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3 Stocks to Watch From a Bouyant Air-Freight & Cargo Industry

Prospects of participants of the Zacks Transportation - Air Freight and Cargo industry are being hit by uncertainties related to slowing global economic growth and inflationary pressure. Moreover, high fuel costs are restricting bottom-line growth.

Despite the abovementioned challenges, we believe that the space still has fuel left in the tank, especially for operators that target growth opportunities and operating efficiency initiatives. Even though economies are reopening, consumers’ thirst for online shopping is rampant. The still impressive e-commerce demand scenario is a huge positive for the industry participants. High shipping rates should also drive revenues. In view of these favorable developments surrounding the space, we advise investors to focus on United Parcel Service UPS, FedEx FDX and Air Transport Services Group ATSG.

About the Industry

The companies housed in the Zacks Transportation - Air Freight and Cargo industry provide air delivery and freight services. Most players in the space are involved in offering specialized transportation and logistics services. Some participants offer a range of supply-chain solutions, such as freight forwarding, customs brokerage, fulfillment, returns, financial transactions and repairs. The well-being of the companies in this industrial cohort is directly proportional to the health of the economy. Leading industry players, including UPS, transport millions of packages each day across the globe. Apart from operating a ground fleet of multiple vehicles, some of these companies maintain an air fleet. While some players focus on providing air transportation services for passengers and cargo, others deliver services to entities that outsource air-cargo lifting requirements.

3 Key Trends to Watch in the Transportation-Air Freight & Cargo Industry

Strong Financial Returns for Shareholders: With economic activities gaining pace, more and more companies are allocating their increasing cash pile by way of dividends and buybacks to pacify the long-suffering shareholders, thereby underlining their financial strength and confidence in business. Among the Transportation – Air Freight and Cargo industry players, UPS announced a 6.6% hike in its quarterly dividend in January 2023, apart from unveiling a new share buyback program.

E-commerce A Key Catalyst: It is hardly surprising that the pace of growth of e-commerce demand has slowed from the levels witnessed at the peak of the pandemic. Despite the slowdown as economies re-open, the same remains impressive, driven by the convenience associated with-line shopping. The race to digitization also supports the momentum in e-commerce growth.  E-commerce demand strength should continue to support growth of the industry players. Favorable pricing will also bear good news for the industry players.

Supply-Chain Woes & High Costs a Downside: Supply-chain disturbances and a tight labor market are ailing the Air Freight and Cargo Industry players. Higher labor and transportation costs are aggravating their woes. Shortage of labor impaired their ability to meet high demand. Costs will likely continue to be steep going forward due to supply-chain troubles. The spike in fuel costs is also increasing the operating expenses of the industry players. Even though oil price has declined from its multi-year highs due to recession fears, it remains high. Notably, oil price was up 6.7% in the October-December period. Fuel expenses represent a key input cost for any transportation player. Naturally, operating expenses are on the way up given the rise in fuel cost.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Air Freight and Cargo industry, housed within the broader Zacks Transportation sector, currently carries a Zacks Industry Rank #101. This rank places it in the top 40% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, the average of the Zacks Rank of all member stocks, indicates dismal 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.

The industry’s position in the top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining in confidence in this group’s earnings growth potential. The industry's earnings estimate for 2023 has increased 19.7% on a year-over-year basis.

Before we present a few stocks from the industry that investors can retain in their portfolios, let’s take a look at the industry’s recent stock market performance and the valuation picture.

Industry Lags S&P 500 and Sector

The Zacks Air Freight and Cargo industry has underperformed the Zacks S&P 500 composite and the broader Transportation sector over the past year.

The industry has decreased 24.3% over this period compared with the S&P 500’s depreciation of 13% and the broader sector’s decline of 14.6%.

One-Year Price Performance

Industry's Current Valuation

On the basis of the trailing 12-month enterprise value-to-EBITDA (EV/EBITDA), a commonly used multiple for valuing Transportation-Air Freight and Cargo stocks, the industry is currently trading at 7.97X compared with the S&P 500’s 12.15X. It is also lower than the sector’s trailing 12-month EV/EBITDA of 10.66X.

Over the past five years, the industry has traded as high as 13.37X, as low as 6.56X and at the median of 9.79X.

Enterprise Value-to-EBITDA Ratio (TTM)

3 Transportation-Air Freight and Cargo Stocks to Keep a Tab On

UPS: The rapid e-commerce growth rate in the current scenario is a huge plus for Atlanta-based UPS, currently carrying a Zacks Rank #3 (Hold). Robust free cash flow generation by UPS is a major positive, leading to an uptick in its shareholder-friendly activities.

UPS earnings outshined the Zacks Consensus Estimate in each of the last four quarters.UPS shares have gained 9.8% over the past three months.

  You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here. 

Price and Consensus: UPS

FedEx: FDX’s efforts to reward its shareholders even in these difficult times are praiseworthy. In June 2022, FedEx raised its quarterly dividend by 53% to $1.15 per share (or $4.60 annually). FDX is also active on the buyback front. During fiscal 2022, FedEx repurchased shares worth $2.2 billion. FedEx's liquidity position is also solid.

FDX’s efforts to cut costs are driving its bottom line. Despite the global weakness, FDX's second-quarter fiscal 2023 earnings per share came above expectations. Moreover, the top line was favorably impacted by yield improvement and higher fuel surcharges. FDX shares have gained 20.6% over the past three months. FDX currently carries a Zacks Rank #3.

Price and Consensus: FDX

Air Transport Services Group: Wilmington, OH-based ATSG is a leading provider of aircraft leasing, and air-cargo transportation and related services globally. Over the past 60 days, Air Transport Services, currently carrying a Zacks Rank #3, has seen the Zacks Consensus Estimate for 2023 being raised by 2.5%.

The strength in e-commerce demand is a tailwind for Air Transport Services Group. ATSG is well-served by the buoyant demand for midsize freighters.


Price and Consensus: ATSG

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