DO NOT FORWARD – DO NOT DISTRIBUTE – DOCUMENT CAN ONLY BE PRINTED TWICE This report is limited solely for the use of clients of Wolfe Research. Please refer to the DISCLOSURE SECTION located at the end of this report for Analyst Certifications and Other Disclosures. For Important Disclosures, please go to www.WolfeResearch.com/Disclosures or write to us at Wolfe Research, LLC, 420 Lexington Avenue, Suite 648, New York, NY 10170. WolfeResearch.com Page 1 of 12 April 1, 2016 INSIDE FREIGHT Transport 1Q Earnings Preview: Cautious Positioning Transports Ahead of 1Q Earnings. Our WR Transport index has surged more than 25% the past ~2 months and has outperformed the S&P 500 by more than 1,500bp over this period. While recession fears have faded, we don’t expect 1Q earnings season will be a catalyst for many upward EPS revisions. So valuations have expanded, and we think commentary on March/April freight demand could be disappointing… so we’re mostly cautious on the transports heading into earnings season. Some Puts and Takes in 1Q. Transport EPS should benefit in 1Q from mild weather, an extra operating day and an early Easter. However, asset- based transports face tough fuel comps, continued muted demand, and likely slower pricing for the TLs. Declines in TL spot rates and ocean spot rates have moderated slightly, so gross yield expansion for the brokers/forwarders could also slow a bit. See the list on the right for our expectations of beats and misses in 1Q – we’re now most above 1Q Cons. for AAWW, CVTI and WERN and most below for ARCB and YRCW. Is Freight Improving? We saw solid improvement in y/y Rail, Truck, Ocean and Air vols in Jan. and Feb. into a combination of easy comps (West Coast port issues last year) and mild weather. However, rail vols deteriorated meaningfully in March, and our channel checks with private truckers and ports suggest a similar softening into much tougher comps. How About Pricing? We continue to expect Rail pricing to hold up best this year, followed by LTL pricing, and see the most risk to TL pricing ahead. We also expect the Rails and LTLs to benefit more from any potential improvement in industrial and export end-markets ahead following recent commodity strength and dollar weakness. Lowering Ratings on CHRW and SWFT; Raising Target Price on JBHT. In separate notes today, we have lowered our ratings on CHRW and SWFT, both from Outperform to Peer Perform as both closed at or above our prior target prices. Meanwhile, we’ve raised our target price and reiterate our Outperform rating on JBHT which is seeing uniquely strong volume growth among the transports which we think deserves a higher valuation. Small List of Transport Stocks to Own. We recommend staying disciplined in transports, and now have a pretty small list of Outperform- rated stocks. Rails remain our favorite transport sub-sector, and our favorite stocks are NSC, CP, GWR, R and JBHT. On the other side, our best Underperform ideas are HTLD, CMI and PCAR. AIRFREIGHT & SURFACE TRANSPORTATION Airfreight & Logistics – Market Weight Railroads – Market Overweight Trucking – Market Weight Truck Machinery – Market Underweight ` Source: FactSet; Wolfe Research Scott H. Group (646) 845-0721 [email protected]Ivan Yi (646) 845-0724 [email protected]Vanck Zhu (646) 845-0725 [email protected]Christian Theodoropoulos (646) 845-0726 [email protected]1Q EPS Wolfe Cons. Var. BEATS AAWW $0.30 $0.26 15% CVTI $0.24 $0.21 14% WERN $0.35 $0.32 9% SAIA $0.42 $0.40 5% JBHT $0.88 $0.84 5% CNI $0.96 $0.92 4% UPS $1.26 $1.22 3% NSC $0.99 $0.96 3% CHRW $0.83 $0.81 2% IN LINE CP $2.41 $2.40 0% KNX $0.29 $0.29 0% ODFL $0.76 $0.76 0% HUBG $0.41 $0.41 0% EXPD $0.55 $0.55 0% LSTR $0.69 $0.69 0% WAB $0.99 $1.00 (1%) GWR $0.71 $0.72 (1%) R $1.04 $1.05 (1%) MISSES FWRD $0.42 $0.43 (2%) CSX $0.36 $0.37 (3%) KSU $0.95 $0.99 (4%) HTLD $0.15 $0.16 (6%) UNP $1.05 $1.14 (8%) SWFT $0.20 $0.22 (9%) CGI $0.19 $0.21 (10%) RRTS $0.18 $0.23 (22%) YRCW ($0.87) ($0.49) (78%) ARCB ($0.17) ($0.09) (89%)
Transcript
DO NOT FORWARD – DO NOT DISTRIBUTE – DOCUMENT CAN ONLY BE PRINTED TWICE This report is limited solely for the use of clients of Wolfe Research. Please refer to the DISCLOSURE SECTION located at the end of this report for Analyst Certifications and Other Disclosures. For Important Disclosures, please go to www.WolfeResearch.com/Disclosures or write to us at Wolfe Research, LLC, 420 Lexington Avenue, Suite 648, New York, NY 10170.
