Clerical workers at the port of L.A. went on strike and ILWU dockworkers at 1 of 13 terminals at the port also struck in sympathy. On Wed., the strike spread to 9 terminals at LA/Long Beach and could spread to other West Coast ports in the coming days. The West Coast (WC) ports faced a 10-day lockout in 2002 before Pres. Bush invoked Taft-Hartley and forced the ports to re-open. We believe Pres. Obama would step in to stop a widespread WC port strike within a week or so but even if the strike lasts longer, the impact should be much less severe than the ’02 lockout which occurred in Sept/Oct during peak import season. Peak season has basically ended already this year. Also, if the strike doesn’t spread beyond LA/Long Beach, freight can be diverted to other WC ports, unlike in ’02.
December is historically one of the biggest months of transport stock outperformance, particularly for truckers. Truck outperformance in Dec. has been even more pronounced in recent years, perhaps as retailers need to re-build low inventory levels following the onset of holiday shopping. SWFT’s CEO Jerry Moyes will sell 4.83M shares of stock (9% of his stake and 3% of total shares) through a private placement. Jerry will use the proceeds to meet upcoming tax obligations, but he’s required to repurchase all 4.8M shares back at the same selling price within the next 4 years. Jerry and his family still retain 56% voting power at SWFT.
In this note, we review our C13-14 EPS forecasts vs. Cons. and unveil our new target multiples and year-end 2013 target prices (or fair values for Peer Performs) to rank our 34 stocks by upside/downside. We generally recommend overweighting transport stocks after our group’s relative underperformance, and we continue to favor companies that can grow earnings solid double digits regardless of freight demand through pricing, productivity, cost reductions, and/or acquisitions.
The ISM Manufacturing Index increased to 51.5 in Sept. after holding below 50 the prior 3 months. As we show below, a short retreat in the ISM below 50 like this has typically coincided with strong Transport stock outperformance. However, transport stocks have materially underperformed the market to date the past 3 months. CP announced that Mike Franczak, currently EVP and Chief Operations Officer, has resigned after 25 years with the company. While CP will not fill the COO position at this time, this seems like a positive 1st step toward new CEO Hunter Harrison bringing on a hand-picked head of operations later this year or early C13.
GWR raised $393M of cash net of deal expenses (excluding $15M sold by Chairman Mort Fuller) from selling 3.3M primary shares and issuing 2M tangible equity units at 5%. We expect GWR to place an additional $61M net from exercising the green shoe. We expect GWR to benefit from deal accretion related to eliminating duplicate back office costs, improved purchasing power, less competition for future acquisitions and more potential highly accretive contiguous acquisitions. On the downside, the larger combined company will mean it’s harder to move the EPS needle with acquisitions. We have raised our prior pro-forma C13 EPS forecast from $4.20 to $4.35 to reflect the improved financing terms on the debt deal, offset partially by greater dilution from a larger than expected equity deal and modest underlying operating tweak.
STB proposed several reforms to make rate cases simpler and less expensive for captive shippers (this did not hit newswires during market hours). Stand-alone cost (SAC) rate cases are very expensive and lengthy to adjudicate, but very few shippers use the Board’s more simplified rate case procedures because of limits on potential rate relief. To address this, the STB proposed to eliminate the rate relief cap (currently $5M) for simplified SAC cases.
UPS announced that the European Commission did not grant Phase I approval of its pending acquisition of TNTE. Since UPS must now move to Phase II approval, which can take up to 25 weeks, UPS now expects its TNTE acquisition to close in 4Q:12 relative to our prior expectations of early Sept. We believe UPS will ultimately receive EU approval and close the TNTE deal, but we now suspect it could face more material divestitures than initially expected. AAWW was awarded a large 4-yr contract to move cargo for the U.S. Military, but the company did not issue a press release. The contract could be worth $2.9B of total rev. over 4 years, split by AAWW and 2 other carriers. Assuming an equal rev. split and a 5% margin implies about $0.25 of annual EPS for AAWW, but these assumptions seem very rough.
The ISM Manufacturing Index fell to 49.7 in June, marking the 1st dip below 50 in nearly 3 years. Historically, a short retreat below 50 in the ISM of 3 months or less has led to strong Transport stock outperformance, while a longer downturn has driven Transport stock underperformance. Additionally, HACTL reported that its Hong Kong airfreight vols increased 4.3% y/y in June, improved from +1.5% and +0.6% the prior 2 months. This marks the best y/y growth in over a year, but key export vols were flattish y/y despite a very easy comp.
The large-cap rails beat expectations by 14% on avg. in 1Q, but 2Q Cons. estimates for the group have come down modestly since then the past 3 months. While coal vols have weakened further in 2Q and easy weather comps have normalized, fuel prices have come down materially. We are raising our 2Q EPS estimates on avg. by 4% for the large-cap rails (ex-CP) and we are now 2% above Cons. We expect the best report vs. expectations for UNP and the worst report for CP following a 9-day strike in June.
News hit the tape that a federal judge ruled to certify a class action lawsuit against the major U.S. rails regarding their fuel surcharge programs. The suit, dating back to 2007, alleges that the rails illegally conspired to coordinate their fuel surcharge programs. The 4 major U.S. rails are named as defendants in the case, but not KSU, the Canadians or the short-lines. Based on similar fuel surcharge cases against LTLs, global air carriers and forwarders, we believe it’s very unlikely the rails face anywhere close to $30B of potential liability. Rather, we suspect a worst case scenario settlement or ruling (likely not for a couple of years) would have little impact on the rails’ balance sheets or pricing power. We also don’t see risk of rail fuel surcharges going away as the STB previously ruled fuel surcharges were a fair practice in 2007, when they required the rails to switch to mileage-based from rev. based fuel surcharges.