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.
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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.
Even with Friday’s record bounce (3/13/20), our WR Transport index fell 10% last week, underperforming the 9% fall in the S&P 500. SNDR (+1%), PCAR (+1%) and UPS (up slightly) were notable outperformers last week, but everyone else was down including double-digit declines for most of our coverage. The Forwarders (-6%) and TLs (-7%) held up relatively best, while the Rails (-12%) performed worst. After the last 3 weeks, our Transport index is now down 20% YTD, underperforming the 16% drop in the S&P 500 (slide 3).
We spoke with a contact at one of the West Coast ports about volume expectations. Our contact highlighted that February volumes were very soft as expected due to a combination of Chinese New Year and extended production cuts related to coronavirus. Our contact expects a similar, if not bigger, decline in import volumes in March. That said, he’s encouraged that factories in China are starting to ramp up production and that ocean carriers are starting to reduce their number of blank sailings. As a result, he expects West Coast port imports to stabilize in April and then strengthen above normal in May with a number of production orders already placed in China. Looking past May, our contact believes June port activity is more up in the air depending on the level of demand destruction in the U.S.
Following tonight’s (03/11/20) U.S.-Europe 30-day travel ban announced by President Trump, our chart today compares the size of the U.S.-Europe transatlantic air cargo market relative to the size of the U.S.-China transpacific cargo market.
This morning (03/10/20), FDX updated its macro assumptions on its website and cut its C20 global GDP, U.S. GDP, U.S. Industrial Production (IP), and consumer spending forecasts. As shown in Exhibit 1, FDX lowered its C20 U.S. IP forecast by 30bp, and cut its C20 global GDP and U.S. consumer spending forecasts by 20bp each, respectively.
Amid a perfect storm of coronavirus headlines, plummeting oil prices, and rising fear of a global recession, our WR Transport index fell 11% yesterday, underperforming the 8% drop in the S&P 500. It was the worst day for transports since the 1980s, surpassing any single day of the financial crisis. The Rails (-14%) performed worst, while the non-asset Forwarders (-4.5%) and larger TLs (-4%) held up relatively best. Not surprisingly, stocks with higher-end oil exposure or higher-end balance sheet leverage badly underperformed today .
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