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A weaker-than-expected demand environment is hurting the prospects of participants in the Zacks Transportation - Air Freight and Cargo industry. The slowdown of economic growth and supply-chain woes are creating additional headwinds.
Despite the above-mentioned 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. Industry players’ cost-cutting efforts to drive their bottom lines are commendable as well. In view of these favorable developments surrounding the space, we advise investors to focus on United Parcel Service and GXO Logistics.
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 and FedEx, 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. Moreover, some industry participants focus on providing air transportation services for passengers and cargo.
4 Key Trends to Watch in the Transportation-Air Freight & Cargo Industry
Persistent Demand Erosion - A Grave Concern: Due to the decline in shipping demand, particularly in Asia and Europe, volumes are being hurt. The weak demand scenario has led to a decrease in the volume of packages shipped. Lackluster volumes are hurting the results of key industry players like FDX. Evidently, FDX reported lower-than-expected earnings and revenues in second-quarter fiscal 2024 mainly due to demand woes. Weak demand for cargo aircraft is another bane.
E-commerce Still a Force to Reckon With: 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 with the reopening of economies. However, it remains impressive, driven by the convenience associated with online shopping. The race to digitization also supports the momentum in e-commerce growth. E-commerce demand strength should continue to aid growth of the industry players.
Economic Uncertainty Remains Worrisome: Even though inflation in the United States has declined sharply, it remains above the Federal Reserve’s 2% target. Due to the hotter-than-expected January inflation reading, consumer sentiment took a beating. The University of Michigan’s consumer sentiment survey displayed a reading of 76.9 in February, down from the January figure of 79.
Fed Chair Jerome Powell's recent statement that he needs to "see a little bit more data" before rate cuts become reality highlights that interest rates will remain high, at least in the short term. Higher interest rates rise borrowing costs, escalating the chances of an economic slowdown. Rising inflation can turn markets more volatile in the coming days. Rising economic uncertainty does not bode well for stocks in this industry.
Supply-Chain Disruptions - Another Bane: Although economic activities picked up from the pandemic gloom, supply-chain disruptions continue to dent stocks in the industry. Increased fuel and labor costs are also limiting bottom-line growth.
Zacks Industry Rank Indicates Dull Prospects
The Zacks Air Freight and Cargo industry, housed within the broader Zacks Transportation sector, currently carries a Zacks Industry Rank #237. This rank places it in the bottom 6% 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 bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are becoming pessimistic about this group’s earnings growth potential. The industry’s earnings estimates for 2024 have gone down 18.2% year over year.
Despite the dim near-term prospects of the industry, we will present a few stocks that you may want to consider for your portfolio. But it is worth taking a look at the industry’s shareholder returns and current valuation first.
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 slipped 7.2% over this period against the S&P 500’s growth of 29.4% and the broader sector’s appreciation of 11.5%.
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 10.29X compared with the S&P 500’s 14.72X. It is also lower than the sector’s trailing 12-month EV/EBITDA of 11.44X.
Over the past five years, the industry has traded as high as 13.58X, as low as 6.64X and at the median of 9.6X.
2 Transportation-Air Freight and Cargo Stocks to Keep Tabs On
Both companies mentioned below presently carry a Zacks Rank #3 (Hold).
UPS: We are appreciative of the company's efforts to reward its shareholders through dividends and buybacks. Robust free cash flow generation by UPS is another major positive and is leading to an uptick in shareholder-friendly activities.
Even though the demand for online shopping has slowed down from the pandemic peak with the reopening of the economy, the figures are still higher than the pre-pandemic levels. UPS’s earnings outpaced the Zacks Consensus Estimate in the last four quarters, the average beat being 1.38%.
GXO Logistics: The company is gaining from rapid growth of e-commerce, automation and outsourcing. GXO’s efforts to strengthen logistics capabilities also bode well.
The company beat the Zacks Consensus Estimate in the last four quarters, the average beat being 9.08%. The Zacks Consensus Estimate for GXO’s 2024 earnings is pegged at $2.79 per share, indicating a 7.7% rise from the year-ago reported figure.
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Join us on Facebook: https://www.facebook.com/ZacksInvestmentResearch/ Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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Zacks Industry Outlook Highlights United Parcel Service, GXO Logistics and FedEx
For Immediate Release
Chicago, IL – March 20, 2024 – Today, Zacks Equity Research discusses United Parcel Service (UPS - Free Report) , GXO Logistics (GXO - Free Report) and FedEx (FDX - Free Report) .
