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.
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
), 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
) 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.
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 (
) 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 (
) 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
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 (
), 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
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.
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 (
) 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.
), 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
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
Kathleen Pender writes a personal finance and investing column,
Net Worth, three times a week for The San Francisco Chronicle.