CP:CC - Transports Poised For Delayed Recovery

2024-06-21 05:58:32 ET

Summary

• Transport stocks are mired in a freight recession, yet reshoring and improving operating efficiencies leave high-quality operators well positioned for an economic recovery.
• LTL operators have higher barriers to entry and more margin expansion potential than truckload segment, with Old Dominion Freight Line and XPO Logistics well-positioned.
• Rail operators offer cost advantages, with Union Pacific and Canadian Pacific Kansas City poised for earnings improvement and benefiting from reshoring trends.

By Stephen Rigo, CFA and Hannah Whang

Manufacturing Recovery Would Reinvigorate Trucking, Rails

The last two years have seen a prolonged contraction in manufacturing activity, resulting in weaker volumes for companies that transport industrial goods on trucks and trains. The ISM Purchasing Managers Index, a measure of U.S. manufacturing activity, has a notable correlation with transport volumes, as it reflects the demand for raw materials, intermediate goods and finished products. A PMI reading above 50 in March, a level indicating expansion in industrial activity, was a rare bright spot that drove optimism about a potential freight recovery in 2024. However, PMI retreated below 50 in April and May and the New Orders Index has also been weak, with a May reading of 45. As a result, we believe a freight recovery has been pushed out but see the pullback in these stocks as a good opportunity to prepare for an eventual pickup in activity and freight volumes....

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