Zacks Industry Outlook highlights United Parcel Service, FedEx and Air Transport Services Group
For immediate release
Chicago, IL – March 29, 2022 – Today Zacks Equity Research discusses United Parcel Service UPS, FedEx Corp. FDX and Air Transport Services Group ATSG.
Industry: Air freight and freight
Rising e-commerce demand amid pandemic restrictions has so far boosted the Zacks Transportation – Air Freight and Freight the industry enormously. Despite the reopening of economies, the thirst for online shopping is rampant among consumers.
The strong demand for medium-sized freighters is also a boon. We expect companies like United Parcel Service, FedEx Corp. and Air Transport Services Group take advantage of favorable trends. However, supply chain issues continue to plague the industry.
About the industry
Companies belonging to the Zacks Transportation – Air Freight and Freight industry provide air delivery and freight services. Most players in this space are involved in the provision of specialized transport and logistics services. Some participants offer a range of supply chain solutions, such as freight forwarding, customs brokerage, fulfillment, returns, financial transactions and repairs.
The well-being of firms in this industrial cohort is directly proportional to the health of the economy. Major industry players, including UPS, move millions of packages every day around the world.
In addition to operating a ground fleet of several vehicles, some of these companies maintain an air fleet. While some players focus on providing air transportation services for passengers and cargo, others provide services to entities that outsource air cargo lifting requirements.
3 key trends to watch in the transportation, air freight and freight industry
E-commerce demand is expected to remain strong: The northward movement in e-commerce demand during the coronavirus-induced restrictions that have confined people to their homes has been a huge support for air cargo and freight industry stocks to date. Ushering in more good news for industry players, the penchant for online shopping remains strong even with economies reopening and people heading out for work.
This is driven, among other things, by the race for digitization and changing consumer habits. The global e-commerce market is expected to experience a CAGR of 14.7% over the period 2020-202H7. This bodes well for industry players.
Dividend hikes signal financial strength:As economic activities resume, many companies are reactivating their shareholder-friendly measures like dividend payouts and buyouts, underscoring their financial strength and confidence in the business. Among air cargo and freight players, UPS and FedEx had announced dividend hikes even during the coronavirus-induced uncertainty in 2021, underscoring their pro-shareholder stance.
UPS paid dividends worth $3,437 million in 2021, up 1.9% year-over-year. In 2021, UPS repurchased shares worth $500 million, up 130% year-over-year. UPS aims to reward its shareholders with $6.2 billion in 2022 through dividends ($5,200 million) and share buybacks ($1,000 million).
Supply chain issues are a major headwind: The pandemic has disrupted operations, forcing most businesses to grapple with supply chain bottlenecks. These supply chain and capacity issues have driven up transportation and labor costs due to the need to deliver finished goods to customers on time.
For example, high transportation and labor costs hurt FedEx’s recently released third quarter fiscal 2022 results. The Ground segment (FedEx’s second largest segment by revenue contribution) was hard hit by weak segment operating results due to high operating expenses due to labor market pressures and salaries as well as the increase in costs related to the expansion of the network.
Salary and benefits expenses increased 18% in the third fiscal quarter due to increased labor expenses and network inefficiencies. Purchased freight increased 7% due to unfavorable labor market conditions. Costs also rose due to supply chain issues at the other major industry player, UPS.
Zacks’ Industry Ranking Indicates Sunny Outlook
The Zacks air cargo and freight industry, housed within the wider Zacks Transportindustry, currently boasts a Zacks Industry ranking of #87. This ranking places it in the top 35% of over 250 Zacks industries.
That of the group Zacks Industry Ranking , which is essentially the average of the Zacks Ranking of all member stocks, indicates a bullish near-term outlook. Our research shows that the top 50% of industries ranked by Zacks outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the top 50% of industries ranked by Zacks is the result of the positive earnings outlook for the constituent companies overall. Looking at revisions to overall earnings estimates, it appears analysts are gaining confidence in the earnings growth potential of this group. Notably, the industry’s 2022 earnings estimate rose 16.1% year-over-year northward.
Given the bright near-term outlook for the industry, we’ll highlight a few stocks investors can buy to add to their portfolio. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.
Industrials trail the S&P 500 but outperform the sector
The Zacks air cargo and freight industry has underperformed the Zacks S&P 500 composite, but has outperformed the broader transportation sector over the past year.
The industry gained 5.3% over the period compared to the 14.9% appreciation of the S&P 500. Meanwhile, the broader sector was down 0.3% over the period. .
Current industry assessment
Based on enterprise value to EBITDA (EV/EBITDA) over 12 months, a multiple commonly used to value transportation, airfreight and cargo stocks, the industry is currently trading at 11 .77X compared to 15.02X of the S&P 500. . It is also below the industry’s 12-month EV/EBITDA of 15.58X.
Over the past five years, the industry has traded as low as 13.79X, as low as 6.57X and at the median of 10.36X.
3 Transport – Air freight and freight stocks to watch
Airline Services Group: ATSG, based in Wilmington, Ohio, is one of the world’s leading providers of aircraft leasing, air cargo transportation and related services. Over the past 60 days, Air Transport Services, which currently holds a Zacks Rank #2 (Buy), has seen the Zacks consensus estimate for 2022 increase by 5.91%. The stock is up 28.8% over the past six months.
The surge in e-commerce demand in these coronavirus-ravaged times is a tailwind for Air Transport Services Group. Driven by sustained demand for mid-size freighters, the ATSG has released a bullish view of Adjusted EBITDA for 2022. The ATSG expects the metric to be $640 million, or nearly 100 million above 2021 levels. Due to the strength of its cargo leasing and airline operations, the ATSG expects adjusted EPS for 2022 to be $2, indicating a growth of 20% compared to the actual figures for 2021.
You can see the full list of today’s Zacks #1 Rank (Strong Buy) stocks here
UPS: The exponential growth rate of e-commerce in the current scenario is a huge plus for Atlanta-based UPS, which currently holds a Zacks #3 (Hold) ranking. Robust free cash flow generation from UPS is a major positive, driving an increase in its shareholder-friendly business.
Mainly due to the rise of e-commerce, UPS shares gained 28.1% in one year. Over the past 60 days, the Zacks consensus estimate for 2022 revenue has moved 7.47% north.
fedex: FedEx is taking advantage of tailwinds such as favorable prices and a strong demand scenario. We are also pleased with FDX’s efforts to reward its shareholders even in these difficult times. The FDX stock currently carries a Zacks rank of 3.
FedEx’s robust free cash flow generation is a boon and is ramping up its shareholder-friendly business. FDX earnings for the current fiscal year are expected to rise 13.1% from last year’s reading.
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United Parcel Service, Inc. (UPS): Free Inventory Analysis Report
FedEx Corporation (FDX): Free Inventory Analysis Report
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