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3 absolutely positively good air-freight stocks
FedEx and many of its rivals have had impressive years, and they have an advantage airlines dont: They can pass higher fuel costs on to customers. Here are the best of this group of flyboys.
By Robert Walberg
Higher fuel prices may be crippling the beleaguered airline industry, but theyve done nothing to slow down the fast-growing, hard-charging air freight and delivery services group. Led by heavyweights United Parcel Service (UPS, news, msgs) and FedEx (FDX, news, msgs), the industry is posting an average year-to-date gain of 40.5%.
Even removing the outsized 183% gain in Hub Group (HUBG, news, msgs), the group is up by an impressive 24.7%. Though the industry might hit an occasional air pocket, strong fundamentals and reasonable valuations suggest that most of the stocks will continue to fly high for the foreseeable future.
Among the trends currently working in the industrys favor are: - Growth in the U.S. economy: As business expands, more inventory gets shipped.
- Expansion into the fast-growing Asian marketplace, especially China: The federal government recently approved an increase in all-cargo U.S.-to-China service.
- Increased e-commerce: All those books, videos, computers, etc., need to be delivered to customers by someone, and, with the holiday shopping season fast approaching, look for the air freight industry to enjoy another boon.
- Corporate shift in inventory management: This trend means a rise in small package deliveries, and pushing product out in smaller doses requires more frequent use of delivery companies.
- The plight of long-haul airlines: Major carriers such as United, Delta Air Lines and US Airways, all of which have declared or threatened to declare bankruptcy, carry freight along with passengers. If one or more of those carriers goes under, that freight business will be picked up by a competitor -- most likely either UPS or FedEx.
Its natural to assume that the rise in fuel prices would mitigate some of these advantages. However, unlike the airline companies, air-freight firms have had no trouble passing the rising fuel costs on to customers. FedEx, for example, has a fuel surcharge in place that adjusts monthly based on the spot price of crude.
Interestingly enough, the rise in costs to customers hasnt seemed to slow demand. Both UPS and FedEx recently indicated that sales growth remains robust. Barring a dramatic rise in fuel prices from current high levels or an unexpected price war between the delivery firms, investors can safely assume that high crude prices wont ground the sector any time soon.
Can the group make Wall Street happy?
About the only thing that could cause the sector some near-term turbulence is the high expectations on Wall Street. One investment company after another has upgraded these firms over the past several weeks and months. That, in turn has helped to underpin the stocks. However, that reality often counts for less than expectations in dictating short-term stock-price movement. In other words, with analysts and investors looking for strong growth, any disappointment -- real or perceived -- could trigger a bout of profit-taking.
Intermediate- to long-term investors shouldnt be overly concerned about such things, however. The underlying fundamental and technical trends remain decidedly bullish. Consequently, any short-term dips should be perceived as re-entry points.
Which stocks in the group offer the best value going forward?
FedEx: The first and foremost choice. Not only does the company dominate the fast-growing Chinese marketplace, it also is making inroads into UPSs bread-and-butter ground delivery business. Share gains in this segment will help bolster FedExs margins, which should help it narrow the valuation gap with UPS. UPS, which has historically delivered higher operating margins and return on equity (ROE), typically trades at a premium to FedEx. At present, UPS trades at 25 times forward earnings, while FedEx trades at 18.8 times projected this years estimated earnings.
FedExs recent acquisition of Kinkos, the printing/copying chain, should be another long-term growth driver. It will help fuel the ground delivery business and reduce operating costs as a percentage of total revenues. With these factors contributing to continued strong top- and bottom-line growth, FedEx should be able to achieve a multiple of at least 23 times earnings -- or close to that given to UPS. Based on forward estimates, that puts the stock on a path to the $100-$115 area, or 16% to 32% above its current price.
TPG: The Dutch entry. Another air-freight company worth considering is TPG (TP, news, msgs). Though this company is considerably smaller than either UPS or FedEx, not to mention less liquid, growth has been consistently strong in recent quarters, and valuations are quite compelling. The company, formerly known as the TNT Post Group, is based in the Netherlands. It provides mail, express and logistics services worldwide. These services involve the collection, storage, sorting, transport and distribution for its customers within specific time frames and related data and documentation management services.
TPG is expected to earn $1.78 this year and $1.98 in 2005, resulting in forward price/earnings multiples of only 13.5 times and 12.1 times. The stocks price/sales ratio of 0.76 is also well below its peers. However, its ROE of 12% and operating margins of 7.8% are above the industry average, and its dividend yield of 2% is unmatched. As long as the company lives up to expectations, look for moderate multiple expansion to result in a test of the $27-to-$28 range.
Navigant: Downright cheap. My last play in this industry is Navigant International (FLYR, news, msgs). Unlike the others, Navigant isnt in the business of moving packages. What it does is provide corporate travel management services. Through its Scheduled Airlines Traffic Offices, the company provides airline travel reservation services to U.S. government employees as well as to corporate, military, leisure and meetings and incentives clients. Though its debt burden is a bit higher than one would like and its relative strength ratings are nothing to get excited about, Navigant is downright cheap.
Despite expected earnings growth of nearly 13%, the stock trades at 10.2 times this years estimated earnings and only 8.3 times next years projection of $1.98 per share. Its price/sales ratio of 0.63 is also low for the group. Basically, in a group as strong as this, Navigants stock is too cheap to ignore. If Im right and the rest of the group continues to power ahead, Navigant should achieve a PEG (P/E to long-term growth) of at least 1.0, which, in turn, would result in a 38% jump in the stock price.
Other stocks in the group, such as UTi Worldwide (UTIW, news, msgs), Expeditors International of Washington (EXPD, news, msgs) and EGL (EAGL, news, msgs), may also experience gains over the next few months, but, at this point, most of the good news appears to be priced into these stocks. Same goes for UPS. However, if investors want to beat the market over the next three to six months, FedEx, TPG and Navigant International should deliver the goods.
At the time of publication, Robert Walberg neither owned nor controlled shares in any equities mentioned in this column.
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