Industry: Air Freight & Cargo
Link: https://www.zacks.com/commentary/2242902/2-air-freight-cargo-stocks-to-watch-despite-industry-woes
A weaker-than-expected demand environment is hurting the prospects of participants in the Zacks Transportation - Air Freight and Cargo industry. The slowdown of economic growth and supply-chain woes are creating additional headwinds.
Despite the above-mentioned 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. Industry players’ cost-cutting efforts to drive their bottom lines are commendable as well. In view of these favorable developments surrounding the space, we advise investors to focus on United Parcel Service and GXO Logistics.
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 and FedEx, 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. Moreover, some industry participants focus on providing air transportation services for passengers and cargo.
4 Key Trends to Watch in the Transportation-Air Freight & Cargo Industry
Persistent Demand Erosion - A Grave Concern: Due to the decline in shipping demand, particularly in Asia and Europe, volumes are being hurt. The weak demand scenario has led to a decrease in the volume of packages shipped. Lackluster volumes are hurting the results of key industry players like FDX. Evidently, FDX reported lower-than-expected earnings and revenues in second-quarter fiscal 2024 mainly due to demand woes. Weak demand for cargo aircraft is another bane.
E-commerce Still a Force to Reckon With: 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 with the reopening of economies. However, it remains impressive, driven by the convenience associated with online shopping. The race to digitization also supports the momentum in e-commerce growth. E-commerce demand strength should continue to aid growth of the industry players.
Economic Uncertainty Remains Worrisome: Even though inflation in the United States has declined sharply, it remains above the Federal Reserve’s 2% target. Due to the hotter-than-expected January inflation reading, consumer sentiment took a beating. The University of Michigan’s consumer sentiment survey displayed a reading of 76.9 in February, down from the January figure of 79.
Fed Chair Jerome Powell's recent statement that he needs to "see a little bit more data" before rate cuts become reality highlights that interest rates will remain high, at least in the short term. Higher interest rates rise borrowing costs, escalating the chances of an economic slowdown. Rising inflation can turn markets more volatile in the coming days. Rising economic uncertainty does not bode well for stocks in this industry.
Supply-Chain Disruptions - Another Bane: Although economic activities picked up from the pandemic gloom, supply-chain disruptions continue to dent stocks in the industry. Increased fuel and labor costs are also limiting bottom-line growth.
Zacks Industry Rank Indicates Dull Prospects
The Zacks Air Freight and Cargo industry, housed within the broader Zacks Transportation sector, currently carries a Zacks Industry Rank #237. This rank places it in the bottom 6% 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 bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are becoming pessimistic about this group’s earnings growth potential. The industry’s earnings estimates for 2024 have gone down 18.2% year over year.
Despite the dim near-term prospects of the industry, we will present a few stocks that you may want to consider for your portfolio. But it is worth taking a look at the industry’s shareholder returns and current valuation first.
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 slipped 7.2% over this period against the S&P 500’s growth of 29.4% and the broader sector’s appreciation of 11.5%.
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 10.29X compared with the S&P 500’s 14.72X. It is also lower than the sector’s trailing 12-month EV/EBITDA of 11.44X.
Over the past five years, the industry has traded as high as 13.58X, as low as 6.64X and at the median of 9.6X.
2 Transportation-Air Freight and Cargo Stocks to Keep Tabs On
Both companies mentioned below presently carry a Zacks Rank #3 (Hold).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
UPS: We are appreciative of the company's efforts to reward its shareholders through dividends and buybacks. Robust free cash flow generation by UPS is another major positive and is leading to an uptick in shareholder-friendly activities.
Even though the demand for online shopping has slowed down from the pandemic peak with the reopening of the economy, the figures are still higher than the pre-pandemic levels. UPS’s earnings outpaced the Zacks Consensus Estimate in the last four quarters, the average beat being 1.38%.
GXO Logistics: The company is gaining from rapid growth of e-commerce, automation and outsourcing. GXO’s efforts to strengthen logistics capabilities also bode well.
The company beat the Zacks Consensus Estimate in the last four quarters, the average beat being 9.08%. The Zacks Consensus Estimate for GXO’s 2024 earnings is pegged at $2.79 per share, indicating a 7.7% rise from the year-ago reported figure.
Why Haven’t You Looked at Zacks' Top Stocks?
Since 2000, our top stock-picking strategies have blown away the S&P's +7.0 average gain per year. Amazingly, they soared with average gains of +44.9%, +48.4% and +55.2% per year.
Today you can access their live picks without cost or obligation.
See Stocks Free >>
Join us on Facebook: https://www.facebook.com/ZacksInvestmentResearch/ Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
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Zacks Investment Research
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.