FreightWaves

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More volume, fewer taxes for transport

Economic growth around the globe is helping drive more freight volumes which bodes well for transport of all modes, especially trucking. (Photo: Shutterstock)

Almost every freight flow is growing.  Some are growing a little and some are growing a lot, and all of them are accelerating in their rates of growth.  About the only freight flow that isn’t growing is coal.

Transports are surging as the underlying strength in both the consumer and industrial goods flow continues to improve.  We see this as extraordinarily bullish for the overall U.S. economy.

The acceleration in freight flow growth is not just happening in the U.S. or even in just North America.  We are also seeing growth in other parts of the world.  Asia and Europe, especially when viewed through the lens of airfreight volume, are continuing to post strong volumes.

Historically, strength in our Asia Pacific Airfreight Index has had a high positive correlation with the semiconductors industry. 

We are especially emboldened by European Airfreight, as it has historically signaled stronger overall growth for the EuroZone.  This is a positive for the global economy, because while the largest single country economy in the world is the U.S., collectively the EuroZone is the world’s largest economy.  Stronger, better than expected growth in the European economy also bodes well for stronger, better than expected growth in our economy since the EuroZone is the largest export market for U.S. goods.

And, the Tax Plan

Transportation stocks are also surging as the market tries to assess the value it should give to the transportation companies which are publicly traded.  Given the tax plan in its current form, we see it as a positive for the valuation for most companies.  The extent to which it which it positively effects transports depends on a number of factors, including what the final legislation does and does not include.  That said, we see the current tax plan as having two primary effects on transports:

  1. Rails and trucks are predominately domestic (so no foreign income to return), but for international players (such as FDX, UPS, and XPO) that’s a different story.  Overseas profits that would normally incur a higher tax rate if repatriated can now be brought back to the U.S. without penalty.
  2. To the extent that investment/capital expenditures can be immediately expensed (100% bonus depreciation), almost all transports (trucking, railroads, airfreight / parcel) are very capital intensive and tend to be long lived assets (locomotives and planes last for decades).  The billions they spend each year on their own infrastructure would shield them from taxes in the short term and improve their efficiency in the long term.

Hence, we see the biggest beneficiaries as FDX, UPS, and XPO (because they get the international benefit and the cap ex benefit on long lived assets), followed by the railroads (because they get the cap ex benefit on long lived assets), followed by the truckers (who are capital intensive, but assets have a relatively short-life), followed by the logistics/freight brokers (who don’t have much cap ex).

We will have a full dissection, once and if a tax plan is passed and signed into law, but for now the simple answer is it depends on how capital intensive the transport is and how much of the profit is generated outside the U.S.

Stay tuned…

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