Wall Street turns bearish on transports after early misses, negative guidance

Wall Street is taking an increasingly bearish view of the transportation sector, lowering its price targets and earnings estimates after misses by FedEx and Knight-Swift opened the third-quarter earnings season. 

On Friday, Bank of America equities analyst Ken Hoexter’s biweekly shipper survey came back with some startling results: Respondents reported the lowest expected truckload demand in the history of the survey back to 2012, excluding the COVID-19 lockdown period of March to May 2020. The index fell to 45.6 from 47.6, remaining below 50 for the second consecutive survey. The all-time average for the survey, according to Hoexter, is 62. 

(Chart: Bank of America)

Meanwhile, shippers were optimistic about their ability to source truckload capacity, with the rates indicator showing a reading of 25.8, up from its recent historic low but well below any level reached during the freight downturn of 2019 or since. FreightWaves SONAR’s Outbound Tender Rejection Index, a measure of capacity relative to demand that tracks the percentage of contracted truckload shipments rejected by carriers, has fallen to 4.4% from where it started the year at 22%.

On Monday, Jefferies equities analyst Stephanie Moore initiated coverage on North American transportation and logistics with a note titled “Hazards On,” giving “buy” ratings on Forward Air, GXO, XPO and UPS, and “hold” ratings on C.H. Robinson, FedEx and Landstar.

Moore’s take on transportation was notable because she cited Jefferies’ macroeconomic analysis to the effect that “the real recession hasn’t even started yet.” She characterized the negative gross domestic product numbers in Q2 and Q3 as an “inflation squeeze” that would be relieved by falling energy prices, only to go negative again in the second half of 2023.

(Chart: Jefferies)

“We’re broadly critical on the [transportation and logistics] space over the next 12 months as (1) consumers shift to spending on services (causing freight/shipment demand to fall off) and (2) incremental capacity comes to market just as demand is slowing/supply chains are easing,” Moore wrote. “All of this while driver wages/cost inflation pressures margin. We highlight that the freight market would be further pressured as Fed-driven demand-destruction forces a U.S. recession in 2H23. To put simply, negative real GDP is not a constructive backdrop for T&L stocks, in our view.”

Persistent downward pressure on truckload volumes will eventually force carriers to optimize their networks for asset utilization rather than yield, cut contract rates and even deploy assets into a weakening spot market in order to keep trucks full. 3PLs with heavy spot exposure may be in for another round of pain next year as they face not only margin pressure (declining contract rates against bottoming spot rates) but volume pressure from asset-based competition as well.

Less-than-truckload carriers, Moore noted, may be able to retain their pricing power through a volume trough because the capacity side of the marketplace is more consolidated and rational. 

Wednesday morning, Old Dominion Freight Line announced its third-quarter results, beating earnings estimates but missing on revenue. A hedge-fund trader told FreightWaves that the release indicated a “low quality beat from tax rate; tonnage trends increasingly deteriorating sequentially but nothing bad.” 

Even transportation companies that did extremely well in the quarter went out of their way to communicate caution and uncertainty in their guidance. 

J.B. Hunt experienced an outstanding quarter, growing revenue by 22% year over year (y/y) and earnings per share by 37% y/y. But company president and CEO John Roberts repeated his warning from the previous quarter that the freight market was experiencing a “cyclical shift and market balance” and mentioned that he had seen data indicating that truckload volumes were deteriorating in October compared to September.

“Further evidence has presented itself over the course of the quarter that requires an increased level of caution and awareness on broader demand trends and economic activity,” Roberts said on the earnings call. “Data, experience and frequent dialogue with our customers will continue to guide us in this area. The complementary nature and diversification of our businesses will continue to serve us well in this changing market.”

J.B. Hunt CFO John Kuhlow said he was trimming the sails, paying down debt and pulling back on capital expenditures, noting that 2022 capex would end up short of the original $1.5 billion the company had projected. COO Nick Hobbs reported that J.B. Hunt was leaning heavily into Dedicated, which is growing significantly faster than planned. 

The effects of the slowdown in U.S. consumer demand and the inventory pileup in retailers’ distribution networks affected various modes of transportation at different times. Air cargo volumes are down hard, but railroad carloadings are making a tentative recovery for the first time in a couple of years. 

On Tuesday, Susquehanna equity analyst Bascome Majors published a client note focused on air cargo that showed global volume by weight down 9% y/y, lower than 2018, 2019 or 2021. 

(Chart: Susquehanna)

“Blended air cargo export rates (spot/charter + BSA/contract) from key China export gateways to [North America] are now flirting with 2020’s late October levels, with rates out of Shanghai just crossing over the two-year stack (down 36% y/y, minus-4% vs. comp week 2020) and rates out of Hong Kong still slightly above (down 34% y/y, plus-9% vs. comp week 2020),” Majors wrote.

The railroads, on the other hand, have experienced trouble growing volume to meet demand after deep cuts to their workforces in the past few years. Well after truckload capacity loosened, intermodal networks were congested, especially in Chicago, hampering the railroads’ ability to meaningfully increase volumes. 

Year to date, intermodal volumes are still down 4% compared to 2021, although over the past four weeks they dropped just 2% and just 1% y/y last week (Week 42).

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