Bloomberg News

Holiday Sales Clues Seen in U.S. Rail-Truck Shipments: EcoPulse

August 16, 2013

Rail-Truck Shipments Reveal Holiday Sales Clues

Freight trains in the Alameda Corridor in Los Angeles, California. Photograph by Tim Rue/Bloomberg

Holiday sales are poised to rise from last year, based on the current volume of goods transported primarily by both truck and rail.

Investors looking for early clues are tracking these shipments now because they’re an “important metric” for gauging activity driven by retailers building up inventories ahead of the holiday season, said Alan Gayle, senior strategist in Atlanta at RidgeWorth Capital Management, which oversees about $48 billion.

Total U.S. intermodal volume -- goods shipped by more than one means of transportation -- rose 4 percent for the four weeks ended Aug. 10 compared with a year ago, according to figures from the Washington-based Association of American Railroads. That’s the biggest increase since March.

The data will reflect a change in pace “before it becomes a broad phenomenon” and supplement commentary from trucking and railroad companies, Gayle said.

The shipping total is a good proxy because consumer goods such as electronics and clothing make up about 72 percent of containerized freight, said Charles Clowdis, managing director of transportation-advisory services at IHS Global Insight in Lexington, Massachusetts.

Freight data point to a pick-up in sales even as retailers including Wal-Mart Stores Inc. (WMT:US), Kohl’s Corp. (KSS:US) and Macy’s Inc. (M:US) cut their guidance this week for fiscal-year sales or earnings. Li & Fung Ltd. (494) -- the world’s largest supplier of clothes and toys -- also reported first-half profit that missed analyst estimates amid sluggish demand from U.S. customers.

Falling Income

Net income fell 16 percent to $96 million for the six months ended June 30 from a year ago, excluding a writeback in the year-earlier period, the Hong Kong-based company said Aug. 13. That compares with an average estimate compiled by Bloomberg of $106.3 million from three analysts.

Li & Fung’s U.S. customers -- which include Wal-Mart, Target Corp. (TGT:US) and Kohl’s -- “have all adopted a more cautious view toward their winter sales this year” as the “retail environment is tracking with the slow pace of economic recovery,” the company said in a statement.

Wal-Mart, the world’s largest retailer, now forecasts earnings of $5.10 to $5.30 a share for its fiscal year ending January 2014, compared with its earlier projection of $5.20 to $5.40. The Bentonville, Arkansas-based company’s “customer remains challenged,” William Simon, chief executive officer of the U.S. division, said on an Aug. 15 conference call.

Economic ‘Tension’

“There’s a tension in the economy right now that will continue into the holiday season and beyond,” said Robert Dye, chief economist at Comerica Inc. (CMA:US) in Dallas. Even so, sales still could be stronger than last year, driven in part by rebounding home values, steady hiring and rising equity prices, he said.

Retail sales excluding restaurants, vehicles and gasoline could climb by an inflation-adjusted 3 percent to 3.5 percent in November and December, the traditional holiday rush, compared with 2.5 percent a year ago, Dye estimated.

The median price of an existing house jumped 13.5 percent to $214,200 in June from a year earlier, the biggest increase since 2005, according to data from the National Association of Realtors. Employers have added an average of 192,430 jobs to payrolls each month this year, compared with 180,570 during the first seven months of 2012, based on figures from the Labor Department. The Standard & Poor’s 500 Index of stocks has risen almost 17 percent since Dec. 31, 2012.

‘Overly Bullish’

Companies that use Pacer International Inc. (PACR:US) for transporting goods aren’t “overly bullish” or anticipating “anything bold,” said Paul Svindland, chief operating officer of the intermodal, trucking, freight and transportation-logistics service provider.

The primary window for sending goods via intermodal channels already has opened, and shipments will taper off by mid-November. While Dublin, Ohio-based Pacer predicts an “uptick” in volume, there probably won’t be “much of a spike” as in years past, Svindland said in an interview.

Any increase probably will be more like “a small mound,” Clowdis said, partly because the traditional peak season now begins earlier. He forecasts volumes will advance more than 3.7 percent during the holiday season from a year ago, compared with less than 1 percent to 2 percent for all modes of transportation, with some intermodal growth coming from increased use by retail outlets.

Diversified Play

Companies specializing in this type of shipping offer investors a “very diversified economic play,” unlike businesses that are leveraged to a specific commodity, said Timothy Ghriskey, chief investment officer at Solaris Asset Management in New York, which manages more than $1.5 billion. Union Pacific Corp. (UNP:US) and J.B. Hunt Transport Services Inc. (JBHT:US) -- both of which Solaris currently holds -- are ways to bet on improvements in this industry and the broader economy, he said.

