It’s been a couple of weeks since Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B) released its annual letter to shareholders. By now, investors and media alike have had a chance to digest everything Warren Buffett had to say about the year that just passed.
For 2017, there was no bigger news story than the $29 billion windfall to the company’s net worth, thanks to the reduction in the federal corporate tax rate from 35% to 21%. Berkshire Hathaway isn’t the only company to benefit from the tax cut. But it is one of the most widely followed, so Buffett’s comments on the subject traveled fast.
As I went through the entire letter, I found it to be one of the least entertaining in recent years. Sure, there were the usual lighthearted moments, but it didn’t come across nearly as folksy as in past years. Perhaps the Oracle of Omaha has nothing left to say.
For me, the tidbit that caught my attention — you’d need a microscope to find it — was a brief mention of BNSF, the company’s railroad subsidiary:
“Our operations other than insurance delivered pretax income of $20 billion in 2017, an increase of $950 million over 2016,” wrote Buffett. About 44% of the 2017 profit came from two subsidiaries. BNSF, our railroad, and Berkshire Hathaway Energy (of which we own 90.2%).”
BNSF recovered nicely from an off year in 2016, delivering 7.9% growth on the top line and 10.9% growth on the bottom line.
There is no better indicator that the American economy is alive and doing very well than BNSF’s 2017 results.
For those who want to ride the coattails of companies like BNSF, here are 7 transportation stocks to buy that drive the American economy.
Transportation Stocks That Drive the U.S. Economy #1:
Berkshire Hathaway (BRK)
As BNSF goes, so goes Berkshire Hathaway.
It’s been eight years since the holding company completed the $26 billion acquisition of the remaining 77.4% of the railroad it didn’t already own. Including the 22.6% equity stake it already owned, BRK paid approximately $35 billion for the entire company.
By the end of 2016 Berkshire Hathaway had already received $22 billion in dividends, covering almost the entire purchase price of the 77.4% ownership interest.
Furthermore, BNSF’s net income before the deal was $2.1 billion. Today, despite some off years, it’s almost doubled to $4.0 billion. Anytime you can pay off a multi-billion acquisition (from dividends received) in less than a decade, you’re doing very well.
More importantly, buying BNSF reduced Berkshire Hathaway’s reliance on its insurance businesses, which accounted for 62% of its overall profits in 2009. Today, that’s down to around 20%, providing investors with greater diversification.
There’s no doubt in my mind that BNSF has made Berkshire Hathaway an even sturdier long-term investment.
Transportation Stocks That Drive the U.S. Economy #2:
The other day I got a FedEx Corporation (NYSE:FDX) delivery at precisely 8 a.m.. Where I live it’s virtually unheard of for someone from the trades to show up at that time of the morning. But there was one of the FedEx’s drivers, ringing my doorbell bright and early for the first stop of his day.
I’ve always been impressed with FedEx compared to United Parcel Service, Inc. (NYSE:UPS). Back in September 2011, I recommended investors buy FDX stock because it was the better value buy at the time.
If you went along with my suggestion, a $10,000 investment back then would be worth $36,420 today. The same $10,000 investment in UPS would be worth $20,290, a little more than half what FedEx has been able to generate over the same six-and-a-half year period.
Fast forward to 2018.
I recently called FedEx one of the seven stocks to buy for Valentine’s Day despite the fact it could face some heat in the future from Amazon.com, Inc. (NASDAQ:AMZN). The e-commerce giant is busy building a shipping service to get its third-party sellers’ products to customers faster.
It’s unknown whether Amazon will go as far as taking control of the entire shipping process including the final mile. Until it does, FDX remains one of the best transportation stocks to buy for a long-term hold.
Transportation Stocks That Drive the U.S. Economy #3:
Southwest Airlines (LUV)
Is Warren Buffett ready to gobble up an entire airline?
While Buffett did admit the airline industry comes with above-average risk, he also acknowledged that consolidation has resulted in stronger businesses less susceptible to collapse.
Berkshire Hathaway’s invested almost $10 billion in the four major U.S. airlines. Southwest was Buffett’s biggest investment as of the end of September. A quick check of its Q4 2017 13-F filing shows that LUV remains the largest of the four at $3.1 billion.
The analysts like it as well.
“Southwest has a good balance sheet, it delivers a good product to customers, particularly leisure customers, (and) they pay a dividend and buy back stock,” Helane Becker, managing director at Cowen & Co., recently told Forbes.
Berkshire Hathaway already owns a railroad. Adding one of the best-run airlines in North America wouldn’t be a bad idea.
Transportation Stocks That Drive the U.S. Economy #4:
JB Hunt (JBHT)
My dad always said you can tell the strength of an economy by the number of trucks on the road. Sure, the same theory probably applies to railway cars, cargo planes, etc., but transport trucks are the most visible form of transportation in our daily lives, so they’re also the most applicable.
JB Hunt Transport Services Inc (NASDAQ:JBHT) had a good year from a revenue perspective in 2017 up 10% to $7.2 billion with all four of its operating segments showing year over year improvement in sales.
On the bottom line, however, JB Hunt saw operating expenses increase by 13% with almost every major cost of doing business rising in fiscal 2017. As a result, operating income dropped 13% to $624 million from $721 million a year earlier.
So you’re probably wondering why I’m recommending JBHT stock. Basically, when an economy heats up, drivers become important commodities in the trucking industry, and until they come up with driverless trucks, you’ve got to pay more to keep them in the fold. So JB Hunt’s increase in operating expenses is a good sign.
