase in consumer demand could tighten air-freight capacity, driving up pricing and profit for the air-cargo industry.”
FedEx and UPS are likely to benefit, said Sterling, who maintains “buy” ratings on the companies. Memphis, Tennessee-based FedEx cut its full-year profit forecast to between $6.25 and $6.75 a share, 10 cents lower than the previous range, when it reported first-quarter earnings Sept. 22. Atlanta-based UPS reports third-quarter results Oct. 25.
While a holiday rush would boost sales, an “advertising-driven Christmas” might force retailers to compete in offering the best deals, which would hurting their bottom lines, Beemer said.
Retail Priced In
Retail stocks also aren’t likely to experience a big bump because they “significantly outperformed” during the past three years, Gayed said. The SPDR S&P Retail Exchange-Traded Fund has risen 200 percent since Nov. 18, 2008, compared with the S&P 500 ETF’s 40 percent gain. “Any upside holiday surprise in earnings and revenue is most likely already priced in,” he said.
Whether Americans will be ready to spend remains to be seen, as some Federal Reserve districts reported “many retailers were reluctant to build inventories ahead of the holiday season, pointing to recent declines in consumer confidence,” the Fed said in its Oct. 19 Beige Book report. Confidence in the economic outlook reached its lowest level since February 2009 in the week ending Oct. 16, based on the Bloomberg Consumer Comfort Index.
The job market’s “poor performance” is depressing optimism, Fed Chairman Ben S. Bernanke told Congress’s Joint Economic Committee on Oct. 4. The unemployment rate held at 9.1 percent in September and has been above 9 percent for 27 of the past 29 months, Labor Department data show.
Still, “the holiday-shopping season should be decent, but unspectacular,” as consumers find ways to splurge by dipping into savings or making other sacrifices, Sweet said.
“Consumers aren’t acting like they say they feel,” Sweet said. “They may be on better footing this holiday season than previously anticipated.”
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