Bleak Near-Term Outlook for Air Freight & Cargo Stocks

The Zacks Transportation - Air Freight and Cargo industry includes players that provide air delivery and freight services. Most companies in the space focus on offering specialized transportation and logistics services.

Apart from operating a ground fleet of multiple vehicles, some of these companies maintain an air fleet. They offer air transportation services for passengers as well as cargo. Some companies also render their services to those entities that outsource air cargo lift requirements.

Let's take a look at the industry's three major themes:

  • Driven by the advancement of relevant technologies, e-commerce - the method of buying and selling goods and services via a software platform - continues to display phenomenal growth. This growth story is a huge positive for the sector participants. According to United Parcel Service (UPS), one of the key members of this industry, cross-border e-commerce volume will grow by 28% in the 2019-2021 period. The upbeat freight scenario is an added positive for the providers of air delivery and freight services. In fact, the Cass Freight Shipments Index has expanded on a year-over-year basis in each of the first 11 months of 2018. Additionally, a lower tax rate due to the current tax law will aid margin growth.

  • Recommendations from a task force appointed by President Trump suggested that the United States Postal Service ("USPS") should raise the price for shipping packages. The move, apart from hurting online retailers may also hit the likes of UPS and FedEx (FDX) as these companies often use USPS for the last mile delivery. Furthermore, competition is likely to intensify in the space with (AMZN) looking to expand its logistics network. In November 2018, media reports suggested that Amazon was offering steep discounts for its pilot shipping program that is being currently tested. The discounts made Amazon's shipping service, launched last year, cheaper than those offered by the likes of UPS and FedEx.

  • Major industry players have significant exposure to China's economy, which is in doldrums. Moreover, the tariff war between the United States and China is not doing any good to the global economy either. Fears of a global trade slowdown were reflected in the bearish fiscal 2019 guidance provided by FedEx in December 2018. Moreover, with these companies investing significantly to upgrade their facilities following the surge in e-commerce demand, their bottom lines are under pressure due to escalated capital expenditures. For instance, capital expenditure at UPS for full-year 2018 is projected between $6.5 billion and $7 billion. The estimation reflects an increase in excess of 100% from the approximately $3 billion incurred by UPS toward capital expenditures in 2016.

Zacks Industry Rank Indicates Gloomy Prospects

The six-member Zacks air freight and cargo industry, housed within the broader Zacks Transportation sector, currently carries a Zacks Industry Rank #216. This rank places it at the bottom 16% of more than 250 Zacks industries.

The group's Zacks Industry Rank , which is basically the average of the Zacks Rank of all the member stocks, indicates bleak near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

Our proprietary Heat Map shows that the industry's rank has remained in the bottom half over the past several weeks.

The industry's positioning in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group's earnings growth potential. Over the past six months, the industry's earnings estimate for 2019 has declined 3.9%.

Despite the bleak near-term prospects of the industry, we will present a few stocks that one can buy or retain given their growth prospects. But it's worth taking a look at the industry's shareholder returns and current valuation first.

Industry Lags Sector & S&P 500

The Zacks Airfreight & Cargo industry has lagged both the broader Transportation sector and the Zacks S&P 500 composite over the past year.

Over this period, the industry has declined 30.9% compared with the broader sector and the S&P 500 index's depreciation of 18.3% and 6.7%, respectively.

One-Year Price Performance

Industry's Current Valuation

On the basis of the trailing 12-month EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation and amortization) ratio, which is a commonly used multiple for valuing transportation stocks, the industry is currently trading at 9.47X compared with the S&P 500's 10.07X. It is also below the sector's EV/EBITDA ratio of 9.84X.

Over the past five years, the industry has traded as high as 12.83X, as low as 8.20X and at the median of 10.36X.

Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio

Bottom Line

Even though the surge in online shopping is a positive for industry participants, we believe that players in the Zacks Transportation Air Freight and Cargo industry will struggle in the short term mainly due to increased capital expenses, possibility of global trade slowdown and issues related to the U.S.-China trade war. Moreover, technological failures like the TNT Express cyberattack at FedEx in 2017 have the potential to cripple operations.

Overall, the industry might not be able to tide over the challenges in the near term and therefore none of the stocks in the industry currently holds a Zacks Rank #1 (Strong Buy). However, below is a stock that has been witnessing positive earnings estimate revisions and carries a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

Radiant Logistics (RLGT) operates as a third-party logistics company. It provides multi-modal transportation and logistics services. The Zacks Consensus Estimate for fourth-quarter EPS has been revised 9.1% upward over the past 90 days. The company outshined estimates in each of the last four quarters, the average positive surprise being 36.1%.

Price and Consensus: RLGT

Additionally, we discuss two stocks from this space that investors may want to retain for the time being amid challenges due to their growth prospects. Both stocks carry a Zacks Rank #3 (Hold).

United Parcel Service , based in Atlanta, is the world's largest express carrier and package delivery company.The Zacks Consensus Estimate for fourth-quarter EPS is projected to grow 14.4% year over year. The company outshined estimates in three of the last four quarters, the average positive surprise being 0.7%.

Price and Consensus: UPS

Atlas Air Worldwide Holdings (AAWW) is a provider of outsourced aircraft and aviation operating services across the globe. The Zacks Consensus Estimate for 2018 EPS has been revised 0.5% upward over the past 60 days. The company, based in Purchase, NY, trumped estimates in each of the last four quarters, the average positive surprise being 30.2%.

Price and Consensus: AAWW

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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