We spoke with consumer products shipper about the potential impact of coronavirus on global air and ocean trends. Our contact noted that production in China isn't close to normal levels yet with many people not yet back at work. Additionally, there are a lot of logistical challenges in China with local trucking for loading and conveying. So while there have been some blank ocean sailings, our contact has not seen backlogs of freight in China build up yet. But this shipper believes the situation will change very quickly and expects the biggest issues with finding airfreight capacity. Capacity right now is essentially limited to freighters as passenger airlines have effectively cut almost all their flights. As a result, inbound rates to China are already tracking up ~50% from normal levels. Outbound rates haven't spiked yet given factory delays, but once production ramps, our contact believes airfreight rates out of China could spike to 2x-3x previous levels.
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This morning, R reported a 4Q adjusted EPS loss of ($0.01), below Cons. of +$0.03. R also provided C20 EPS guidance of $1.30 at the midpoint, materially below prior Cons. of $2.56 including a much larger than expected loss in 1Q:20. The stock fell another 10%.
R reported an adjusted 4Q EPS loss of ($0.01) vs. Cons. of +$0.03, our estimate of +$0.01 and prior guidance of ($0.03)-+$0.07. Dedicated results were slightly better than our expectations, SCS results slightly worse, and FMS results materially worse than we expected, offset by a much bigger tax shield in the quarter. Losses on sales of $10M were worse than our $5M expectation but improved from a $23M loss in 3Q.
Yesterday (2/11/20), a U.S. District Court judge in Texas ruled in favor of the rails and issued a permanent injunction ordering the largest railway labor union (SMART-TD) to negotiate with the rails about train crew sizes. The rails kicked off the latest round of labor negotiations late last year including a proposal to move to one-person crews and redeploy conductors from locomotives to ground-based positions. However, the conductors’ union has refused to negotiate on this issue, and yesterday's ruling now forces the union to start negotiating on crew size.
Our WR Transport index rebounded 4.0% last week and outperformed the 3.2% rise in the S&P 500. We had some big moves last week, including double-digit increases for USX, HUBG, ODFL, SAIA, and AAWW. Overall, the LTL and TL stocks performed best last week, while the Truck OEMs performed worse.
FDX rallied 5% on Friday (2/7/20) after announcing a plan to increase efficiency and lower the cost of residential deliveries by using Ground trucks to deliver select day-definite residential Express shipments. FDX will roll this out first in Greensboro, NC before adding more markets the rest of the year. FDX will then expand the program more broadly in F21 after evaluating the service and financial performance.
AAWW’s stock is down more than 50% over the past year amidst a weak global airfreight market and several large earnings cuts. But we see near-term catalysts emerging for the airfreight market following the coronavirus outbreak, and expect airfreight pricing to benefit. AAWW has the most leverage in our coverage to a spike in airfreight rates and thus we’re raising our rating from Peer Perform to Outperform and introducing a year-end ’20 target price of $32 (30% upside).
Pasted below, please find our Friday Freight note. We distribute this product via email each Friday mid-day, so clients have some freight reading material to make their weekends truly worthwhile! Your feedback is always appreciated if you have any suggestions.
After the close (02/06/20), HUBG reported adjusted 4Q EPS of $0.84, in line with our estimate and $0.01 above Cons. Against very tough comps, net revenue, EBIT and EPS declined 9%, 19% and 17% y/y. Net revenue missed our model by 3% on weaker gross revenue, but gross yields still expanded 40bp y/y and were in line with our model. Net operating margins were also 20bp better than we expected on better cost control.
USX reported a 4Q EPS loss of ($0.05), better than Cons. of ($0.09) and our estimate of ($0.10) but down materially from +$0.39 a year ago. TL margins fell over 600bp y/y but were 130bp better than our model, but note that 4Q included $3.9M of property gains that boosted TL margins by 100bp and EPS by $0.05. So underlying TL results were in line with our expectations, and brokerage posted a $2M loss vs. our break-even expectations. On the headline beat, the stock popped 13%.
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