Our WR Transport index fell 2.6% last week, underperforming the 0.9% drop in the S&P 500. Transports badly underperformed last week following FDX’s report and given rising fears about a trade war. As we discussed last week, we think a trade war is negative for pretty much all transports as all of our companies are either directly or indirectly exposed to global trade activity. We don’t face immediate headwinds from rising import costs like some industrials, but if tariffs lead to lower demand, it’s certainly would be negative for freight volumes. Among the transports, EXPD and AAWW have by far the exposure to global trade with China. Among the rest of the group, we see a little more risk for FDX than UPS, a little more risk for UNP than the eastern rails, and more risk for JBHT and HUBG than the TLs or LTLs. So while last week’s underperformance at EXPD makes sense, we’re surprised AAWW was one of the best performing stocks last week, and we’re a little surprised that UNP and JBHT didn’t underperform a bit more.
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We spoke with a large retailer about recent TL pricing and demand trends. The shipper’s tender acceptance rates improved from around 80% in January to over 85% from February through April, but have deteriorated again since mid-May as demand has picked up seasonally. Our contact recently completed his annual bids and his TL rates are increasing around 8%-9% y/y, while his intermodal rates are increasing 10%. This shipper is already a big intermodal user, and with intermodal rates increasing even more than TL rates, our contact doesn’t see much opportunity to increase his intermodal exposure this year. Lastly, this shipper saw relatively benign LTL pricing increases of 3% this year, and his air/ocean import costs overall are flattish y/y due to weakness in ocean pricing.
Late Thurs. night (06/21), the Teamsters announced an agreement in principle on a new 5-year labor contract with UPS (click here). The deal includes slightly lower wage inflation for full-time employees and reduced costs for weekend deliveries, offset by higher pay for part-time workers. Overall, the deal seems like a small positive for UPS and it removes a potential near-term catalyst for FDX from accelerated share gains.
After the close on Tues. (06/19/18), FDX reported F4Q EPS of $5.91 vs. Cons. of $5.68 and our estimate of $5.80 although the quarter included a $0.25 gain on sale at TNT. Underlying Express results were weaker than we expected, Ground was in line, LTL was better than we expected, and a low tax rate helped by $0.10. So normalizing for the tax rate and gain on sale, FDX would have slightly missed Cons. in F4Q.
The STB released May headcount data for the U.S. rails today. Total headcount increased 0.7% sequentially, the 4th straight increase and the largest m/m increase in the past 3 years (see Exhibit 1). But headcount still declined 1.4% y/y in May relative to a 5% increase in overall rail volumes. So labor productivity (volume growth minus headcount) remains strongly positive in 2Q.
Our WR Transport index increased 1.3% last week and outperformed the S&P 500 which was flat. TL stocks (+2%) performed best as spot rates increased materially during Roadcheck week and commentary from WERN and KNX was very positive at a conference. And R was the best performing transport stock as used truck pricing for the industry showed nice improvement in May. We still see EPS risk for R next year, but improvement in its used truck pricing should support its valuation.
We spoke with a contact at the Teamsters about its ongoing contract negotiations with UPS ahead of the July 31 contract deadline. While the Teamsters have authorized a strike, our contact believes that neither sides want a strike and both sides are hopeful to announce a tentative deal by the end of June. Our contact added that the two sides have already agreed to most of the non-economic (non-wage) issues, and the wage issues currently being worked on. Our contact believes the biggest issue right now is 2-tier hybrid drivers which would allow UPS to hire lower-paid workers to deliver packages on weekends, including Sunday. These employees would work Sunday to Thursday or Tuesday to Saturday, avoiding overtime pay. Under the current contract, most package drivers earn higher wages if they work on the weekend. Thus, our contact believes UPS wants to start Sunday delivery.
After the close (6/13/2018) , ACT Research reported that preliminary May Class 8 used truck pricing increased 15% y/y, accelerated from +6% and +7% the prior 2 months and the biggest y/y increase since Nov. 2014. Used pricing also increased 10% sequentially.
Our WR Transport index increased 0.7% last week and relatively underperformed the 1.6% increase in the S&P 500. LTL stocks (+1%) continued to diverge from TL (-1%) stocks last week despite recently lower oil prices and CVTI’s large upside pre-report. Pricing, utilization and deadhead were all better than we expected for CVTI and the read is directionally positive for all of the TLs in 2Q. But KNX, SNDR and WERN all badly underperformed last week after some disappointing spot data and concern that personal conveyance rules will help ease TL capacity. Meanwhile, 2Q updates from the LTLs were a little better than expected for ODFL and more in line with our expectations for SAIA and ARCB. Outside of the trucks, FDX (+2.6%) outperformed UPS (-0.6%) last week following the strike authorization vote against UPS. Until UPS announces a tentative labor deal, we suspect the stock could continue to relatively underperform.
Today’s chart (06/11/18) compares forward P/E valuations for non-union LTLs (ODFL and SAIA) vs. our TL Index (CVTI, HTLD, KNX, WERN and SNDR). Since 2011, the TLs have traded at a 10% premium on average to the LTLs, but the TLs are currently trading at a 20% discount, and this is the largest discount we’ve seen over this period.
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