Transportation stocks could benefit from hurricanes

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Storms could also put carriers in better position for higher contract rates

A natural disaster can rarely be called a benefit, but there are positives for the transportation industry from the double hit the nation took from Hurricanes Harvey and Irma.

Trucking fleets have been, and will continue to be, hauling many of the relief supplies for those storms and as residents in areas devastated by the hurricanes start to rebuild their lives, items such as food, lumber, appliances, and even automobiles, will need to be moved into the regions.

That has the potential to boost the bottom lines of many carriers as they enter the fourth quarter, and it may provide an opportunity for investors to take advantage of stock price increases – should they appear.

“Transportation stocks appeared to have priced in a Hurricane Harvey impact since the last week of August,” Ravi Shanker, executive director with Morgan Stanley Research, explained to FreightWaves. “Investors have been bullish on trucks and brokers and negative on the rails. It is still in the very early days to figure out the impact of the storm based on commentary we have received from companies in the past week. However, there will be likely be a lingering but temporary impact.

“Our TLFI index saw a sharp bounce in the last week, driven by the storm. Past storms have seen spikes of 1000-3000 bp vs. seasonality in our index,” Shanker adds.

A J.P. Morgan note on Friday listed transportation and logistics and construction stocks as possible winners from the storms. Transportation stocks closed generally higher on Friday, with most up between 1% and 2% on the day.

John Larkin, managing director - Transportation and Logistics for Stifel, says that the industry will see some short-term issues due to the storms, but overall, there should be plenty of positives.

“There will be short-term operational issues with missed deliveries, missed pick ups, and damaged terminals and equipment,” he says. “But the freight that was going to ship and be delivered will ship and be delivered - and then some. Rescue/relief work and rebuilding work will then dominate, creating more volumes than the industry can accommodate.”

Larkin notes that with recovery efforts requiring added capacity into Texas and Florida, other regions of the country could be short of equipment. In addition, a presention by Stifel last week noted that larger fleets have continued downsizing their fleets, even as truckloads have remained steady.

“The spot rates should spike enough to cause contract shippers to finally belly up to the table to discuss much needed contractual increases,” Larkin notes. Contract pricing has remained fairly stable this year, even as spot rates have steadily risen, but DAT’s Mark Montague expects contract rates to rise even quicker due to the storms as well as the upcoming ELD mandate that was already expected to tighten capacity.

Larkin says that from an investor standpoint, Landstar, Daseke and Universal Logistics Holdings are three companies to watch as all provide a lot of flatbed capacity, which will be needed to haul building supplies for reconstruction. “Brokers like C.H. Robinson and Echo Global should also be beneficiaries as they marshal capacity into areas most demanding of additional capacity,” Larkin notes.

One way for investors to determine the potential impact of the hurricanes is to revisit history. Thomas Albrecht, president of Sword and Sea Transport Advisors, says there are some lessons that can be learned from the post-Katrina recovery.

“When assessing Harvey and possibly Irma, it’s easy to use Katrina as the starting point,” he says. “But it is more of a contrast than a parallel. In August 2005, when Katrina hit, the freight market was clearly decelerating and capacity was getting looser by the month. Tons of trucks were bought in 2004 and 2005 and the giddiness of early 2005 was giving way to worry. Then Katrina hit and bailed the sector out until about February or March. Yet the stocks did well.  

“Contrast that with today.  Capacity has been tightening as industrial production has resumed growth this year and the excess capacity of 2015-2016 has been worked off,” he adds. “On top of that, put Harvey and ELDs and these two events as tightening mechanisms at a time when the freight market momentum was already shifting to carriers. Rate discussions and bid season will be completely different, which bodes well for carrier earnings. This does not feel like Katrina, where that was the last hurrah before things fell apart after the initial push.”