Jan. 18 (Bloomberg) -- A pickup in air cargo shipments from Asia may benefit shares of Expeditors International of Washington Inc. and FedEx Corp. as global economic growth improves.
Exports at Hong Kong Air Cargo Terminals Ltd. grew 5.9 percent in December from the prior year, following an 8.5 percent increase the previous month, based on data from the biggest handler in the world’s busiest freight airport. The recent gains came after shipments had contracted by an average rate of 4.2 percent in the 24 months ending last October.
The rise in this gauge of shipments from Asia is encouraging for Expeditors, with 2011 revenue of $2.9 billion from airfreight services, and FedEx, said David Ross, a Baltimore-based transportation analyst at Stifel Nicolaus & Co. These exports -- particularly high-tech shipments -- are “part of the equation” that boosts earnings for those companies, he said.
“It doesn’t take much of an uptick in demand in that market to have shippers scrambling for capacity,” said Ross, who maintains buy recommendations on these companies. While Expeditors has missed analysts’ earnings estimates for the past four quarters, it may be “nearing a beatable quarter” this year, he said. The Seattle-based company is scheduled to report fourth-quarter results on Feb. 26.
Exports from Hong Kong Air Cargo Terminals have a “strong correlation” with annual growth in airfreight revenue at Expeditors and yearly gains in the average daily pounds of FedEx’s international priority freight, according to Peter Nesvold, an analyst in New York at Jefferies & Co. Their earnings are sensitive to changes in such shipments because margins are high, he said.
When FedEx reported fiscal second-quarter results, the Asia-Pacific airfreight market was doing “quite well,” David Bronczek, president and chief executive officer of FedEx Express said on a Dec. 19 conference call. “We are actually seeing some positive trends from our key customers in our market segment.” The Memphis, Tennessee-based company is scheduled to report fiscal third-quarter results on March 20.
Shares of companies in this industry have “done pretty well” since mid-November with “less nervousness” about a worldwide economic slowdown, said Frederic Dickson, chief investment strategist in Lake Oswego, Oregon, at D.A. Davidson & Co. Even signs of a “little bit of stabilization in Europe” and increased exports from China can be met with a big price reaction, he said.
Overseas shipments from China increased 14.1 percent from a year earlier, the most since May, based on data from the customs administration in Beijing. Though the rise exceeded economists’ forecasts, analysts at Goldman Sachs Group Inc., UBS AG and Australia & New Zealand Banking Group Ltd. questioned the reliability of the figures.
The Citigroup Economic Surprise Index for the euro region, was at 11.4 yesterday, the highest reading in nine months. A positive reading in the index indicates economic statistics have on balance been beating consensus estimates.
Shares of Expeditors, which provides ocean-freight services as well as for air cargo, have risen 20 percent since Nov. 16, while FedEx, operator of the world’s biggest cargo airline, is up 16 percent. That compares with an 8.9 percent gain in the Standard & Poor’s 500 Index during the same period.
Investors are drawn to this industry because it’s “one of the moving parts that benefits from a cyclical recovery,” said Dickson, who helps manage $32 billion. “We may be transitioning from a period of deceleration to slight acceleration.”
Global manufacturing activity, as measured by a JPMorgan Chase & Co. purchasing managers’ index, rose for the second consecutive month to 50.2 in December, the highest level since May. Readings above 50 indicate expansion.
Another sign of improvement is Stifel’s monthly Logistics Confidence Index, which serves as a “barometer of the health and trajectory of international freight movements,” Ross said. Though this indicator remains below the threshold of 50 that shows better conditions, it rose to 48 in December, the second consecutive month of increases, he said.
In addition, barring a “material unraveling in the U.S. economy,” there probably will be a “nice re-stocking cycle” by retailers between March and May that will benefit airfreight, Nesvold said. The economy expanded at a 3.1 percent annual pace -- more than previously reported -- in the third quarter, though growth probably slowed to 1.5 percent in the three months ended Dec. 31, based on the median estimate of seven economists surveyed by Bloomberg News.
Even so, secular shifts could hurt the companies’ long-term growth prospects. Ocean freight has become a more attractive alternative in the past two years as customers try to save on shipping costs, Nesvold said. “Higher fuel has become sort of a permanent tax on the airfreight industry, while service levels on the water have gotten better over time,” he said.
At the same time, technology products such as tablets are becoming smaller, lighter and less expensive. This hurts volumes of airfreight, a more profitable business for Expeditors than ocean services, he said. The company derived about 41 percent of third-quarter revenue from its airfreight division, according to a Nov. 6 statement.
The carrier is facing a “very uniquely challenging business environment” as it adapts to transporting these new products, as well as “lackluster consumer and business demand and global economic uncertainty,” Chairman and Chief Executive Officer Peter Rose said in the same statement.
Still, Expeditors’ valuation is attractive on a price-to-earnings basis, trading at about 20 times Nesvold’s estimate for earnings, compared with an historical average multiple of about 25 to 30, he said.
The stock also could appeal to investors as a “proxy for a play on the entire Far East economy,” Dickson said. The two-month rally in Expeditors and FedEx shares suggests that investors are feeling better about exports from the region and growth in general, he said.
“These stocks act as a harbinger that things may be improving globally,” Dickson said.
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