Transport Shares Showing U.S. Slowdown Due for Surprise: Freight

Investors have driven down transportation stocks on concern a recession is looming in the U.S. That may be an opportunity for those who see the industry getting a fresh boost from holiday sales.

Landstar System Inc. (LSTR) and Old Dominion Freight Line Inc. (ODFL) were among companies making early announcements of results that fell below forecasts after activity in the third quarter was slower than anticipated. Carriers were working through a small inventory glut, creating “sluggishness,” said John Larkin, managing director in Baltimore at Stifel Nicolaus & Co.

Still, there’s no indication the “economy is cratering,” said Larkin, who has been covering or involved in transportation since 1977. “The slowdown appears to have been more of a mid-course correction, similar to others we have experienced since the economic trough formed in early 2009.”

While volume since June has been consistent with a “very slow-growth” expansion, more recently there’s been a “modest pre-holiday peak” for transportation companies carrying imports from the west coast, Larkin added. His favorite picks are Swift Transportation Co. (SWFT), Ryder System Inc. (R), Celadon Group Inc. (CGI) and CSX Corp. (CSX) These companies became more attractively valued after the earnings announcements, he said.

U.S. gross domestic product is forecast to grow at a 1.8 percent annual rate in the third quarter and 1.9 percent in the three months ending Dec. 31, based on the median estimates of economists surveyed by Bloomberg News. That suggests a rebound from the second quarter’s 1.3 percent annual rate.

New Lows

The iShares U.S. Dow Jones Transportation Average Index Fund, an exchange-traded fund that includes C.H. Robinson Worldwide Inc. (CHRW) and FedEx Corp. (FDX), has fallen 4.1 percent since June 18, compared with the SPDR Standard & Poor’s 500 ETF’s 7.3 percent rise. About three weeks ago, the transportation ETF fell to a relative low last reached in April 2009 during the midst of the 18-month recession that ended in June of that year.

The stock performance of transport carriers suggests investors are bracing for a recession, which is “too pessimistic against a modest-growth backdrop,” said Jack Ablin, who helps oversee about $65 billion of assets as chief investment officer at BMO Private Bank in Chicago. The holiday season tends to benefit carriers because they transport merchandise to retailers, making these companies a “good gauge” for anticipated spending, he said.

Retail sales during November and December will rise 4.1 percent to $586.1 billion this year, higher than the 10-year average of 3.5 percent, though less than last year’s 5.6 percent gains, the National Retail Federation in Washington said in an Oct. 2 statement.

Bright Spot

The advance in housing and the resurgence in automobile sales is a bright spot for transportation carriers, Larkin said. These industries have helped to maintain modest growth in transportation volume because their supply chains require a lot of freight, he said.

Carmakers sold cars and light trucks at an annualized rate of 14.9 million in September, taking into account seasonal adjustments, the best pace since March 2008, according to researcher Autodata Corp. Meanwhile, sales of new U.S. homes held near a two-year high in August, at a 373,000 annual pace, down from July’s revised rate of 374,000, based on Commerce Department data.

The Federal Reserve’s Open Market Committee said “the somewhat faster pace of home sales and construction provided some encouraging signs of improvement.” Autos and housing were “notable areas of relative strength,” according to the minutes of its September meeting released Oct. 4.

Better Christmas

Rallying stocks and incremental gains in consumer confidence are providing “the underpinnings for a Christmas selling season that will be better than last year,” Ablin said.

The S&P 500 Index (COMFCOMF) is up about 14.6 percent this year, while sentiment as measured by the Bloomberg Consumer Comfort Index has risen 8.9 points to minus 38.5 as of the week ended Oct. 7, from 2012’s low of minus 47.4.

The early earnings announcements were “an amplification of the overall sluggish economy,” said Larry Gross, a senior consultant in Mahwah, New Jersey at FTR Associates.

Domestic intermodal shipments -- those sent by both truck and rail -- are a good proxy for the Christmas season because they are “more sensitive to the cyclicality of holiday shipping,” Gross said. This segment of the industry now is “operating in a pretty seasonal fashion,” he said.

An indicator of domestic volume, revenue movements of intermodal equipment, has rebounded more recently, growing 8.9 percent from a year earlier in August, up from 6.7 percent in July and 6.3 percent in June, Gross estimated, using data from the Intermodal Association of North America in Calverton, Maryland.

‘Pretty Decent’

Even so, the outlook for Christmas retail sales varies among transport and retail executives. Phoenix-based Swift Transportation is looking ahead to a “pretty decent holiday season,” Chief Executive Officer Jerry Moyes said at a Sept. 11 conference hosted by RBC Capital Markets. Meanwhile, Union Pacific’s customers “clearly are being cautious not to over build inventory,” Robert Knight, chief financial officer for the Omaha, Nebraska-based company, said at a Sept. 5 conference hosted by Dahlman Rose & Co.

Wal-Mart Stores Inc. (WMT), the world’s largest retailer, had a “very strong” back-to-school season that will continue into the holiday period, executives from the Bentonville, Arkansas-based company said yesterday at an investor community meeting.

The looming so-called fiscal cliff and U.S. elections on Nov. 6 also could temper consumers’ holiday spirits, Ablin said. The U.S. faces higher taxes and reductions in spending on government programs that will take effect at year-end unless Congress acts.

No Great Start

If there are fewer shipments, then this also could constrain the transport carriers’ ability to raise prices, particularly in the spot market, Larkin said. September volume, typically among the best of the year, was disappointing, while October “doesn’t appear to be off to a great start,” he said.

Landstar, based in Jacksonville, Florida is scheduled to report third-quarter earnings on Oct. 24, followed by Thomasville, North Carolina-based Old Dominion the day after. United Parcel Service Inc. (UPS) will release its holiday shipping forecast for this year in late October. FedEx hasn’t given a time frame for its projections.

There’s still “no indication that we’re entering a contraction,” Gross said. In addition, October typically is the busiest month for intermodal shipments and the highest yearly increases in volume came late in 2011, so there’s still room for further improvement, he said.

“So far it looks like the peak shipping season is unfolding in a pretty normal fashion,” he said.

To contact the reporters on this story: Anna-Louise Jackson in New York at ajackson36@bloomberg.net; Anthony Feld in New York at afeld2@bloomberg.net

To contact the editor responsible for this story: Anthony Feld at afeld2@bloomberg.net

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