The reality is JB Hunt has never been more financially-sound than it is today. Its free cash flow in 2017 was $328 million or 4.6% of revenue, the company’s best FCF margin since 2008.
From a P/E valuation perspective, JBHT stock is cheaper than it’s been since 2008. With fuel prices unlikely to go much higher in 2018 and the company continuing to take market share, now is an ideal time to buy into this transportation stock.
Transportation Stocks That Drive the U.S. Economy #5:
Kirby Corp (KEX)
Kirby Corporation (NYSE:KEX) operates tank barges on various U.S. waterways including Alaska and Hawaii. In fact, the company operates the largest inland and offshore tank-barge fleet in the U.S.
So, if you’re a company in Minneapolis that’s importing grain from Latin America, it might arrive by Kirby ship in New Orleans. And then it might be offloaded to a Kirby tank barge for the trip up the Mississippi River to the Twin Cities.
Over the past five years, Kirby’s stock’s achieved a measly 0.5% annualized total return, considerably less than the 14.4% return from the S&P 500.
However, there’s a good reason for Kirby’s stock woes.
Kirby moves a lot of it. Until mid-way through 2017, the price of oil was stuck under $50, meaning oil and natural gas producers weren’t calling on Kirby’s services nearly as much.
However, fourth-quarter results suggest that the tide has begun to turn. As CEO David Grzebinski stated in KEX’s Q4 2017 press release:
“A favorable pricing environment for our customers’ products and new petrochemical capacity led to increased movement of petrochemicals and crude oil by tank barge. During the quarter, we took actions to improve the efficiency of our business, including workforce reductions and early retirements, and the sale of aging and inefficient towboats. While these actions adversely impacted the quarter’s financial results, we believe they improve overall efficiencies and put Kirby in a position of strength as this market begins to recover from a prolonged industry downturn.”
Normally, I don’t like to use long quotes by CEOs. But in this instance, the context is important for anyone considering an investment in Kirby.
Kirby, like every other business related to oil and gas, has suffered in recent years. While I’m not sure we’ll see a $100 barrel of oil anytime soon, a $60 price does seem sustainable.
If oil prices hold you can expect Kirby’s stock to start climbing back over $100 where it traded in 2014.
Transportation Stocks That Drive the U.S. Economy #6:
XPO Logistics (XPO)
If there’s a word that’s hotter than hot these days, logistics would have to be it. Any business related to supply chain management — especially those helping e-commerce companies move their product around the world — is currently gold.
XPO Logistics Inc (NYSE:XPO), like JB Hunt, has a trucking business that both owns and contracts out assets to get customer shipments to where they’ve got to go.
However, XPO also has a logistics business that uses state-of-the-art technology to help clients maximize their shipping efficiency.
It’s a one-two punch that’s resulted in tremendous growth over the last five years. In 2013, XPO had revenue of just $702 million and was losing money. Flash forward to 2017 and it’s revenues were $15.4 billion with an operating profit of $623 million.
With that kind of growth, it’s easy to understand why XPO stock has achieved a five-year annualized total return of 42%.
The question is whether that growth can continue.
I believe it can.
In the company’s February 2018 slide presentation, it makes mention of the last mile, that trickiest of places where retailers either win or lose by how well they do getting a product to a customer’s door. ” From XPOs presentation:
“E-commerce is an immense tailwind for last mile, and one that’s predicted to grow globally at double-digit rates through at least 2020. Within e-commerce, there’s an ongoing shift toward customers buying large, heavy items online. Given our specialization in heavy goods, this represents tremendous growth potential for us.”
Companies — such as online furniture dealer Wayfair Inc (NYSE:W) — depend on home delivery to be handled efficiently. That’s XPOs sweet spot if you will.
In 2018, XPO expects $1 billion in free cash flow, up more than 10% from this past year. With organic growth of more than 10% in 2017, XPOs primed for another strong year.
Its price isn’t cheap, but if you’re in for the long haul, you’ll do just fine.
Transportation Stocks That Drive the U.S. Economy #7:
Macquarie Infrastructure (MIC)
If I had a dollar for every time I’ve read the word “infrastructure” over the past year, I’d be a rich man.
One of my favorite companies is Brookfield Asset Management Inc (NYSE:BAM). Its fingerprints are all over the infrastructure industry. In July 2017, I called it one of the 7 Best Buy-and-Hold “Holdings” on Wall Street. I still believe that’s the case.
However, I wanted to spread the love a little bit for this article. So instead I’ll go with Macquarie Infrastructure Corp (NYSE:MIC). Macquarie is a New York-based owner and operator of U.S. infrastructure assets that includes Atlantic Aviation — a business that provides airport services at more than 70 non-commercial locations across the U.S.
Currently yielding about 10%, MIC is not everyone’s cup of tea. On February 22, Macquarie announced its Q4 2017 earnings. And while some investors might have been disappointed with the eight-cent miss on pro forma profits, the even bigger disappointment was the cut in the quarterly dividend from $1.44 to $1.00.
The company said it wanted to hold back some of its cash flow to invest in some new growth projects but investors weren’t having any of it.
MIC stock dropped 41% on the news. As a result of the massive single-day correction, it now trades where it did in 2012, erasing considerable gains.
Of all seven of the transportation stocks listed, MIC would be the one you need to go into with your eyes wide open.
Aggressive investors should be buying.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.