Is There Any Spice in the Airfreight Sector?
Zain is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
No airfreight stock has been able to beat the market since the start of this year. United Parcel Service (NYSE: UPS) has seen the most appreciation of 18%, which is less than S&P 500's +20% performance for the year. This performance has not come as a surprise. Airfreight trends have decelerated throughout 2Q13, with particular weakness noted within the Asia region and on Asia-to-Europe trade routes.
Most recently, PACTL reported a 2.4% decline in international traffic in June and HACTL reported a 7.0% year-over-year decline in total throughput. PACTL is Shanghai’s Pudong International Airport Cargo Limited, while HACTl is the same institution in Hong Kong which announces data related to air-freight demand and trends. A decline in these numbers implies some risk to top-line revenue growth for the airfreight companies.
Let’s have a look at some of the airfreight companies:
High exposure to Asia
As already mentioned, the recent retracement in intra-Asia traffic raises the risk of modest top-line disappointment. Hence, the Street has recently been bearish on Expeditors International of Washington (NASDAQ: EXPDNASDAQ: EXPD)) given its significant exposure to Asia trade flows. Expeditors is viewed as a bet on global trade, which will remain lackluster in the near term. The degree to which the company participates in an international freight rebound is uncertain following significant under-performance in recent quarters.
Furthermore, long-term structural trends (e.g., changing freight flows, miniaturization, near-shoring, increased price transparency) do not support a constructive view on a rebound in earnings growth at Expeditors. Investors will also look toward commentary from management on the outlook for the second half of the year after the company expressed ‘cause for optimism’ along with its 1Q13 earnings results.
Best run asset-based freight company
Morgan Stanley believes UPS to be one of the best run asset-based companies that it covers; However, after failing to acquire TNT, UPS is left pursuing a less-than-exciting growth story focused on tuck-ins and share buybacks. Furthermore, while the company has exposure to a broad global recovery in trade and airfreight, it is less levered to those trends than its closest competitor, FedEx (NYSE: FDX).
Outside of an unexpectedly robust macro environment, there seems to be little reason for multiple expansion. Weakness in macro trends was properly communicated by UPS in a press release on July 12, when the company expressed that it expects EPS to come in at $1.13 during Q2, below the consensus estimate of $1.20. Guidance for FY13 EPS is cut to a range of $4.65 to $4.85 versus the $4.98 consensus. The company cited slowing package volume growth due to labor negotiations on top of the general sluggishness it's seeing with the industrial economy
Is FedEx going to be Bill Ackman’s next target?
FedEx is down 2% since United Parcel’s announcement on a weak airfreight market. However, the stock is still up 4% in the last week, as the shares popped up on a rumor that Bill Ackman might be going long in it as he plans to do just that in a large-cap stock.
Apart from this, there are no obvious near-term catalysts, and hence FedEx is expected to be range-bound for the next several months until investors have greater visibility on the probability of cost savings in 2015.
As far as the segmental performance is concerned, the express business (overnight delivery) is currently witnessing slow trends. The ramp-up of cost- reduction efforts as well as the timing and extent of planned industry-wide capacity rationalization on Transpac routes remain significant earnings-swing factors for 2014 and beyond.
Over the longer-term, the contribution from the ground segment (normal delivery time) remains under-appreciated, as the secular growth in e-commerce and market share gains drive increased profit contribution.
For investors bullish on the macro economy, FedEx still has plenty of cyclical leverage and the stock is expected to show gains at the first sign of a pickup in air freight. However, for now I remain on the sidelines.
Currently, the airfreight space remains far from being attractive given sluggish growth in global markets. However, that means that the stocks in this space are currently pretty cheap and will definitely go up once signs of recovery in airfreight emerge. By what time this will happen is a billion dollar question that nobody knows the answer to.
Zain Abbas has no position in any stocks mentioned. The Motley Fool recommends FedEx and United Parcel Service. The Motley Fool owns shares of Expeditors International of Washington. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!