5 Transportation Stocks to Target If 2022 Is Turbulent, Too
Global supply-chain woes are creating opportunities in transportation stocks. Give these five picks a closer look for 2022.
The past year has been a good one for transportation stocks amid supply-chain glitches and all of the downstream impacts. And with the issues far from resolved, transports are poised to prosper in 2022, as well.
This is because with so many problems getting goods from point A to point B, the companies that provide shipping solutions are sitting in the catbird seat.
Translation: Investors hunting for opportunities in 2022 should look closely at the market's best transportation stocks.
The proof is in the pudding. For 2021 through early December, the SPDR S&P Transportation ETF (XTN) was up nearly 31% – handily outperforming the 25% advance in the broader S&P 500 Index over the same time frame.
There are lots of players in transportation services, too, including freight, logistics, marine shipping and container companies that are all experiencing outsized growth on both the top and bottom lines.
Here, we look at five of the best transportation stocks for 2022. Our short but mighty list looks at both transports that immediately come to mind for many investors, as well as those that fly under the radar. Regardless of how well-known these names are, they are all worth a closer look as supply-chain hiccups continue.
Data is as of Dec. 9. Dividend yields are calculated by annualizing the most recent payout and dividing by the share price.
Expeditors International of Washington
- Industry: Integrated freight and logistics
- Market value: $21.7 billion
- Dividend yield: 0.9%
Right out of the gate, Expeditors International of Washington (EXPD, $128.27) merits a close look for investors because it's a transportation services company, not a transportation company in the traditional sense of the word.
EXPD doesn't own ships, trains and planes, but rather knits them together to create supply chains for its customers. This is important because large fixed assets mean large fixed costs that can be perilous as supply, demand and, most importantly, prices fluctuate.
Shippers need creative new solutions now, and EXPD's sales and earnings indicate it has been delivering them. In its third quarter, sales were up 84% and earnings 88% versus year-ago figures. As a benchmark, consider that in the third quarter of 2019, before the pandemic, sales and earnings were flat.
Not that one flat quarter typifies EXPD's performance. Over the past five years ending 2020, Expeditors International has grown sales and earnings a steady 11% average annually. But the most recent results demonstrate that turmoil is, at least for this transport stock, creating opportunity.
That party is likely to continue, according to analysts. For the fourth quarter, the analyst community is forecasting 39.8% year-over-year sales growth to $4.43 billion and 75.9% annual earnings growth to $2.04 per share. So far this quarter, analysts have lifted their quarterly earnings estimate by 32.5%.
Upward analyst revisions tend to have a positive influence on stock prices. Ultimately, these adjustments come home to roost with actual results. And if the forecasts prove correct, it sets the stage for another leg higher in stock prices.
Another reason EXPD belongs among the best transportation stocks for 2022 is that it has no debt. It does have some fixed-lease obligations, which for all companies are now reported on balance sheets thanks to changing accounting regulations. In the case of EXPD, they are not material, And when the shipping landscape is defined by capacity shortages and price volatility, nothing spells comfort like the absence of fixed-debt obligations.
- Industry: Trucking
- Market value: $10.1 billion
- Dividend yield: 0.8%
Like Expeditors International, logistics company TFI International (TFII, $108.49) is asset-light. But unlike Expeditors, TFI drives growth through acquisitions. The company completed 13 acquisitions in 2020 and five more so far in 2021.
Many of TFII's deals are small and strategic. The November acquisition of D&D Sexton, for instance, added to the company's refrigeration transportation business and shuttle operations.
But the April 2021 acquisition of United Parcel Service's (UPS) dedicated and less-than-truckload business was more significant. With it, TFI brought on UPS divisions that were generating about $3 billion in revenue, a significant addition for a company that had about $3.8 billion in sales during 2020. TFII believes the acquisition will expand its footprint, and, through a five-year agreement with UPS, build its freight volume.
The deal contributed to TFII's hefty sales growth for the first nine months of 2021. But more importantly, TFI's net income increased 138% year-over-year to $450 million. In other words, it looks like TFI brought all of the new revenue and then some to the bottom line, adding credence to CEO Alain Bédard's claims in the trade press that the UPS deal was an "iceberg," with much more going on beneath the surface.
Unlike some of the other transportation stocks on this list, TFII's dividend, at just less than 1%, is tiny. But the company has grown it a respectable 6.2% per year over the last five years, proving another proof point that TFI International's portfolio approach to the transportation business is delivering value to shareholders.
Textainer Group Holdings
- Industry: Rental and leasing services
- Market value: $1.7 billion
- Dividend yield: 2.9%
Shares of Textainer Group Holdings (TGH, $35.01), which owns and leases shipping containers, have been choppy in recent months. While the shipping stock is currently down about 17% from its early November high above $41 to trade at about the same price as it did in August, it remains up 82.5% for the year-to-date.
Even with this choppiness, TGH's underlying dynamics remain compelling – making it one of the most interesting transportation stocks to watch heading into 2022.
