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We think airline stocks sold off Monday because DAL missed PRASM guidance by ~100bp, and we think that simply overlooks a more complex issue. In our view, DAL has fuel hedging problems that might be hurting the company’s ability to match a competitor’s fare sale in a falling fuel price environment. We think investors reacted with strong selling due to macroeconomic concerns and fear of a repeat of 1Q09 when falling oil prices foreshadowed a collapse in airline revenue. To be clear, we have seen no data that implies softening demand.
This week’s Audio Brief consists of 15 slides taken directly from Scott and the team’s recently released 130 page intermodal industry report. We believe the best secular story in freight for at least the next five years should be domestic intermodal growth. Over the past five years domestic intermodal volumes have grown at a CAGR of over 8% despite GDP on average growing only 0.6%. This growth has been driven by increased rail capacity, more efficient rail lines that more effectively compete with highway, vastly improved rail service, rising fuel costs and rising truck prices. Our report and audio clip looks at among other things how relatively small the intermodal market is compared to the domestic trucking market and how much more market share intermodal can take. The Intermodal Marketing Companies (“IMCs”)—JBHT, HUBG and PACR—have by far the most exposure to domestic intermodal followed by the rails. JBHT remains our favorite way to play this strong secular trend given its strong market position, preferential service contracts with BNSF and NSC and its unique ability to set pricing rather than take pricing from the railroads. We show in this audio brief why we believe that JBHT’s combination of high-end revenue growth, returns on capital and free cash generation are likely to propel its valuation to expand to the top of our coverage on average the next five years, even above EXPD and CHRW.
FDX F4Q Preview: Raising F4Q Estimate on Lower Fuel, But Reducing F13 EPS on Pension Drag and Higher Depreciation
FDX announced it’s retiring 24 aircraft and will book a $134M or $0.26/shr non-cash charge in F4Q. FDX will retire another 21 aircraft in F13 and also accelerate depreciation on another 54 aircraft. In total, FDX expects its net depreciation expense to increase $45M or $0.09/shr in F13 (not in our numbers previously) before depreciation inflects to a net positive in F16. At 11.6x forward P/E, we believe FDX’s stock more than reflects expectations for weakening macro demand and seemingly little expectations for a material U.S. restructuring. We favor FDX for its two catalysts—an expected inflection in IP vols and its impending domestic restructuring now expected in Cal. 4Q—and a historically attractive valuation.
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