Larkin Says: |
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| Spot rates have rebounded some recently, after moving lower into the beginning of November. On DAT's load
board, rates were up sequentially in both dry van and reefer, and level in flatbed. |
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What Do You Say?
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New Expert Insight Column on SCDigest: We have partnered with Stifel Financial Corp. to publish its weekly recap of the week in transportation, written by well-known analyst John Larkin. Check the SCDigest home page each Monday morning for the latest edition.
How will falling oil prices impact transportation & logistics companies?
The decline in oil prices should have broad
implications for companies under our coverage - some positive, some negative. In general, lower gasoline prices could
boost consumer spending, but an even larger and more direct impact to demand could come from lower domestic oil
production. Carriers could benefit from lower operating expenses, but much (or sometimes all) of that benefit is offset by
fuel surcharge programs.
Our general conclusions are below, and additional detail can be found in our note How Will
Falling Oil Prices Impact Transportation & Logistics Companies?
Investment Conclusions: In the near-term, we don't expect there will be any exceedingly large impacts from fuel
(negative margin impact to LTL carriers in 4Q14 is likely to be offset by a strong demand and pricing environment), and
none which change our current investment thesis on any sector.
Crude oil production at established operations should
continue, protecting near-term rail volume, and it is likely only the further investment that remains at risk. As a result of
the heightened risk associated with future crude volume growth, rail stocks have been hit recently, as the price of oil
has fallen. Our position on the rails has been consistent over the prior twelve months, as we believe the rails appear to
be (at a minimum) fairly valued - with multiples trading well above peak historical levels.
Even with the modest
pullback, we will remain patient and wait for another catalytic shoe to drop (leading to more attractive valuation) before
we encourage investors to initiate or add to positions in the sector. For railcar manufacturers, we believe the recent
pullback makes the shares look more attractive, as long backlogs and strong lease rates set up the companies for
strong earnings results in 2015. In addition, upcoming tank car regulations (which may cause one-third of the railcars in
flammable liquid service to be retired or moved into non-flammable service), replacement demand for a wide range of
freight railcars (i.e., non-tank), continuing rail congestion issues, and the increased usage of frac sand volume per well,
should all contribute to railcar manufacturing and remanufacturing demand, even if investment in crude infrastructure
slows.
We remain Buy-rated on railcar manufacturer, lessor and diversified manufacturer Trinity Industries (TRN;
$31.65) while reducing our target price from $45 to $41 (or from 11.0x to 10.0x our 2016 EPS estimate of $4.05) to
reflect the view that lower energy prices have a net negative impact on the majority of the company's business
segments. For the truckload sector, we remain positive on industry fundamentals, and think a low-cost fuel environment
could be another positive tailwind for Buy-rated truckload carriers, Swift Transportation (SWFT; $28.66), Celadon
Group (CGI; $21.69), and Universal Truckload Services (UACL; $27.20). Prices are as of the close, 12/5/14.
Previous Columns by
John Larkin |
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Key Insights From the Analysis of Industry Data Feeds
Trucking:
• Spot demand was flat to up on a sequential basis in Week 48. The ITS Market Demand Index (MDI) measured 17.85 in
W48 (+0.8% sequentially). Load-to-truck ratios on DAT were a bit mixed. For dry van, the metric was up nicely
(+22% sequentially). But, for refrigerated equipment, load-to-truck actually decreased 8% sequentially after a strong
W47. Flatbed showed a modest 5% increase, though it is still well below its summer peak.
• Spot rates have rebounded some recently, after moving lower into the beginning of November. On DAT's load
board, rates were up sequentially in both dry van and reefer, and level in flatbed. On ITS' load board, the overall
equipment rate was up $0.14 over the prior two weeks to $2.36. By segment, the trends mirror those seen on
DAT - up in dry van and reefer, while flat-to-down in flatbed. For all segments and on both load boards, however,
rates remain elevated y/y.
• Spot demand appears to be moving towards more rational levels - for essentially the first time in 2014. Spot demand
could easily drop below 2013 levels late in the 4Q, as imbalanced networks have begun to normalize and as UPS
has indicated it will not be caught without sufficient capacity this year - no matter what.
Rail
• Weekly carload trends often aren't as informative around Thanksgiving, so we'll try to stick with monthly and
quarterly recaps this week. For 4Q14 through November, y/y comps have been positive, but generally not quite as
strong as 3Q14. However, sequentially speaking, volume is still higher than 3Q14 levels - the reason for the
decrease in y/y comparisons is largely due to strong grain numbers in 4Q13 from the bumper crop. This year's crop
has also been strong, but is still leading to slightly negative y/y grain comps. So far this quarter, CNI has shown the
largest increase in total unit volume (commodity and intermodal) at +7.2%, while UNP is close behind at +6.6%. CP
and NSC have been the most disappointing QTD (-1.8% and +2.1%, respectively)
• Among all Class I rails, the best performing commodity group remains stone/sand/gravel. Both petroleum and coal also still remain strong in the quarter. Grain remains the worst performer, as the comps are tough against the 2013 bumper crop.
• Intermodal volume is up 3.3% quarter to date y/y. CP's volume has been the most surprising (-5.6%), while BNSF has also been poor (-1.4%). All other rails are up by about 5% or more QTD.
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