The company reported third-quarter earnings in early November, showing net income jumped an eye-popping 281% over the year-ago period, though it was off about 12% on a sequential basis. Revenue grew about 31% year-over-year to $195.8 million during the third quarter.
As part finance company and part transportation company, Textainer enjoys significant financial leverage – and has been able to magnify top-line gains into even larger bottom-line ones. The company's third-quarter results validate this thesis.
Amid bottlenecks and volume surges, lease rates are improving, and Textainer is leasing out more containers at higher rates on new business as well as on lease renewals with existing customers.
At this moment, it appears the container landscape will not change for the foreseeable future. And that seems to be management's view at this time as well.
During the third quarter, Textainer invested $622 million in capital expenditures, bringing the year-to-date total to $1.7 billion. The company also repurchased nearly 524,000 shares, authorized an additional $50 million for share repurchases, declared a dividend for preferred and preference shares and reinstated the common dividend at 25 cents per share. TGH also borrowed more than $800 million and raised another $150 million by issuing new shares.
"The current market fundamentals are expected to continue to be favorable as cargo demand remains strong and supply-chain disruptions are widely predicted to sustain through most of 2022," said Textainer CEO Olivier Ghesquiere in the company's most recent report. TGH remains "committed to enhancing our financial performance to deliver long-term value to our common shareholders focusing on dividends and share repurchases to return capital to shareholders," he added.
Management tends to make bullish statements about the container business in their earnings reports and this sentiment seems to be backed by their actions.
Incidentally, TGH's dividend, which the company suspended in 2016, at $1.00 per share annualized, represents a hefty 2.9% yield.
Star Bulk Carriers
- Industry: Marine shipping
- Market value: $2.2 billion
- Dividend yield: 23.4%
Star Bulk Carriers (SBLK, $21.40), as its name implies, ships commodities such as metals, ore and grains around the world. The company's revenues are largely tied to the Baltic Dry Index, which measures the daily cost to ship bulk dry goods. This index has shot up thanks to glitches in global supply chains. Specifically, the index indicated shipping costs of approximately $12,000 per day at this time last year, while today, the cost is closer to $35,000.
All of this increase hits the top line of Star Bulk, and this has driven earnings to spectacular levels. Revenues jumped nearly 83% year-over-year for the nine months ended Sept. 30, to $927.6 million, while adjusted net income swung to $389.3 million from a loss of $12.8 million a year ago. And during the third quarter alone, growth in earnings was nearly a tenbagger at $225 million versus $27 million a year ago.
Notably, the Baltic Dry Index rates have cooled since their recent peak in early October, with a flattish forecast for next year. Accordingly, analysts expect earnings to cool as well in 2022. But there's still bullish sentiment levied toward the stock, with the average price target at $33.86, representing implied upside of 58% from current levels.
This is likely due to an expansion of SBLK's price-to-earnings (P/E) multiples amid supply-chain disruptions. The stock's forward P/E ratio is currently a low, low 3.4x versus the S&P 500 Index's 20.5x, a fresh $50 million share repurchase program and plenty of cash flow to support an unheard of yield.
Currently, the quarterly dividend is $1.25 per share – or $5 per share annualized – up from 70 cents in August and 5 cents at the beginning of 2020. At $5 per share, the yield works out to be 23.4% – the best among all the transport stocks featured here. In order to bring SBLK's dividend yield to the current S&P 500 average yield of 1.3%, would imply a stock price of $385.
United Parcel Service
- Industry: Integrated freight and logistics
- Market value: $179.5 billion
- Dividend yield: 2.0%
Any discussion about the best transportation stocks must engage in a paper versus plastic, chocolate versus vanilla-type debate over FedEx (FDX) versus United Parcel Service (UPS, $206.54)? Right now, we favor UPS. This is largely due to technical factors, with the latter making a better showing on margin growth, earnings growth and analyst earnings revisions.
The market seems to agree with this assessment, as FedEx shares are down about 5% for the year-to-date, while UPS shares have advanced a handsome 23%.
Labor shortages have been tough on both companies, but a union labor force appears to have given UPS an edge. And with the all-important holiday shopping season in full swing, UPS may demonstrate earnings superiority for several quarters to come.
Furthermore, most analysts and investors who are bullish on transportation stocks are speculating that the shop-from-home habit, which drives freight volume, will not recede after the pandemic does.
Even if we weren't in a pandemic amid a holiday season, there's a lot to like about UPS. It has grown revenues an average of 9.4% annually since 2016, assuming it hits the average analyst revenue estimate for the fourth quarter – a reasonably safe bet at this date.
More impressive, the company's earnings per share have improved from $3.88 in 2016 to this year's average estimate of $11.59, or a 24.5% compound annual growth rate (CAGR). It is worth noting that these calculations mask a precipitous drop in sales and earnings for the pandemic-laden 2020.
The company has grown its dividend an average of 5.5% annually over the last five years, with the yield at a healthy 2% relative to today's prices. And with Value Line's estimated 2021 cash flow per share at more than $15, the $4.08 per share dividend appears safe.