As shippers increasingly turn to container-based, so-called “intermodal” freight, the companies that are best positioned to compete in the intermodal business are the ones most likely to reward shareholders over the long haul.
Intermodal freight is gaining traction because of its flexibility: A single container can move by ship, rail or truck. These shipments grew by nearly 6% to an all-time high of 13.1 million moves in 2012, according to the most recent report from the Intermodal Association of North America.
Railroads are vying for a piece of the action to help replace steep declines in coal shipments. Intermodal gives railroads a value play in the space because they can transport a ton of freight more than 480 miles on a single gallon of diesel, making them more efficient than other transport modes.
Meanwhile, a mass hemorrhaging in the trucking space — 1,800 companies have declared bankruptcy since the Great Recession — has led to tight trucking capacity, and utilization rates are high for those that still remain … giving railroads yet another “in.”
In the hotly competitive intermodal space, there are bound to be winners and losers. Here are four hot transport stocks — two railroads and two trucking firms — that can get you in on the intermodal boom:
The bad news: CSX‘s (NYSE:CSX) domestic coal business declined 30% last year, CFO Fredrik Eliasson said at a JPMorgan investors’ conference on Wednesday. The good news: CSX has worked to counter those trends by diversifying its revenue stream and boosting efficiency. As a result, the company has added 300,000 intermodal units and those operations now account for 38% of its business. The railroad also has benefited from strong growth in auto transport.
CSX’s valuation metrics look good, too. Although its price/earnings-to-growth ratio looks a tad high at 1.1, the stock has a forward P/E of only 11.5 — lower than any of its Class I freight railroad peers. CSX also has the best dividend yield of these four stocks at 2.4%.
The stock just set a new 52-week high on Monday, and I think intermodal growth will continue to drive CSX even higher.
The decline in coal shipments has been the bane of freight railroads’ existence since the recession — last year’s drought had a similar impact on grain carloads. To copmensate, Union Pacific (NYSE:UNP), which also participated in Wednesday’s JPMorgan conference, has set its sights on intermodal and shale petroleum transport as key growth areas in the near future. CFO Robert Knight announced that UNP has targeted some 7 million to 10 million containerized truckloads in its territory that it believes can be converted to rail.
Union Pacific also is fairly valued at a PEG of 1, and its forward P/E of 13 is a little below the sector average. UNP also currently yields a decent 2.1%; that dividend has been reliably growing for years. Slow and steady is the name of this game.
J.B. Hunt Transport
Despite the competitive threat from railroads, J.B. Hunt Transport (NASDAQ:JBHT) plans to keep on truckin’. Targeting intermodal growth has been a strategic priority — intermodal accounted for only 36% of revenue in 2002, but jumped to a whopping 60% by 2012. On the bottom line, the numbers are even more pronounced: Intermodal accounted for 71% of profits last year, compared to just 55% in 2002.
On the surface, JBHT looks a little overvalued compared to some of its peers — it has a PEG ratio of 1.2 and a forward P/E of nearly 20. But I still think JBHT is a buy because of its focus on intermodal infrastructure, a strong growth strategy and a return on equity of nearly 47%.
Swift Transportation (NASDAQ:SWFT) is betting big on the growth in intermodal. The company added some 2,500 intermodal containers to its fleet last year, and the strategy paid off — SWFT grew intermodal revenues by 40.2% in 2012, according to Supply Chain Digest.
JBHT is one of the most undervalued names in the trucking industry right now, with a slim PEG ratio of 0.77 and a forward P/E of less than 11. There’s no dividend, so it’s growth or bust on this one, but JBHT has cruised more than 30% in the past year to keep resetting all-time highs, and it boasts a monster RoE of nearly 68% — making it a good bet on even more future growth.
As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.