Shares of Union Pacific have risen 228 percent since Dec. 31, 2008, while J.B. Hunt’s stock is up 178 percent. That compares with an almost 84 percent gain for the S&P 500.

While “the bigger picture remains phenomenal” for both stocks, they’ve weakened in the past four months, said Jim Stellakis, founder and director of research at Greenwich, Connecticut-based research company Technical Alpha Inc. Further underperformance would signal partly that investors are bracing for a slower holiday season, he said.

Sideways Moves

Even though J.B. Hunt, based in Lowell, Arkansas, has been “one of the strongest trucking names for a long time,” its stock has moved “sideways (JBHT:US)” since April, said Stellakis, a chartered market technician. Shares of Omaha, Nebraska-based Union Pacific also have been “losing steam (UNP:US)” and now are trading near the lowest level since May on a relative basis.

That’s not deterring Ghriskey, who is looking ahead to stronger fourth-quarter U.S. growth and holiday sales after a “really disappointing first half.” An improvement could force retailers to expand inventories from “unsustainably low” levels to meet increased consumer demand, he said.

The ratio of retail stockpiles to sales was 1.4 in June, after reaching a 32-year low of 1.34 in October 2011, based on figures from the Census Bureau. That compares with a five-year pre-recession average of 1.52.

Gross domestic product will accelerate by 2.3 percent in the third quarter and 2.6 percent in the fourth, based on the median estimate of economists surveyed by Bloomberg. That follows a gain of 1.1 percent in the three months ended March 31 and 1.7 percent for the second quarter.

Lingering Concerns

Walter Kemmsies of Moffatt & Nichol Inc. has some lingering concerns about the strength of the U.S. expansion. He forecasts intermodal freight will increase 3 percent in July through October compared with the same four months in 2012, the lower end of his previous estimate of 3 percent to 5 percent. Sequestration -- automatic, across-the-board federal spending cuts -- “seems to have depressed businesses and consumers” more than predicted, even as housing prices have improved, he said.

Macy’s cut its fiscal-year earnings forecast this week amid “softer than anticipated” sales in the three months ended Aug. 3, Chief Executive Officer Terry Lundgren said in an Aug. 14 statement.

The Cincinnati-based retailer’s second-quarter performance in part “reflects consumers’ continuing uncertainty about spending on discretionary items in the current economic environment,” he said. Macy’s now projects earnings of $3.80 to $3.90 a share, down from its May estimate of $3.90 to $3.95.

Expedited Transport

Any late-season surge in consumer spending might not benefit companies that specialize in intermodal transportation, Clowdis cautioned. That’s because retailers will use expedited methods such as air freight to get goods to their stores; intermodal adds about two days to transit time, he said.

Norfolk Southern Corp. (NSC:US) operates three types of intermodal services -- international, domestic and premium -- giving it broad exposure to holiday-related shipments, according to Jeff Heller, a vice president at the Norfolk, Virginia-based railroad carrier.

“Preliminary projections from the retail and ocean-carrier sectors would indicate that there will be some semblance of a peak season this year, but it will be gradual,” he said in an interview. “I haven’t seen data suggesting people are feeling much better this year than last.”

Christmas Spending

Consumer confidence is particularly important for Christmas spending, Comerica’s Dye said.

Sentiment fell to minus 26.6 in the week ended Aug. 11 after it was the highest since 2008 the prior week, according to the Bloomberg Consumer Comfort Index. If monthly hiring gains exceed 200,000 a month late in the year and shoppers feel more secure financially because of rising equity and housing prices, sales would benefit, Dye said. “A virtuous economic cycle is starting to engage.”

A significant increase in intermodal activity would reflect “greater retailer confidence” that Gayle would look to confirm with commentary from company executives, he said. If volumes contracted for three or four consecutive weeks, “this would be a real red flag for the holiday season and for the economy,” Ghriskey said.

Christmas sales only are “part of the story” for Ghriskey’s bullishness, so investors with an optimistic outlook should consider companies specializing in intermodal transportation now, he said.

“These are the vehicles that would directly benefit from increased economic activity.”

To contact the reporters on this story: Anna-Louise Jackson in New York at ajackson36@bloomberg.net; Anthony Feld in New York at afeld2@bloomberg.net

To contact the editor responsible for this story: Anthony Feld at afeld2@bloomberg.net


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Companies Mentioned

  • WMT
    (Wal-Mart Stores Inc)
    • $76.38 USD
    • 0.13
    • 0.17%
  • KSS
    (Kohl's Corp)
    • $59.09 USD
    • -0.11
    • -0.19%
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