After the close yesterday (03/31/20), FDX announced it will implement a temporary surcharge on all international package and airfreight shipments, including TNT shipments. The surcharges don’t impact domestic U.S. or domestic international (e.g. intra-Germany) shipments and will take effect next week. We estimate these surcharges will impact 21% of total revenue, although we assume some customers with contracts won’t have to pay the surcharges.
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Even with the market’s rally over the past week, our WR Transport index fell 11.3% last month, just slightly outperforming the 12.5% decline in the S&P 500. Our index is now down 19% YTD, also slightly outperforming the 20% drop in the S&P 500.
Our WR Transport index bounced back 10.6% last week, just slightly outperforming the 10.3% rise in the S&P 500. The Rails (+15%) bounced back the hardest as they’ve been the worst performers among transports this year, while the TLs (+6%) relatively lagged the most after previously holding up the best. So it was very much a mean reversion week within transports. Even with last week’s bounce-back, our Transport Index is still down 24% since the market peak in mid-February, just barely outperforming the 25% drop in the S&P 500.
While 1Q earnings should be fine for most transports, we expect 2Q and full-year C20 Cons. EPS estimates to come down materially in the near term. Today, we have moved to recession assumptions in our models and have assumed the worst sequential volume declines in 2Q that we’ve ever seen, followed by a slight recovery in 3Q and more meaningful recovery in 4Q and C21. We have lowered our C20 Rail, Truck and Airfreight/Logistics EPS estimates by 15%, 27% and 16%, respectively. We are now assuming -5%, -29% and -21% y/y EPS growth for these sub-sectors this year, and our estimates are now 12%, 21%, and 17% below Cons. for the year.
We spoke with two private LTL carriers about recent volume trends in light of coronavirus. The first regional carrier is heavily leveraged to the Northeast and has seen volumes fall off sharply in the past week. About two weeks ago, this carrier’s LTL shipments were tracking up 7%-8% y/y, but in the past five days, they’re tracking down 10.5% y/y, with even bigger declines the past 2-3 days. The other carrier we spoke with isn’t as exposed to the Northeast, and his volumes have only fallen off modestly this week. So far, they’ve been holding up better than feared. Meanwhile, both carriers noted that there’s little pricing activity happening right now and they’re generally keeping rates flattish right now. Lastly, both carriers are keeping a close eye on YRCW as they’re not sure they can survive a sharp downturn in 2Q. Neither carrier is hearing about shippers leaving YRCW and they don’t see signs of shippers implementing any contingency plans right now.
The bill includes $4B in grants for cargo airlines to cover their payroll and another $4B in loans. We believe the loans and grants have some restrictions on buybacks and dividends, so we expect FDX and UPS would be reluctant to utilize this aid. AAWW doesn’t pay a dividend and is more focused on debt paydown than buybacks, so perhaps it could benefit from the $4B in grants to cover its payroll if the restrictions aren’t too severe. We estimate around $200M of potential grants to AAWW relative to its $600M market cap.
Our WR Transport index fell another 10% last week, outperforming the 15% fall in the S&P 500. AAWW popped 28% and the Integrators increased 2% on average, while the LTLs (-5%) and TLs (-7%) relatively outperformed. However, the Rails fell another 15%, and they’re now the worst performing transport sub-sector this year. The Rails are now down 31% YTD, and they’re now the only transport sub-sector that’s underperforming the S&P 500 (-29% YTD). In contrast, the LTLs (-17%) and TLs (-23%) are now the biggest outperformers.
We spoke with a large international freight forwarder about international freight trends and the impact of coronavirus. Business levels in China have rebounded in March, with production now running at around 60%-80% of normal capacity right now, depending on the region. With reduced passenger belly capacity and following the production delays, this forwarder is seeing a significant amount of charter activity out of China and very elevated airfreight rates in the $5-10 per kilo range vs. typical rates in 1Q around $1-2. Overall volumes remain down y/y in March, but rates are up a lot and so net revenue is tracking down less y/y than volumes. Looking ahead, this forwarder expects to see a similar dynamic in transatlantic market where belly space is even more important. This forwarder isn’t sure how long airfreight rates will stay this high as passenger capacity will eventually return to the market.
With an increasing focus on balance sheet and cash flow risk across the market, we’ve been getting questions about potential liquidity risk at YRCW. While YRCW has a market cap of just ~$60M, it’s still the second largest LTL carrier by revenue with an estimated market share of 11%. So potential liquidity issues at YRCW could have a big impact on the rest of the industry. Absent liquidity issues at YRCW, the fundamental environment for LTLs seems challenging ahead with lower fuel prices and an impending economic downturn in 2Q.
After the close, FDX reported adjusted F3Q EPS of $1.41, above our estimate of $1.30 and Cons. of $1.27 that had reset much lower ahead of the print. Relative to our expectations, Express beat our model by $0.36 on better revenue and a smaller incentive comp drag, while Ground missed by $0.28 on continued weak margins, and LTL beat by $0.14 on better yields and margins. Amid coronavirus uncertainty, FDX withdrew its F20 guidance.
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