The US transportation sector, at only 0.5% of the S&P 500 index, is not a high profile area for fund...
The US transportation sector, at only 0.5% of the S&P 500 index, is not a high profile area for fund managers. It is perceived as a highly cyclical sector that is sensitive to the economy, which looks unattractive at a time when the Fed is raising interest rates.
The sector has not performed well recently, though the volume of investment is reasonable, says Grant Cowley, North American fund manager at Perpetual.
The largest chunk of the transportation sector is made up of airline firms. Airlines were de-regulated in the 1980s and there was a proliferation of new carriers, many of which soon went bust. There were a number of mergers among airlines and according to Simon Melluish, head of equities at Gartmore, this is a sector that is still undergoing consolidation.
Airline ticket pricing was quite strong in the first quarter of this year, which has benefited carriers. Cowley says that in June and July prices rose by more than 35 for leisure tarvel while business travel was hit by a 5% increase in May and additional rises in June.
Grant Wilson, North American fund manager at Martin Currie, points out that while aeroplanes are currently doing relatively well as a business concept, rising fuel prices have hurt the industry. Cowley agrees noting oil was priced at $12 a barrel at the beginnibg of 1999 and as of 6 Septmeber has risen to $35 a barrel.
According to Wilson, transportation companies should be doing better than they are, especially due to the amount of restructuring and consolidation that is taking place in the industry. Railroad companies Burlington and Union Pacific were each involved in recent corporate activity, merging with smaller firms. "Generally after consolidation companies should make a lot of money but these two did not appear to," Wilson says.
Railroads and truckers have moved to fairly cheap valuations but it is difficult to find a catalyst to get stocks moving, says Cowley. For example, railroad stock CSX is currently on a P/E of 10.3 times and was trading at share price of $24.62 as of 7 September. Cowley expects railroad companies to show good year on year earnings growth next year. Cowley finds logistics to be one of the more attractive areas of the transportation sector, in particular among small to mid cap companies.
Perpetual did have holdings in Forward Air, a logistics company, which made a lot of money this year, Cowley says. Forward Air, whose share price went up 40%, in dollar terms, year to date, provides transportation and logistics services to air cargo carriers and air freight forwarders. As it does not own significant assets it can react to changes in demand and is more flexible than larger companies, he adds.
Expeditors International is another interesting company Cowley likes, though Perpetual do not have holdings in it. It is a global logistics company involved in ocean freight forwarding, air freight forwarding, customs clearance and marine insurance. Its share price has risen 12%, in dollar terms, this year in an otherwise flat market.
If transportation can put in reasonably robust growth this year, its intermediate prospects are good, though it is never going to be a sector that is a darling of Wall Street, says Cowley.
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