Sunday, June 12

Week 258 - Barron’s 500 Multimodal Transportation Companies

Situation: If you want to feel the pulse of an economy, look at trends in transportation. Those trends won’t tell you where the economy is headed next but they will show you where it’s been, and where the pressure points are. Right now, one pressure point for the US economy is the inefficiency of off-loading cargo from ships to drayage trucks, and transferring containers to warehouses or railroads. Another pressure point is the “final mile,” or how to get goods into the hands of consumers with a minimum of inconvenience. “Vertical integration” appears to be the answer for both problems, meaning companies like FedEx and UPS (and increasingly Amazon) will try to perform as many integrated services in-house as is possible. Finally, there are environmental considerations, namely, how do we move cargo around without leaving such a large carbon footprint. One solution that is off to a good start is replacing diesel truck engines with compressed natural gas (CNG) engines. The largest US truck fleet (JB Hunt Transport Services; JBHT) is an early adopter. Given the centrality of these above-mentioned companies, it would be a good idea for you to hold shares in one, or shares in an Exchange Traded Fund (ETF) for the transportation sector such as the iShares Transportation Average ETF ( IYT at Line 21 in the Table).

Mission: Provide a capsule summary for investors in Air Freight & Logistics companies, as well as multimodal trucking companies and railroads. Examine only those companies with revenues sufficient to be included in the recently published 2016 Barron’s 500 List. Assess current value by calculating Net Present Value (see Week 256) and providing the Graham Number. That number tells you what the stock price would be if it were to reflect 15 times earnings/share and 1.5 times book value/share. Finally, we’ll take a peek at future valuation by comparing the Weighted Average Cost of Capital (WACC) to the Return on Invested Capital (ROIC).

Execution: see Table.

Bottom Line: Dow Theory is the oldest method to assess current and future value in the stock market. The critical variable is the Dow Jones Transportation Average (DJTA), a running index of stock prices for 20 transportation companies. A “primary uptrend” ( Bull Market) is not declared when the Dow Jones Industrial Average (DJIA) hits new highs, but instead is declared when the DJTA confirms that event by also hitting a new high. We saw a confirmation most recently in November of 2014. The opposite also holds: a “primary downtrend” (Bear Market) must see a new low in the DJIA being confirmed by a new low in the DJTA.

The linchpin that holds transportation together is the Surface Transportation Board (STB), which has “wide meet the nation’s changing transportation needs.” The STB is the most powerful Federal regulatory agency that transportation companies (even pipeline carriers) must face. Its power and reach is a boon to investors, since they won’t be permitted to lose much money: There will be volatility but there will be no bankruptcies, or strategic end-runs such as trucking companies underpricing railroads. In this week’s Table, we drill down on the 11 largest companies in the transportation space. Many of you may consider Amazon (AMZN) to be an outlier here, but Amazon is both the largest warehousing operation and the largest logistics company. And there will soon be thousands of Amazon-branded tractor-trailers on the highways. Time is money.

Risk Rating = 7 (where Treasuries = 1 and gold = 10).

Full Disclosure: I dollar-average into UNP and also own shares of CNI.

NOTE: Metrics are current for the Sunday of publication. Metrics highlighted in red indicate underperformance vs. our key benchmark, the Vanguard Balanced Index Fund (VBINX, at Line 17 in the Table). Metrics highlighted in green at Columns P and Q in the Table indicate improving performance trends for fundamental metrics (per analysis by Barron’s 500 editors). Metrics highlighted in purple at Columns Z and AA in the Table indicate a company in current difficulty, ROIC being lower than WACC.

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1 comment:

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