Benzinga – by Zacks, Benzinga Contributor.
The Zacks Transportation-Air Freight and Cargo Industry faces challenges, from inflation-induced high interest rates to concerns regarding supply-chain disruptions and a slowdown in economic growth.
We believe that despite the challenges mentioned above, the space has plenty of fuel left, especially for operators who target growth opportunities and take cost-reduction measures. Although economies are reopening and consumers are increasingly interested in online shopping, this trend is not going away. It is also commendable to cut costs in order to improve the bottom line. We advise investors, in light of the positive developments surrounding this space, to focus on United Parcel Service(NYSE : UPS), FedEx(NYSE : FDX) or GXO Logistics (NYSE : GXO).
About the Industry
The companies in the Zacks Transportation Air Freight and Cargo Industry provide air delivery and cargo services. The majority of players in this space offer specialized transportation and logistic services. Some players offer a variety of supply-chain services, including freight forwarding and customs brokerage. Others provide fulfillment, returns, financial transactions, and repairs. The health of this industrial group is directly proportional with the well-being of its companies. UPS and FedEx are major industry players that transport millions of packages every day around the world. Some of these companies operate a ground fleet with multiple vehicles and also maintain an aircraft fleet. Some players specialize in providing air transportation for passengers and cargo while others provide services to entities who outsource air cargo lifting.
4 Key Trends in the Transportation-Air Freight & Cargo Industry
Strong financial returns for shareholders With economic activity picking up from the pandemic levels, more and companies are allocating cash to buybacks and dividends in order to appease long-suffering investors. This shows their confidence and financial strength. FDX, a player in the Transportation – Air Freight and Cargo sector, announced a 10% rise in its quarterly dividend for June 2024.
Focus on cost-cutting to drive bottom line:Despite the signs of cooling, the measure is well above the Fed’s 2% target. We note that the industry experienced significant levels of inflation including higher prices for fuel, labor and freight. The industry players are focusing their efforts on cost-cutting and improving productivity and efficiency in order to mitigate high expenses, and weaker than expected demand scenarios.
The persistent erosion of demand is a grave concern: Due to the decline in shipping demands, especially in Asia and Europe. Volumes are being hurt. Lackluster volumes hurt the results of major industry players such as FDX. FDX reported lower than expected revenues in the third quarter of fiscal 2024. This was primarily due to demand issues. FDX’s Express unit, the largest segment, was severely hit. Segmental revenues declined 2% over the past year due to volume issues. FedEx Freight revenues declined 3%. FedEx’s fourth-quarter fiscal performance is expected to be affected by a lackluster shipping demand. UPS, another leading industry player reported lower-than expected revenues in the first quarter of 2024 due to a lackluster demand.
Ecommerce is Still a Force: With the reopening economies, it’s not surprising that e-commerce growth has slowed down from the peak levels seen during the pandemic. It is still impressive, driven by convenience of online shopping. The race for digitization also helps to support the momentum of e-commerce growth. The demand for e-commerce should continue to drive growth in the industry.
Zacks industry rank indicates bright prospects
The Zacks Air Freight and Cargo sector, which is part of the Zacks Transportation industry, has a Zacks Industry Ranking #92. This ranking places it in the top 37 percent of more than 245 Zacks Industries.
The Zacks Industry Rank of the group, which is the average Zacks Rank for all member stocks, shows bright near-term prospects. Our research shows that top 50% of Zacks-ranked sectors outperform bottom 50% by more than a 2 to 1 factor.
The industry’s ranking in the top half of Zacks-ranked sectors is due to a positive outlook for earnings across all constituent companies. We will first look at the recent performance of the stock market and the valuation picture for the industry before presenting a few stocks that investors should keep in their portfolios.
Industry Lags S&P500 and Sector
Over the past year, the Zacks Air Freight and Cargo sector has underperformed both the Zacks composite S&P 500 as well as the Transportation sector.
The industry has fallen 12% in the last year, compared to the S&P 500’s gains of 16% and a sector-wide appreciation of 4.6%.
One-Year Price Performance
Industry’s current valuation
The industry trades at 10.1X based on the trailing 12-month enterprise-to-EBITDA ratio (EV/EBITDA), a multiple commonly used to value Transportation-Air Freight and Cargo shares. This compares with the S&P 500, which is trading at 13.98X. This is also lower than the sector’s trailing 12-month enterprise value-to-EBITDA of 11,07X.
In the last five years, the industry traded at as high as 13,58X, as low 6.64X, and at a media of 9,65X.
Enterprise Value-to-EBITDA Ratio
3 Transportation Stocks: Air Freight and Cargo to Watch Each of the stocks mentioned carries a Zacks Ranking #3 (Hold).
UPS We appreciate UPS’ efforts to reward shareholders through dividends, buybacks and other means. UPS’s robust free cash flow is a positive factor that has led to an increase in shareholder-friendly actions.
The figures are impressive, even though online shopping is down from its pandemic peak since the reopening economy. UPS’s earnings have exceeded the Zacks Consensus estimate in each of the four last quarters. The average beat was 3.14%.
Price and Consensus : UPS
FedEx FDX is doing a great job rewarding its shareholders in these uncertain times. FDX has been active in the buyback market, as well as paying dividends. FedEx has a solid liquidity position. The company’s efforts at cutting costs are driving the bottom line.
FDX’s earnings exceeded the Zacks Consensus estimate in three of the four last quarters, and missed it in the fourth. The average beat was 8.06%. The Zacks Consensus estimate for FDX’s fiscal-year earnings shows a growth of 18.72% over the previous reported number.
Price and Consensus for FDX
GXO Logistics We are impressed with GXO’s efforts in strengthening its logistics capabilities. The rapid growth in e-commerce and automation, as well as outsourcing, is a boon to the company.
GXO’s earnings exceeded the Zacks Consensus Expectation in three of the four last quarters, and missed it in the fourth. The average beat was 5.59%. GXO shares have risen 1% in the last three months.
Price and Consensus GXO
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