The economy may be limping along, but it's full steam ahead for transportation-related stocks. Over the past year, the Dow Jones transportation average, which includes airlines, railroads, and trucking and shipping firms, has gained 22%, six percentage points more than the Dow Jones industrial average.
Transportation companies tend to be sensitive to the ups and downs of the economy. So despite tepid growth in gross domestic product, the rally could mean that the economy is set to soar. A big question hanging over transit-related stocks, however, is what impact federal budget cuts will have on the sector. With that in mind, here are some companies that move people and things and that could do well in a variety of environments because they have superior strategies, managers, niches or opportunities. (Note that our list goes beyond the names you find in the typical transportation index. If a company is involved in something that moves, we consider it fair game.)
Railroads and Truckers
Railroad and trucking companies are considered bellwethers because they carry the raw materials and end products that other companies use and make. An increase in the number of railcars loaded or tons shipped by truck often signals an upturn in the economy. But neither number has been rising much lately. “U.S. rail traffic continues to mirror the overall economy: not great, not terrible, anticipating a better future,” says John Gray, a senior vice-president with the American Association of Railroads.
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Growth in some types of freight is offsetting weakness in others. The bright spots: Railroads are shipping much of the oil coming out of the Bakken shale region in North Dakota and Montana. They also are carrying a greater share of the intermodal containers, which can be transported by boat, truck or train.
Analyst William Greene, of Morgan Stanley, prefers railroads over truckers because they have lower fuel and labor costs and they ship oil. His top pick is Canadian Pacific Railway (symbol CP), which runs one of the main lines into the Bakken. Activist investor William Ackman won control of the company in May 2012 and brought in legendary railroad executive Hunter Harrison to serve as CEO and make the company more efficient. CP’s operating ratio (operating expenses divided by revenues, a key measure of efficiency) was one of the worst in the business. But the ratio improved to 75.8 in the first quarter, down from 80.1 a year earlier, and the company is shooting to lower the figure to the mid 60s by 2016.
Meanwhile, CP’s stock has been chugging along nicely. Over the past year, the stock, at $131.20, climbed 75% and now trades at 21 times estimated 2013 earnings, compared with 18 for the average railroad stock (prices and related data are through May 8). Even if the economy weakens, “we see significant opportunity for improvement” as Harrison continues to cut costs and increase productivity, Greene says.
Recent trucking statistics have also been mediocre. But Ryder System (R) can thrive in a slow-growth economy because it rents trucks to small businesses that are wary of taking on the cost and maintenance headaches of buying a vehicle. Its customers are “the butcher, the baker, the candlestick maker,” says analyst Kevin Sterling, of BB&T Capital Markets.
Truck prices have risen sharply, partly because of new emissions standards. That makes leasing more cost-effective for many customers. Ryder, one of only two national truck-leasing companies (the other is privately held Penske Truck Leasing), has an advantage over smaller rivals because it can get volume discounts on new trucks. Its stock, which has climbed 31% to $61 over the past year, trades at 13 times estimated 2013 earnings, below the trucking-industry average of 17. Analysts expect Ryder’s profits to climb by 20% in 2013 and by another 13% next year.
Airlines
Baggage fees, crowded flights and high fares have passengers grumbling and investors grinning. The U.S. airline industry posted a third straight year in the black in 2012. Although the industry is infamous for having lost more money than it made since its creation, things really may be different this time.
The industry is beginning to reap the benefits of consolidation, which allows airlines to cut overhead and overlapping routes that can spark costly fare wars. Before 2008, eight carriers accounted for 88% of domestic airline capacity, says analyst Helane Becker, of Cowen Securities. If the proposed merger between US Airways (LCC) and American Airlines, which is in bankruptcy reorganization, goes through, only four carriers will control 88%.
Airlines also are reaping big profits by charging for things that used to be free, such as meals, checked luggage, priority boarding and talking to a reservation agent. And, at least for now, they are resisting the temptation to expand capacity for the sake of growth. “The biggest change that U.S. passenger airlines have made is the shift in focus from increasing market share to one of boosting shareholder return on investment,” the Federal Aviation Administration said in its annual forecast.
