Price Action of Transportation Stocks Indicates Slowing Economy
Monday, October 21st, 2013
By Mitchell Clark, B.Comm. for Profit Confidential
Transportation stocks are now reporting their third-quarter earnings, and it’s important for investors to pay attention to what these leading market indicators have to say.
J.B. Hunt Transportation Services Inc. (JBHT) is one of the largest trucking firms in North America. The company reported a solid third quarter, but earnings came in just slightly below what Wall Street was looking for.
Third-quarter revenues grew 11% to $1.44 billion, which is solid growth for a mature business. Earnings were $89.5 million, or $0.75 per diluted share, compared to $78.2 million, or $0.65 per diluted share. Wall Street was looking for total sales of $1.45 billion, with $0.78 in earnings per share.
The company’s cash position and accounts receivable grew solidly, and so did shareholder’s equity. All in all, it was a good quarter for this trucking firm. If Wall Street consensus was a little too high, then it was. This was still a solid report, and the company’s financial health improved.
In the railroad industry, companies continue to deal with weakening demand for coal, but earnings are holding up on modest revenue growth and higher prices.
Union Pacific Corporation (UNP) reported third-quarter sales of $5.57 billion, growing four percent over the comparable quarter last year. The company’s earnings were $1.15 billion, or $2.48 per diluted share, compared to $1.04 billion, or $2.19 per diluted share.
Third-quarter revenues measured by total revenue carloads were flat. Most of the company’s gain in total revenues came from price increases. Earnings met consensus, while revenues were just a hair below.
So there is growth out there, but it’s modest and not necessarily the result of improving business conditions.
The stock market, as measured by its key stock indices, is taking the news positively, and there is a definite willingness on the part of institutional investors to keep buying if earnings reports don’t disappoint too much.
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The Dow Jones Transportation Average is trading right at its all-time record high, and so long as it is, I don’t see the broader market breaking down. This index has been and should continue to be a leading indicator.
CSX Corporation (CSX) slightly boosted its full-year earnings outlook. The Jacksonville, Florida-based railroad saw its share price retrench after reporting, based on several Wall Street downgrades.
Earlier, FedEx Corporation (FDX), a component of the Dow Jones Transportation Average, reported earnings growth of approximately seven percent, with revenues gaining only two percent. (See “Another Earnings Season Suggests Another Quarter of Slow Growth Ahead.”)
This position recently shot up significantly on the stock market after management announced a new 32 million share buyback program. While no time limit was placed on the buyback, this represents just a little more than 10% of the company’s current shares outstanding.
Modest earnings growth on even more modest revenue growth; stronger cash positions with new share buybacks; and some increased dividends: it’s the same metrics as the second quarter. The numbers support current share prices, but so far, the third quarter is looking pretty slow.
So in this slow economic environment, I still favor existing winners—those blue chip stocks that have done well since the beginning of the year. Of course, dividends, in my view, remain the most attractive aspect to the equity market in an environment of very modest top-line growth.
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