Air-Freight Stocks Deliver the Goods
Stocks of air-freight outfits have been climbing nicely. The S&P 1500 Air Freight subindustry index, which is dominated by industry giants FedEx (FDX) and United Parcel Service (UPS), saw its trailing 52-week relative strength ranking (RSR) rise to 4 (in the top 30% of companies in the S&P 1500) from 3 (the middle 40%) during the week ending Apr. 13.
This up-move isn't enough to admit it to the , which is reserved for those that have attained an RSR of 5, but it was enough to catch my attention while I flipped through my batch of relative strength charts.
Investors in these issues are probably pleased with the group's recent run, since the subindex advanced 14.1% in the past 13 weeks while the S&P 1500 gained only 0.5%. As can be seen in the chart , the rolling 12-month relative price performance for this group has exceeded that for the overall market, and is continuing the recovery initiated early in the year.
As a reminder, the jagged blue line represents the subindex's rolling 52-week price performance as compared with the 52-week performance for the S&P 1500. Any point above 100 indicates market outperformance over the prior year, while points below 100 indicate market underperformance. The red line is a rolling 39-week moving average, while the two green bands indicate one standard deviation above and below the subindex's 15-year mean relative strength.
How long can these issues maintain such a lofty cruising altitude before preparing for an eventual landing? To help answer this question, I turned to Jim Corridore, S&P's Airlines & Air Freight analyst.
Corridore has a positive fundamental outlook for the air freight and logistics industry, reflecting S&P's view that the economy is likely to remain robust at least into 2007, driving likely pricing gains and volume increases. The majority of logistics companies in S&P's coverage universe have been experiencing strong revenue growth over the past three quarters, he notes.
In Corridore's view, the outlook for earnings in the sector remains strong. In addition, he expects solid demand for international shipping in 2006 and over the next several years, partly driven by export activity out of Asia.
Freight-volume growth has been steady, notes Corridore. Year to date through February, 2006 (latest available), total cargo (measured in revenue ton-miles) grew 1.6%. In 2005, total cargo grew 1.3%, driven by a 2.3% rise in freight and express cargo, which outweighed a 7.8% dip in express mail. Domestic air cargo ton-miles fell 1.2% in 2005 after a 4.4% rise in 2004. International ton-miles increased 3.7% in 2005, after a 10.9% rise in 2004.
For 2006, S&P sees about 5% total air cargo growth, with 8% international growth, and 3% domestic growth. S&P believes the volume of activity coming out of Asia, and particularly China, should act as a natural support to air freight volumes over the next couple of years.
In addition, Corridore notes most carriers have been successful in pushing through price increases and recouping rising fuel costs through fuel surcharges. However, given the level of fuel prices, signs of customer push-back against fuel surcharges are starting to emerge, he says. Overall, though, S&P thinks the current expansion could continue for longer than many investors think.
S&P believes the strongest performers in the industry will be those companies offering total logistics and information services to their customers. Corridore thinks they're best positioned to capitalize on the strengthening demand he foresees, and he believe these companies should be able to offset high fuel costs with rate increases and/or fuel surcharges.
So there you have it. From both a fundamental and momentum standpoint, S&P believes the investment outlook for the S&P Air Freight & Logistics group is favorable over the coming 12 months. Corridore's top pick in the group is FedEx, which he ranks 5 STARS (strong buy). Of the other companies mentioned in this report, UPS is ranked 4 STARS (buy).
Source: Standard & Poor's
Industry Momentum List UpdateFor regular readers of the Sector Watch column, here is this week's list of the industries in the S&P 1500 with Relative Strength Rankings of "5" (price performances in the past 12 months that were among the top 10% of the industries in the S&P 1500) as of April 13, 2006.