Alaska Airlines (ALK) epitomizes the new focus on profitability. “It’s a company that puts shareholders at front of mind when making strategic decisions,” says analyst Hunter Keay, of Wolfe Research. It generates “consistent, robust” free cash flow, which it uses to finance growth, repay debt and buy back shares.
Becker likes Alaska because it is well positioned for growth in north, south and central America and especially in the western U.S. She adds that 17% of its capacity is within Alaska, “and those are monopoly markets.”
The stock, at $67.33, has doubled over the past year and trades at 12 times estimated 2013 earnings. On a price-to-earnings basis, that makes Alaska more expensive than Delta, United Continental and US Airways but cheaper than Southwest, which, at $14.33, trades at 14 times forecast 2013 profits.
Although U.S. airlines are keeping a lid on capacity, worldwide demand for aircraft is growing, and so is the percentage of planes being leased. That’s helping Air Lease (AL), which rents jets to carriers worldwide. Demand is growing as airlines add routes in developing countries and replace aging fleets in developed ones. Some European banks that had been lending money for aircraft purchases pulled back after the financial crisis, and that has forced some carriers to rent rather than buy.
Air Lease is led by Steven Udvar-Hazy, who founded International Lease Finance Corp. and stayed on after American International Group bought it. After leaving ILF, he started Air Lease in 2010. “Hazy is the kingpin of this business,” says John Osterweis, manager of the Osterweis Fund, which has a stake in Air Lease. “He’s respected all over the world.”
Osterweis found Air Lease appealing because as a newer company, it has a young fleet and a balance sheet unburdened with crisis-era baggage. At $29.42, the stock trades at 17 times estimated 2013 earnings, at the industry average.
Cars
U.S. auto sales have pulled out of their Thelma-and-Louise cliff dive, and that’s helping carmakers, dealers and parts manufacturers. Sales of cars and light trucks plunged from 17.4 million in 2005 to 10.6 million in 2009, then started recovering. They are now running at a seasonally adjusted annual rate of 15.3 million, close to the past decade’s average. Pent-up demand, new model launches and lease expirations are driving auto sales, and the housing recovery could lure contractors into new trucks. The big negative: Business in Europe, a large market for U.S. auto and parts makers, is tanking.
General Motors (GM) emerged from bankruptcy in July 2009 as a leaner, more efficient company. “Its break-even point is so dramatically lower it can make money in almost any part of the business cycle,” says Morningstar analyst David Whiston. Despite a 43% jump in its stock over the past year, the shares, at $32.08, trade at a modest 10 times forecast 2013 earnings.
GM still has warts that leave investors wary. Among them: its underfunded pension and significant exposure to Europe. Plus, Uncle Sam still owns 16.4% of the automaker, and the Canadian government owns another 9.5%. Investors fear the share price will slide when the governments unload their holdings. Whiston says he expects “an orderly exit” next year.
CarMax (KMX), the nation’s largest used-car retailer, has no exposure to Europe, which helps explain why its stock has climbed 58% over the past year. The company operates 118 no-haggle dealerships in 30 states that mostly sell late-model used cars. It sells older models through wholesale auctions and offers service and financing, and it derives 2% of its revenues from sales of new cars.
Some 35 million to 40 million used cars are sold every year. CarMax has just 2% of the market, leaving “a long runway for growth,” says James Albertine, an analyst at Stifel Nicolaus. Carmax’s rivals, he says, lack the company’s physical presence, and mom-and-pop operators are unable to match CarMax’s technical expertise and its ability to get access to relatively inexpensive capital.
The slump in new-car sales during and after the Great Recession hurt used-car dealers because they had access to fewer late-model vehicles. With new-car sales rising, the shortage is largely over. With the shares at $47.09, CarMax trades at 23 times estimated earnings for the fiscal year that ends in February 2014. That’s not cheap, so you may want to wait for the shares to pull back a bit before buying.
Kathleen Pender writes a personal finance and investing column, Net Worth, three times a week for The San Francisco Chronicle.
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