What is the Transportation Sector? (PART 1)
A Brief Analysis on Industries in the Sector
Transportation is everywhere, essentially when you move it's a form of transportation. This does not pertain to our interest, though. What we're interested in is the transportation sector, which is a type of stock related to the transportation of goods or customers. Typical examples of this include: airlines, railroads, shipping, and trucking companies.
Sector Performance Indicators
A major factor indicating the success of many transportation firms is the price of oil. This makes perfect sense, as if the price of oil/fuel decreases, these companies will have lower costs and thus earn more. If the price of oil/fuel increases, higher costs will lead to lower profits and lower cash flows. Therefore, knowledge of oil prices is essential in determining the right time to buy in to a company. In fact, fuel cost are airlines' second highest expense, indicating how important they are in determining profits.
Major Airlines
Company Profiles
As indicated on Yahoo! finance (source: http://biz.yahoo.com/p/770mktd.html), the top 5 major airlines (based on market cap) include:
1) Ryanair Holdings
2) easyjet PLC
3) Air China Limited
4) Cathay Pacific Airways Ltd.
5) China Southern Airlines
If you haven't noticed, Ryanair Holdings is absolutely dominating the market in terms of size and share. Shortly, we'll be looking at specific indicators to really understand why it's on top, and to deem whether how strong these businesses really are currently.
An important fact to note here is that major airlines are not solely regional airlines, which are companies that only focus on short-haul flights (typically have <$100M revenues)
Performance Indicators
Labour, according to the ATA is an airline's number one cost. Pilots, flight attendants, dispatchers, customer service, baggage handlers, security guards - these numbers do add up.
In addition fuel costs are airlines' second highest expense, really proving how important monitoring the price of oil is.
Weather also plays another major unpredictable and variable factor. The cancellation/delay of flights is quite common (I'm sure we've all been delayed before, right?)
A few other indicators are: airport capacity, route structures, technology, and costs to lease or buy aircraft.
Regional Airlines
As indicated on Yahoo! Finance (source: http://biz.yahoo.com/p/771mktd.html), the top 5 regional airlines (based on market cap) include:
1) LATAM Airlines Group S.A
2) Southwest Airlines Co.
3) Copa Holdings SA
4) Alaska Air Group Inc.
5) JetBlue Airways Corporation
Shipping
As indicated on Yahoo! Finance (source: http://biz.yahoo.com/p/775mktd.html), the top 5 shipping companies (based on market cap) include:
1) Adani Ports & Special
2) China Merchants Holdings
3) Irish Continental Group PLC
4) Essar Ports Ltd
5) Ocean Wilsons Holdings Ltd
Railroads
As indicated on Yahoo! Finance (source: http://biz.yahoo.com/p/776mktd.html) the top 5 railroad companies (based on market cap) are:
1) MTR Corporation Ltd.
2) Container Corporation of India
3) National Express Group PLC
4) Union Pacific Corporation
5) Canadian National Railway Comp
Railroads, as outdated and old western as they seem, are still a crucial part of our economic infrastructure. Like airlines, railroads are in a type of industry that is very cyclical (in good economic times, higher profits, and the inverse) and thus it is important to monitor macroeconomic indicators. More products that companies will sell = more cargo that will be shipped via railroads.
Interestingly, there is indeed profit opportunity in smaller short-line railroads (coal mines, power plants) though it's a bit hard to actually tell whether the company is great or the industry is growing. If it's the latter, fundamental analysis of companies will not be sufficient in determining the value of a company. This is because the companies will have high start-up costs and thus negative cash flows. These companies will have to be analyzed in different ways, particularly by highly skilled adept investors. Speculation will inevitably occur and the risk is very high, but so is the reward.
However, it is important to note that the railroad industry is in a declining market due to decreased demand due to the fact of more efficient ways of transporting goods (air transport). Lack of adaptation to environmental and competitive pressures is another major factor. The bright side of this is that even though it's a declining sector, the non-competitive firms have been weeded out and therefore most of the current companies still in the game will still experience periods of growth.
Rail traffic also is a useful indicator for economy activity - carload traffic correlates well with it, as do railcars deployed and stored.
Evaluating Railroad Companies
Factors to consider when choosing to buy into a railroad company are quite abundant, but there are a few important ones that standout:
1) Revenue growth and strong margins
2) Operating income, operating cash flow, and operating margins
3) Operating Ratio (major measure of profitability)
- Operating Expenses / Revenue
- A ratio of 80 or lower is acceptable, but less than 75 is excellent
4) Top Line sales
- At the "top" of the income statement, the first line at the top is usually gross sales. Therefore, a company that increases their revenues experiences 'top line' growth
- The reason why it's important is because pricing can signal investors about management's strategy
5) Capital expenditure needs
- Railroads aren't very successful at converting revenue into free cash flow
- These companies are essentially in virtual duopolies and have lower costs of capital than might be expected
- In laymen's terms: railroads spend a lot of money, but money spent by railroads is lower risk and more probable return than money spent elsewhere
Dangers/Threats for the Railroad Industry
Things to note before investment in the railroad industry is commenced:
1) Fuel Costs (20% of operating expenses)
2) Labor Costs (33% of operating expenses, workers heavily unionized)
3) Capital Demands (High capital requirements)
4) Economic Activity (if the economy is active, a railroad can stimulate demand through this)
5) Cyclical Nature (limits viability of railroad stocks as long-term investments, but these can be useful in the short term)
6) Difficulty to Value (Due to high capital expenditures, railroads aren't exactly gold when looking at discounted cash flow models, though due to the lower risk nature of the cost of capital, a lower discount rate can be utilized. Other methods include price/book, EV/EBITDA, and price-to-earnings.
Trucking
As indicated on Yahoo! Finance (source: http://biz.yahoo.com/p/774mktd.html) the top 5 trucking companies (based on market cap) are:
1) Stagecoach Group PLC
2) FirstGroup PLC
3) CSR Corporation Ltd.
4) Go-Ahead Group PLC
5) Stobart Group Ltd.
This is it for now, part 2 will include company specific analysis of the top five companies for each component of the transportation sector. It will be fairly detailed, in order to give a more efficient technical analysis of companies that are doing well in the sector and how this affects prices.
