as part of our
For much of this year, the Dow Jones Transportation Average has
been underperforming the broader Dow Jones Industrial Average. But
in May, a wide divergence began to form between the two indexes,
and there is currently an almost 900 basis point spread between the
That disparity is largely due to bad news out of the
transportation sector-Federal Express Corp (
) issued weaker-than-expected earnings guidance in mid-September,
and railroads and trucking companies have been struggling with
lower cargo volumes. Followers of Dow Theory believe this could
portend a coming correction.
If the omens are correct, that means there should soon be some
terrific bargains ahead in equities. Given the overwhelmingly
negative sentiment already at work among transports, the sector
would offer especially compelling values following a selloff.
But even if a
correction doesn't come, with everything from railroads and
airlines to freight companies and equipment manufacturers
generally trading at discounts to their historical valuations,
transportation stocks are a solid buy at these levels.
With the US economy showing some signs of life, particularly the
recent rise in home prices in some of the hardest hit areas and
improving demand for new homes, transports should strengthen over
the coming months.
) has sold off sharply since providing weaker than expected
earnings guidance in mid-September, forecasting third-quarter
earnings per share (EPS) of approximately $1.18 to $1.25.
The railroad laid the blame squarely on king coal. Rock-bottom
prices in natural gas have caused electric utilities to switch over
from coal, and railroad earnings have suffered from the
corresponding decline in coal demand.
Union Pacific Corp
) also hasn't been immune to weak coal demand, recently reporting
that railcar loads were off by 17 percent as a result of weak coal
Weakness in the coal market was hardly unexpected given the
glut of natural gas and the unseasonably warm winter, but it has
weighed heavily on the railroads. Norfolk Southern is off by more
than 11 percent so far this year, and Union Pacific has sold off
from its 52-week high of about $130 down to below $120. In turn,
that has prompted a wave of analyst downgrades of both individual
railroads and the sector as a whole.
But for savvy investors, the recent weakness in the sector is an
opportunity to pick up railroads on the cheap as they continue to
adapt to their market environment.
In the case of Union Pacific, it's combating weakness in coal
shipments by focusing more on petroleum and natural gas, a trend
that's increasingly occurring across the industry. According to
data from the Association of American Railroads, while coal
shipments have declined by 9.6 percent so far this year, petroleum
products have risen by 40 percent.
In the second quarter, Union Pacific saw petroleum carloads
rise by 12 percent, as it hauled equipment into the Bakken Shale
region and petroleum and gas products out. In all, its shale
business is expected to grow to about 400,000 carloads this
By contrast, Norfolk Southern's strategy has been to focus more
on intermodal traffic and efficiency improvements.
One of its most interesting projects was a recent upgrade to its
Heartland Corridor, a 379-mile stretch of track running from
seaports in Virginia to Chicago, to accommodate double-stacked
intermodal freight trains. Hauling two intermodal containers on a
single car not only lowers costs for shippers, it also adds nearly
a third to the revenues generated by each train.
It also invested heavily in network upgrades to accommodate more
daily freight and passenger trains in America's heartland. That
will enable the railroad to move more cargo out of Canada and to
accommodate more energy-related cargo from the nation's shale
Thanks to its heavy network investment, Norfolk Southern has
one of the greatest velocities in the business and is consistently
rated one of the most efficient railroads in the nation.
Both Union Pacific and Norfolk Southern will benefit from
growing petroleum shipments in the coming years. Continued
improvement in both the housing and automotive industries will
also help to increase freight volumes, while higher fuel costs
will push more long-haul freight off the roads and onto
A secondary play on the rail industry is
), a major manufacturer of railcars, such as freight and tanker
cars as well as railcar axles and coupling devices. It is also one
of the largest leasers of railcars and provides management and
administrative services, such as regulatory compliance and fleet
The company also manufactures inland barges, which are commonly
seen in the Great Lakes region, and structural towers for wind
turbines, as well as highway guardrails, concrete and construction
Revenues at Trinity rose by 40 percent last year and are on
track to grow by another 28 percent this year. Most of that growth
is being driven by Trinity's railcar operations, which are
currently working through a backlog of about $3.2 billion, a large
portion of which is for tanker cars to haul petroleum products. The
largely one-off revenues generated through its leasing and
management services saw 16 percent growth in operating profits last
Trinity will continue to benefit from the structural shift the
railroads are experiencing in the types of cargo they haul, a
trend which should drive new railcar order growth over the next few
Shifting gears a bit,
), the largest truckload carrier in North America, is also a
worthwhile transport play.
Analysts have soured on trucking companies, Swift in particular,
because of the slow domestic economy and tight federal regulation
imposed on the industry.
While those are definite headwinds, Swift is attractive because
its truckload mileage should increase by about 1 percent this year
and 3 percent in 2013 due to greater industry consolidation.
Both reduced competition and Swift's "Plus One" program, which
aims to add one new load to each of its 16,000 trucks each week,
have helped drive huge efficiency gains and widening margins over
the past year. The trucker is also working to expand its intermodal
fleet with a goal of adding between 1,000 to 1,500 containers to
its fleet each year through 2015. What's more, it's establishing
partnerships with railroad companies for loading and
Given the capital-intensive nature of its business, Swift does
carry substantial long-term debt of about $1.5 billion. That's
caused many investors to shy away from the company and has
seriously compressed its valuation over the past year.
However, with only $8.3 million of its debt maturing over the
next four years, it's well positioned to pay that down out of its
growing free cash flow, which broke $100 million last year. Uncover
three more growth plays in this