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Stifel sees decent volumes near term, 2Q in jeopardy

The firm views airfreight as the mode to benefit most from coronavirus-related disruption

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While disruption to supply chains from the coronavirus may not be quantified for some time, first-quarter 2020 earnings results may not be as bad as feared.

On a freight and supply chain update call with clients, Stifel Financial (NYSE: SF) equity research analysts David Ross and Bruce Chan discussed how the recent surge in consumer demand, specifically retail and grocery, will likely prop up first-quarter earnings results for some transportation companies.

Ross said the final two weeks in March, usually the most important of any first quarter, will still need to be strong for this thesis to play out.

He said recent channel checks the firm has conducted with truckload (TL) and less-than-truckload (LTL) carriers have been positive and indicative of improved seasonal demand. Further, the surge in demand from consumers stocking up on food, grocery and other household items has resulted in stronger volumes for carriers.


Outbound Tender Volume Index – SONAR: OTVI.USA

Talking about the free fall in transportation stock prices, Ross noted that the “economy wasn’t that great before” the outbreak. He cited weakness in rail carloads, softness in the Cass Freight Index and a sluggish industrial economy as evidence. Ross contended that the group didn’t have “a lot of positive momentum going into 2020.”

He also believes that the depth of the stock price declines had much to do with a market that was likely priced to perfection, referring to it as a “built-up balloon” waiting for a “pinprick.” Other market observers have echoed these remarks recently, saying stock prices reflected higher valuation multiples while forward earnings estimates remained fairly flat to lower in some instances.

Many analysts were expecting 2020 to be the year of a trucking recovery as some TL carriers were forced to exit the market due to increased industry regulation and general cost inflation. The reduction in truck capacity, along with the expectation for flattish volumes on a year-over-year comparison, were expected to move spot and contractual rates higher by the middle of the year. 

Investors appeared poised for another year of upside in transportation stocks. This has been borne out by the visceral negative reaction seen in stock markets as the coronavirus spreads, likely indicative of investor overexuberance heading into the outbreak.


Ross went on to compare the disparity of this stock market decline to the H1N1 outbreak that impacted 60 million Americans. That pandemic had minimal impacts as financial markets were already reeling from a recession.

Stifel global logistics analyst Bruce Chan said manufacturing production in China has resumed and that there is a capacity crunch across all modes as new volume is hitting the country’s transportation system all at once. Chan said this is most notable in Intra-Asia airfreight rates, which have climbed by three to five times and as much as 10 times higher on some lanes.

Chan said the uptick in airfreight rates is the result of a large reduction in belly space capacity as passenger flights are canceled, as well as the willingness of supply chain managers to upgrade to the premium-priced mode to keep production lines humming.

Chan sees this trend continuing and noted that Deere & Co. (NYSE: DE) included an incremental $40 million in its transportation budget to move parts via air this quarter. Chan expects airfreight rates to remain elevated for the near term.

Air Cargo Index Price (Shanghai to North America) – SONAR: AIRLOC.PVGNOA

Near- and long-term implications

Ross doesn’t see a material risk to first-quarter earnings given the recent surge in virus-related consumer buying. He said the recent weeks have essentially provided another peak shipping season even if it proves to be a pull forward in demand. Ross said it will be tough to gauge when demand will dry up, but he believes that second-quarter earnings estimates are at risk and that those numbers will need to come down.

Chan expects to see the intermediaries get squeezed on margins as transportation rates surge. He said global freight forwarders like Expeditors International of Washington Inc. (NASDAQ: EXPD) and C.H. Robinson Worldwide Inc. (NASDAQ: CHRW) will “have to eat” higher costs to procure capacity and honor their contractual relationships.

He said that even though the third-party logistics providers (3PLs) will see the margin squeeze over the next quarter or two, the disruption may benefit them longer term as shippers that have been severely impacted from the disruption look to partner with capacity providers in the future. A similar scenario played out in the TL space in 2018 as capacity became scarce and many shippers were forced to pay materially higher spot market rates to move their goods. The following year, many TL carriers saw an increase in inquiries from shippers for dedicated services.

Chan believes that the freight brokers will get hit on margins in the near term and that those with exposure to contract rates will get squeezed a little more, noting that the recent capacity tightening related to the outbreak is happening alongside produce season. He expects a tough quarter or two for the brokers but noted that select larger brokers like Landstar System Inc. (NASDAQ: LSTR) that have liquidity, scale and deeper relationships will likely see better results.


Both analysts view the coronavirus disruption as a positive for e-commerce as everyone stays home. Also, they expect near-shoring or reshoring activity to increase as concerns around Chinese manufacturing have intensified. The trend most recently accelerated in Mexico during the past decade as Chinese production costs began to climb and higher oil prices drove many companies to near-source production closer to final destination.

Chan said that if the tariffs didn’t force supply chain managers to rethink their distribution networks, the coronavirus likely will.

Chan said industry consolidation will continue for the brokers and 3PLs, but Ross noted that M&A activity could be tame as sellers will want to base valuations off of 2019 results whereas buyers will be more concerned with 2020 expectations.

Chan concluded that airfreight providers Atlas Air Worldwide Holdings Inc. (NASDAQ: AAWW) and Air Transport Services Group Inc. (NASDAQ: ATSG) and e-commerce heavyweight Amazon.com Inc. (NASDAQ: AMZN) could benefit the most.

Stifel also held a call on Sunday with apparel and logistics executives to discuss virus-related supply chain disruptions.

Todd Maiden

Based in Richmond, VA, Todd is the finance editor at FreightWaves. Prior to joining FreightWaves, he covered the TLs, LTLs, railroads and brokers for RBC Capital Markets and BB&T Capital Markets. Todd began his career in banking and finance before moving over to transportation equity research where he provided stock recommendations for publicly traded transportation companies.