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This 120-page report lays out our bullish long-term thesis on the domestic intermodal sector as well as the best ways to invest in secular intermodal growth opportunities. Within the report we provides a deep dive analysis on the intermodal market, including a detailed overview of the market, key players and market share stats. We also discuss the differences between the international and domestic intermodal markets, review each rail’s exposure to intermodal and discuss why intermodal is much more profitable for the rails today versus 20 years ago. We also provide a detailed analysis of the underlying secular demand drivers for domestic intermodal volumes and try to quantify how quickly the market can grow over the next five to ten years and what this could mean for earnings with a similar discussion on international intermodal drivers. We conclude with profiles on the three largest domestic intermodal providers, JBHT , HUBG and PACR (each rated Outperform).
Returning cash to shareholders is an important event in the life cycle of a company. In this report, we summarize our findings in searching for companies in a financial position to materially increase their cash distributions to shareholders. Empirical evidence on subsequent stock price performance of companies returning cash to shareholders supports dividend distributions over share repurchases and market and social factors make a strong structural case for dividend investment strategies over the next five years.
The U.S. equity markets started to lose momentum when weekly leading indicators began to soften (unemployment claims, ECRI, etc.). Interestingly, pundits were quick to blame this correction on events taking place in Europe or, more specifically, in Greece. We’ve had a hard time believing this as many gauges of financial stress in Europe have improved during the most recent market correction. If Europe is the true problem here then why isn’t the European TED spread rising? It’s actually fallen in recent weeks. The answer is that something else may be responsible for this market correction and it might just be U.S. made.
There is no doubt in our mind that a decline in equity markets may eventually translate into slower economic activity ahead. The riddle is trying to figure out why equities are going down. Investors will usually look at CNBC and whatever is on the air will become the reason behind the decline in stocks. In this particular case it was Europe. Interestingly, there are series that called for a soft patch and a market speed bump. Indeed, the relative performance of early cyclicals highlighted an air pocket ahead many months ago. Admittedly, we did not think it could lead to such a powerful sell off. That said, the relationship argues it’s about to come to an end and the markets ahead are more likely to resemble those of the first quarter than those of the past two months. As we see it, this pullback is about the U.S. as much as it is about Europe and one part at least of the equation is about to change for the better. Something to ponder with sentiment readings at bearish extremes.
CP announced that its TCRC members plan to strike after midnight on Wed. (5/23/12) morning. The Teamsters Canada Rail Conference (TCRC) represents 4,800 employees at CP (31% of total workforce), including engineers, conductors and rail traffic controllers in Canada. While there’s never a good time for a strike, it seems like a particularly bad time now with a new CEO and Board and with railroad operations in such good shape relative to a year ago. Even a short strike could materially disrupt CP’s network and momentum as it tries to regain market share lost a year ago. So while past strikes historically have not had a material stock impact on CP or CNI, we’d argue a strike this time around could be a little more impactful. On the flip side, a material cut in pension funding for CP would be a significant positive for its cash flow and stock longer term.
On Friday, FWRD’s stock closed 13% below our prior $35 downside target price and it has underperformed recently after a very strong run in C11. We are raising our rating from Underperform to Peer Perform due to improving near term fundamentals and valuation. Vols remain strong, competitive pricing pressure appears to be diminishing somewhat, the stock has underperformed recently and valuation looks more compelling.
The Wolfe Monthly Macro Watch: Domestic Freight Growth Rebounds in April; More Signs that Int’l Volumes Have Bottomed
This month’s Macro examines March and April data. As shown on Slide 7, y/y freight vols (rail vols, Cass shipments, ATA truck tonnage) generally slowed or turned negative in March. In part, we believe this reflects tough comps related to very mild winter weather this year vs. very bad weather a year ago that pushed more freight than normal into March last year. However, our data below show that reported y/y vols have improved in April vs. March for 5 of 6 volume-based freight series reported thus far including rail vols, Cass shipments, and the Ceridian truck index based on diesel consumption.
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