Our WR Transport index increased 1.7% last week and outperformed the S&P 500 which was up just 0.4%. Transports are now outperforming materially this year with our Transport index up 25% YTD vs. the S&P 500 which is up 18%. Tax reform continues to dominate our discussions with clients. These conversations seem to be getting more nuanced with each passing day, so let’s focus today on some of the most frequent questions we’re being asked by clients
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With a strong finish to the month as tax momentum built, our WR Transport index strengthened 4.6% in Nov. and outperformed the S&P 500 by 180bp last month. U.S. Rails (+8%) with pricing power outperformed the most last month, followed by the Forwarders (+6%) with high book and cash tax rates, and the LTLs (+6%) with high-end U.S. exposure, while Integrators (+3%) with more international exposure relatively lagged among the transports. Our Transport Index is now up 23% YTD, outperforming the S&P by ~500bp.
What a week… our WR Transport index jumped 5.0% last week and materially outperformed the S&P 500 which was up 1.5%. The big news was obviously tax reform, which cleared some major hurdles last week as the Senate passed its bill early Saturday morning. Our in-house Accounting & Tax Policy Analyst Chris Senyek hosted a call on Friday with his latest views of the tax bill and market implications (click here for the replay). Chris thinks the market is still only pricing in a 40%-50% chance of tax reform, so further progress towards passage should continue to drive stocks higher. And in that scenario, transport stocks should continue to outperform as we have high-end U.S. exposure and moving from a 35% to 20% corporate tax rate will add more than 20% book EPS accretion for the majority of our coverage – click here for our Transport Tax Calculator. And in that context, does the risk to frac sand really matter for UNP anymore? Or does it really matter if TL driver pay goes up 10% or 5%? Probably not right now.
Transport stocks bounced back in a holiday-shortened week, with our WR Transport index up 2.1% vs. the S&P 500 which was up 0.9%. Transports are again outperforming this year, with our Transport index up 17% YTD vs. the S&P 500 which is up 16%. The top 2 performing sub-sectors last week and YTD are the LTLs (+37% YTD) and the TLs (+26% YTD), while the Integrators (UPS/FDX) have relatively lagged.
We spoke with a large big-box retailer about current TL trends. This shipper’s tender acceptance rates fell all the way into the high 70s right after the hurricanes, but then rebounded into the low 80s in October and then around 90% in November. Similarly, spot rates are still running at a premium to contractual rates, but they’re down materially from the ~100% premiums right after the hurricanes. Still, our contact characterized peak season right now as the tightest he’s season in the past several years, particularly around the West Coast. Due to TL capacity issues, our contact considered shifting some freight to intermodal, but doesn’t believe he can get enough box capacity on UNP or BNSF right now. He thinks tight container capacity right now reflects delayed box turns with CSX and strong import volumes into the West Coast ports. Looking out to next year, our contact now expects his TL rates to increase high-single digits in C18, up materially from his expectations a few months ago that TL rates would increase low-single digits. He added that many truck brokers have been asking for mid-cycle rate increases, although CHRW hasn’t done this yet, and neither have his asset-based TL carriers. Lastly, our contact expects more modest 3%-5% intermodal rate increases next year.
After speaking with many of our companies the past few days, we're making some changes to our initial analysis of EV trucks vs. current diesel trucks. Of note, we’ve materially reduced the headwind from lower payload capacity due to the weight of the battery. While this improves the payback period for EV trucks (Exhibit 1 below), our conclusion is the same: we continue to expect very slow adoption from over-the-road truckers.
Transport stocks underperformed for the 3rd week in a row with our WR Transport Index down 1.2% last week vs. the S&P 500 which was down 0.1%. Our Transport index is now up 14.6% YTD, slightly underperforming the S&P 500 for the first time since Hurricane Harvey.
Our in-depth note today (11/17/2017) includes 1) the evolution of electric vehicles, 2) a cost-benefit analysis of electric vs. diesel trucks, 3) our expectation for very low adoption rates by over-the-road truckers, and 4) longer-term implications for truckers, rails, and truck OEMs.
Transport stocks underperformed for the second week in a row with our WR Transport Index down 1.9% last week vs. the S&P 500 which was down 0.2%. TL stocks (-3.5%) continued to underperform after both KNX and SNDR missed expectations, while EXPD was the best stock after reporting a large beat this week. The Rails (flat) were also relative outperformers last week.
Greetings from sunny Palm Beach rainy New York city… transport stocks outperformed nicely against last week with our WR Transport Index up 1.7% vs. the S&P which was up 0.2%. It was generally a strong week of earnings reports, led by ODFL which reported a strong beat and 14% tonnage growth in October. That tonnage growth in October was probably the most surprising thing we’ve heard so far all earnings season, and normal seasonality from here implies close to double-digit tonnage growth for ODFL next year. So we don’t think 2018 Street estimates have moved up enough since ODFL’s report, and shame on us for ever questioning their share gains earlier in the year.
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