WolfeResearch.com Page 1 of 12
April 1, 2016
INSIDE FREIGHT
Transport 1Q Earnings Preview: Cautious
Positioning Transports Ahead of 1Q Earnings. Our WR Transport index has surged more than 25% the past ~2 months and has outperformed the S&P 500 by more than 1,500bp over this period. While recession fears have faded, we don’t expect 1Q earnings season will be a catalyst for many upward EPS revisions. So valuations have expanded, and we think commentary on March/April freight demand could be disappointing… so we’re mostly cautious on the transports heading into earnings season.
Some Puts and Takes in 1Q. Transport EPS should benefit in 1Q from mild weather, an extra operating day and an early Easter. However, asset-based transports face tough fuel comps, continued muted demand, and likely slower pricing for the TLs. Declines in TL spot rates and ocean spot rates have moderated slightly, so gross yield expansion for the brokers/forwarders could also slow a bit. See the list on the right for our expectations of beats and misses in 1Q – we’re now most above 1Q Cons. for AAWW, CVTI and WERN and most below for ARCB and YRCW.
Is Freight Improving? We saw solid improvement in y/y Rail, Truck, Ocean and Air vols in Jan. and Feb. into a combination of easy comps (West Coast port issues last year) and mild weather. However, rail vols deteriorated meaningfully in March, and our channel checks with private truckers and ports suggest a similar softening into much tougher comps.
How About Pricing? We continue to expect Rail pricing to hold up best this year, followed by LTL pricing, and see the most risk to TL pricing ahead. We also expect the Rails and LTLs to benefit more from any potential improvement in industrial and export end-markets ahead following recent commodity strength and dollar weakness.
Lowering Ratings on CHRW and SWFT; Raising Target Price on JBHT. In separate notes today, we have lowered our ratings on CHRW and SWFT, both from Outperform to Peer Perform as both closed at or above our prior target prices. Meanwhile, we’ve raised our target price and reiterate our Outperform rating on JBHT which is seeing uniquely strong volume growth among the transports which we think deserves a higher valuation.
Small List of Transport Stocks to Own. We recommend staying disciplined in transports, and now have a pretty small list of Outperform-rated stocks. Rails remain our favorite transport sub-sector, and our favorite stocks are NSC, CP, GWR, R and JBHT. On the other side, our best Underperform ideas are HTLD, CMI and PCAR.
Exhibit 3. Sub Sector Valuations vs. Historical Valuations
Notes: Data as of 3/31/2016. (1) Rails use EV/EBITDAR. Large Cap Rail Index includes CNI, CP, CSX, NSC, and UNP. (2) Truckload Index includes CGI, HTLD, KNX, SWFT and WERN. (3) LTL Index includes ARCB, ODFL, and SAIA. YCRW P/E & EV/EBITDA are not meaningful. (4) Express Carriers use EV/EBITDAR. Express Carrier Index includes FDX and UPS. (5) Non-Asset Based Freight Index includes CHRW and EXPD. (6) Asset-Light Forwarder Index includes FWRD, HUBG, JBHT, LSTR and RRTS.
