Jon A. Langenfeld-Robert W. Baird & Co. Quotes – Incorporated Transports modestly outperform broader market in November… Truckload, Integrators, and 3PLs (+4%) each solidly outperformed S&P 500 Index (+0%); followed by LTLs (+1%), with rails in line with market.
• …aided by above-seasonal November truckload freight trends, consistent with expectation for muted but elongated 2010 peak. Industry contacts indicate November truckload demand above expectations following disappointing August-to-October trends. Above-seasonal trends in recent weeks reflective of a less robust, but elongated peak season, and supported by more constructive holiday shopping season outlook.
• Appetite for inventory build among both industrial and retail shippers an encouraging sign… Both industrial and retail shippers demonstrating a willingness to restock inventory levels in 3Q and through November, reflecting greater confidence in consumer demand expectations. As measured by the ISM, the pace
of Nov-10 inventory restocking the highest level in over 25 years; and F3Q reports across retailers show growth in inventory exceeding prior-year levels.
• …but end-market demand must persist into 2011, which we believe will be driven by healthy industrial production growth (recent consensus reflects +3.8% IP growth in 2011) and broader, catch-up capital spending cycle
• Stable demand outlook, tightening capacity supports 2011 freight rate growth. Conditions support tightening industry capacity during 2011 including: 1) an aging industry fleet, 2) looming regulatory changes, 3) rising operating costs, and 4) disciplined industry fleet growth; “perfect storm” of constrained industry capacity supports the potential for mid-single-digit freight rate growth in 2011.
• Best ideas for transport exposure. We prefer stocks with company-specific catalysts, or greater industrial end-market exposure and leverage to accelerating industry pricing. Top ideas include UNP (secular operating margin expansion,GDP-plus volume growth potential) and JBHT/HUBG (intermodal share gains from
truck, exposure to accelerating freight pricing); and LSTR as short-term opportunity
(taking advantage of low investor sentiment, lagging stock performance, and 2011
operating leverage).
Industrial Research
December 2, 2010
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