Fundamentals in the transportation market are deteriorating, and that's led Bank of America to downgrade nine of the 28 stocks it covers in the sector.
Freight-market signals "have turned increasingly softer and suggest demand is waning,” Bank of America analyst Ken Hoexter wrote in a commentary.
The bank’s indicator of shippers' freight-demand outlook has been flat to down in 16 of the past 23 surveys.
“A large number of respondents commented that pricing is declining rapidly, capacity is available, and these shifts could signal a downturn in the economy,” Hoexter said.
In its latest survey, B of A’s indicator of shippers' ability to find capacity jumped to the highest level since June 2020. Dry-van-truckload spot prices have tumbled 37% since Dec. 31, Hoexter said. And the drop has accelerated in the past month.
Meanwhile, two transportation executives told Bank of America that “the labor market had loosened a bit,” Hoexter wrote. And another said inflation is starting to affect consumer demand.
Still another said container demand is softening, port congestion is past its peak, and effective capacity is increasing as bottlenecks ease, further pressuring rates, Hoexter said.
“Recession fears have increased on rising inflation, fuel prices, interest rates (inverted yield curve), and lower subsidies,” he said.
Those factors are pushing transport stocks down more than the market as a whole, Hoexter said. The Dow Jones Transportation Average has slid 13% since March 29, compared with a 4% dip for the S&P 500 index.
The fading fundamentals led Hoexter to downgrade nine of the 28 stocks in his coverage universe. These include:
· Package-delivery titan United Parcel Service (UNP) to neutral from buy,
· Railroad Union Pacific (UNP) to neutral from buy,
· Railroad Canadian Pacific (CP) to neutral from buy,
· Trucking company Schneider National (SNDR) to underperform from buy,
· Trucking company Werner Enterprises (WERN) to underperform from neutral,
· Trucking company Saia (SAIA) to neutral from buy,
· Trucking company TFI International (TFII) to neutral from buy,
· Trucking company ArcBest (ARCB) to neutral from buy, and,
· Container lessor Triton International (TRTN) to underperform from buy.
As for UPS, Morningstar analyst Matthew Young assigns it a wide moat and puts fair value at $186, close to its recent quote of $189.83.
“UPS’s flagship express and ground package delivery operations enjoy significant and sustainable competitive advantages rooted in cost advantage and efficient scale, which drive our wide moat rating,” he wrote in a February commentary.
“UPS produces operating margins well above competitors', thanks in large part to its leading package density -- it's been around much longer than FedEx (FDX) in the U.S. ground market.”