Source: FactSet; Wolfe Research estimates.
We Prefer LTL over TL Stocks: Within our Market Weight view on our Trucking sector, we favor LTL over TL
stocks. We expect better LTL than TL pricing based on our recent survey work. The LTLs also face easier
volume comps this year and we believe LTLs are better positioned for a potential improvement in industrial and
export end-markets given recent commodity strength and dollar weakness. With our cautious view on TLs,
we’ve lowered our rating on SWFT to Peer Perform today, and we continue to recommend HTLD as one of our
top Underperform ideas. We don’t have any Outperform ratings among the LTLs given the recent bounce in
the group, but we relatively prefer SAIA followed by ODFL in the group. Our favorite Trucking stock is R
(Outperform) where we continue to see strong leasing fundamentals and upside EPS potential based on
conservative guidance from management.
Exhibit 4 below shows our ratings and target price changes today. We have lowered our ratings on both
CHRW and SWFT to Peer Perform. We have also raised our price target on JBHT from $83 to $91 based on
slightly higher EPS and a higher target P/E multiple.
Exhibit 4. Ratings and Target Price Changes
Source: FactSet Information Systems; Wolfe Research.
Current Avg Forward P/E Current Avg Forward EV/EBITDA
R $6.05 $6.05 $6.51 (7.1%) WAB $4.85 $4.85 $4.58 5.9%
Railroads (1.1%)
FDX $11.65 $11.65 $12.13 (4.0%)
UPS $6.00 $6.00 $6.24 (3.8%)
Express (3.9%)
HUBG $2.30 $2.30 $2.43 (5.3%)
JBHT $4.60 $4.65 $4.53 2.6%
Intermodal (1.4%)
Inside Freight
April 1, 2016
WolfeResearch.com Page 8 of 12
Exhibit 8. Y/Y Transport Volume Growth by Mode
Source: Cass Information Systems, Inc.; American Trucking Associations; Association of American Railroads; Airlines for America; International Air Transport Association; Port of Los Angeles, Port of Long Beach; Port of Oakland; Bureau of Economic Analysis; Wolfe Research.
Exhibit 9. 2-Year Stacked Transport Volume Growth by Mode
Source: Cass Information Systems, Inc.; American Trucking Associations; Association of American Railroads; Airlines for America; International Air Transport Association; Port of Los Angeles, Port of Long Beach; Port of Oakland; Bureau of Economic Analysis; Wolfe Research.
Cass ATA Class I Domestic Int'l Air Combined IANA
Shipment Truck Rail Air Cargo Cargo Tonne WC Port Domestic Freight
Index Tonnage Volumes Ton Miles Kilometers Volumes Containers Average
TL and LTL Comps. The two exhibits below highlight our expectations for margins, yield growth and
volume growth for TLs and LTLs in 1Q. We expect to see a deceleration in TL pricing gains, but see
potential for utilization declines to moderate. On the LTL side, we expect strong pricing gains with mix
benefits from falling weight/shipment, and moderating tonnage declines.
Exhibit 10. TL Y/Y OR Improvement (Deterioration), Yields Net of Fuel, and Utilization (Loaded Miles/Truck)
Note: (1) Figures for CGI represent Wolfe calendar estimates as CGI ‘s fiscal year ends in June. (2) CNW TL’s segment is included until.3Q:15 (3) HTLD does provide data for yield or utilization. (4) Utilization and yield figures for JBHT represent Truckload only; OR improvement represents Truckload and Dedicated combined.
Average (3.0%) 0.8% 1.5% 1.5% 0.1% (3.3%) (4.7%) (5.9%) (3.8%)
Inside Freight
April 1, 2016
WolfeResearch.com Page 10 of 12
Exhibit 11. LTL Y/Y OR Improvement (Deterioration), Yields Net of Fuel, and Volumes (Tonnage/day, y/y)
Note: CNW is included until 3Q:15. FDX reported F3Q16 results (which we equate with C1Q). All other companies have yet to report. LTL Avg. for Daily Tonnage is calculated on a volume-weighted basis.
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