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Will the Bull Run Continue for Transport Services Industry?

Nalak Das

The transportation sector seems poised well for both the near and the long term due to robust freight demand on the back of a strong economy. Substantial surge in manufactured goods, massive tax hauls and business-friendly policies of the government are anticipated to fuel the transportation sector’s growth.

Consequently, the companies offering equipment financing and leasing, logistics and supply chain management services to transporters are also likely to perform well in the near future.

Robust Industry Data

Industry bodies of several transportation industries, such as freight rail, airlines, trucking and shipping have forecast strong growth.

In February 2019, the Association of American Railroads, the industry body of the class 1 freight railroad operators, expressed optimism that rail traffic growth rate will continue in the near term. The most important growth driver will be the intermodal segment.

Growth of intermodal volumes in recent years is anticipated to drive railroads’ top line. Volumes at this key revenue generating unit rose 5.6% in 2018, thanks to an increasing number of freight conversions from highway to rail owing to limited truck supply.

In December 2018, the International Air Transport Association predicts global net profit of $35.5 billion for the industry in 2019. This is much higher than the profitability of $32.3 billion in 2018. This bright projection can be attributed to strong demand for air travel.

In its 2018 freight transportation forecast, the American Trucking Association has predicted that there will be persistent growth for truckers driven by manufacturing, consumer spending and international trade over the next 12 years.

Moreover, recent positive developments on the U.S. – China trade war front and decision of the Chinese authorities to stimulate the economy will be major catalysts for the shipping industry. In 2019, the shipping industry will be driven by growth in world trade, especially demand from newly-industrialized emerging economies.

Strong U.S. Economic Fundamentals

The Conference Board’s Consumer Confidence index for February surged to 131.4, its highest level in four months. The consensus estimate was 124.8. Moreover, the future expectation index (which track consumer’s expectations for next six months) jumped 103.4 from 89.4. In February, wage rate grew 0.4% compared with the consensus estimate of 0.3%. The unemployment rate also declined to the historic low level of 3.8% from 4% in January.

On Mar 13, the Department of Commerce reported that new orders for manufactured durable goods rose $0.9 billion or 0.4% to $255.3 billion in January from December. This was the third straight month of growth for durable goods orders. Notably, the consensus estimate for factory orders in January was for a decline of 0.4%.

More important information from the report is that the core durable goods order (which excludes defense aircraft) jumped 0.8% in January after witnessing a sharp fall in the previous two months. This also reflects the highest monthly gain of core factory orders since July 2018. Economists view the core durable goods order data as business investment plans by U.S. corporates.

Performance of Major Transport Services Providers

As of Mar 19, the transportation services industry has grown 9.3% this year. However, major companies in the industry witnessed better performances. Year to date, REV Group Inc. REVG, Hertz Global Holdings Inc. HTZ, ZTO Express (Cayman) Inc. ZTO, Hub Group Inc. HUBG and Expeditors International of Washington Inc. EXPD gained 42.3%, 24.2%, 17.7%, 12.5% and 11.9%, respectively.

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