Despite the current market bloodbath, Zacks’ transportation services business continues to benefit from rising demand driven by economic activity. As life gradually returns to normal and people go out to work after being vaccinated against the dreaded COVID-19, the demand scenario has improved significantly.
Riding on better demand, there has been a substantial increase in manufactured goods so far. This has contributed to the growth of industry players. Actions like CH Robinson Worldwide (CHRW – free report), Matson (MATX – free report) and Hub group (HUBG – Free Report) are well positioned to take advantage of this healthy demand environment.
About the industry
Zacks Transportation-Services industry hosted companies provide logistics, rental and maintenance services to carriers. Some industry players focus on global logistics management activities, including international freight transportation. Third-party logistics entities provide innovative supply chain solutions. They also focus on services such as product sourcing, warehousing, and freight forwarding. The companies have expertise in the fields of trucking, air and maritime transport. Additionally, some of the players in this industry offer domestic and international express delivery services. The well-being of firms in this industrial cohort is directly proportional to the health of the economy. A rise in manufactured and retail goods, favorable prices and improving global economic conditions bode well for industry participants.
3 key investment trends to watch in the transportation services industry
Freight demand remains strong: Due to the gradual resumption of economic activities, freight demand remains strong despite a slight setback. This supports the growth of transportation service providers. The Cass Freight Shipments Index improved 5.4% month over month in May. The general improving trend is evident from the fact that the measure has improved month-over-month in three (February, March and May) of the five months reported so far this year.
Dividend hikes signal financial strength: With the resumption of economic activities, many companies, including some transport service providers, are reactivating their shareholder-friendly measures, such as the increase in their respective dividend distributions, which underline their financial solidity and their confidence in the company . Evidently, in June Matson’s board authorized a 3.3% increase in its quarterly dividend, bringing the total to 31 cents per share. CH Robinson also increased its quarterly dividend late last year.
High fuel costs limit earnings growth: The current scenario of rising fuel prices weighs on the results of transport service providers. The price of oil is moving north, mainly due to supply problems triggered by the Russian-Ukrainian war. Notably, the price of oil soared 33% in the first quarter of 2022.
The price of oil should continue to rise this year. According to the US Energy Information Administration, the average Brent crude oil spot price will be $108 per barrel in the second half of 2022.
Zacks’ Industry Ranking Indicates Sunny Outlook
The Zacks Transportation – Services industry is a group of 28 stocks within the broader Zacks Transportation industry. The industry currently carries a Zacks industry ranking of #60, which places it in the top 24% of Zacks 250+ industries.
The group’s Zacks Industry Rank, the average Zacks Rank of all member stocks, indicates a bright near-term outlook. Our research shows that the top 50% of industries ranked by Zacks outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the top 50% of industries ranked by Zacks is the result of a positive earnings outlook for the constituent companies overall. Looking at revisions to aggregate earnings estimates, it appears analysts are gradually gaining confidence in the earnings growth potential of this group. The industry’s earnings estimate for 2022 rose 49.8% year-over-year.
Before outlining a few stocks you might want to add to your portfolio, let’s take a look at the industry’s recent stock performance and valuation.
The industry is lagging behind the S&P 500 and the sector
The Zacks transportation services industry has underperformed the Zacks S&P 500 composite and the broader transportation sector over the past year.
The industry fell 19.4% during this period compared to the 12.6% depreciation of the S&P 500. The broader sector fell 17.7% during the same period.
Year-over-year price performance
Current industry assessment
Based on the 12-month forward price-to-sales ratio, a multiple commonly used to value transportation services stocks, the sector is currently trading at 1.27X compared to 3.22X for the S&P 500. The value is also lower than the sector’s 12-month P/S of 1.6X.
Over the past five years, the industry has traded as low as 2.16X, as low as 1.27X and at the median of 1.75X.
Price to sales ratio (F12M)
3 transportation services stocks to buy
CH Robinson Worldwide, currently a Zacks Rank #2 (Buy) holder, operates as a light logistics player. Improved freight scenario in the United States helps this Minnesota-based freight broker. Efforts to control costs also bode well. Measures to reward CHRW shareholders boost confidence in the stock.
CH Robinson has an impressive track record when it comes to earnings. Net income has exceeded the Zacks consensus estimate in three of the last four quarters (missing the mark in the last), with the average surprise being 17.1%. CHRW has seen the Zacks consensus estimate for 2022 earnings revised up 0.7% in the past 60 days.
Pricing and Consensus: CHRW
Matson, a shipping and logistics services provider based in Honolulu, Hawaii, currently holds a Zacks ranking of 2. Over the past 60 days, MATX has seen the Zacks consensus estimate for 2022 move 11.2% to the north.
The stock gained 15% in one year thanks to the improvement in freight demand and cost control actions. Matson’s efforts to reward its shareholders through dividends and buybacks are also highly appreciated.
Pricing and Consensus: MATX
Hub group: The Oak Brook, Illinois-based transportation and logistics management solutions provider currently holds a Zacks rating of 2. HUBG is being helped by gradually improving freight market conditions. HUBG has an impressive track record of profits. Net income has exceeded the Zacks consensus estimate in each of the past four quarters, averaging 43.9%.
HUBG’s strong customer base and growth-by-acquisition strategy also bode well. Hub Group acquired Choptank Transport in October 2021, expanding its supply chain solutions operations. The title gained 4.9% in one year.
Pricing and Consensus: HUBG