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Will the Bull Run Continue for Transport Services Industry?

Nalak Das
Updated
The two pro-growth agendas of President Trump, namely, significant cut in corporate tax and deregulation are major catalysts to the transportation sector.

The diversified transportation sector, which includes airline operators, railroads, truckers and shippers, to name a few, performed well in the first half of 2018. Strong U.S. economic fundamentals and substantial surge in manufactured and retail goods are anticipated to fuel the transportation sector’s growth. Consequently, the companies offering equipment financing and leasing, logistics and supply chain management services to transporters have also rebounded in 2018.

Growth Inducing Polices

As the U.S. economy continues to grow, demand for carriage is also increasing and this momentum is anticipated to sustain in the rest of 2018. The two pro-growth agendas of President Trump, namely, significant cut in corporate tax and deregulation are major catalysts to the transportation sector.  

Massive reduction in corporate taxes from 35% to 21% has brought corporate tax rate to its lowest level in 78 years. A large part of transporters book much of their revenues within the United States. Consequently, a significant reduction in corporate tax rate brone by these companies would be immediately accretive to cash flow.

Strong U.S. Economic Fundamentals

U.S. GDP grew at 4.2% in the second-quarter of 2018, marking its highest gain since the third quarter of 2014 and the third-best growth rate since the Great Recession of 2008-2009. In the second quarter, consumer spending increased 4%, business investment grew 7.3% and government spending rose 3.5%.

In the first half of 2018, the U.S. GDP grew at 3.2%, better than the Trump administration’s target level of 3%. Moreover, the unemployment of 3.7% is at its lowest since December 1969. Average wage rate increased 0.5% in August, the fastest pace since January. Despite wage growth, the core PCE index (excluding food and energy) - Fed’s preferred gauge of inflation measure - remained steady at 2%.

Additionally, both manufacturing and services sectors are growing at steady pace and consumer confidence is at its peak. Further, U.S. factory made goods in August rose 2.3%, marking its highest gain since September 2017.

Fed Raises GDP and Job Estimates

On Sep 26, the Fed raised forecast for 2018 and 2019 GDP growth from the 2.8% and 2.4% stated in June to 3.1% and 2.5%, respectively. Although the Fed raised its unemployment rate projection for 2018 from 3.6% to 3.7%, it is still lower than the current rate of 3.9%.

Projections for 2019 and 2020 remained unchanged at 3.5% while the first estimate for unemployment rate in 2021 is pegged at 3.7%. This indicates that the U.S. labor market will maintain near full employment levels over 2018-2021.

Performance of Major Transport Services Providers

Year to date, stock price of six major transport service providers, Matson Inc. MATX, GATX Corp. GATX, Westinghouse Air Brake Technologies Corp. WAB, The Greenbrier Companies Inc. GBX, XPO Logistics Inc. XPO and Fly Leasing Ltd. FLY outperformed the broad market S&P 500 index.

Bottom Line

The transportation sector seems to be positioned well not only in the near term but also in the long haul due to robust freight demand on the back of a buoyant economy. Consequently, growth potential of transportation services stocks is also bright.

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