By Sam Stovall Making a return trip to Standard & Poor's list of industries with top Relative Strength rankings is the trucking group. These stocks have rolled along while the broader market remains stuck in the breakdown lane. The S&P Trucking subindex rose 19.5% in 2001, vs. an 11.8% drop in the S&P Super 1500 (the combined S&P 500, S&P MidCap 400, and S&P SmallCap 600). Year-to-date through Sept. 27, the subindex was up 2.9%, whereas the 1500 slumped 27%.
S&P analyst James Corridore maintains a positive investment outlook for the group. While industry conditions remain difficult, he sees investors rotating into trucking stocks in anticipation of economic and earnings recoveries, consistent with the historical pattern the sector usually follows. But he has caveats: Rising diesel fuel prices may put a squeeze on profits. And Corridore points out that investors generally rotate out of this area in search of faster growth once an economic recovery starts to pick up steam.
The dynamics in the less-than-truckload (LTL) segment of the industry -- haulers that handle shipments weighing 10,000 pounds or less -- were changed by the September, 2002, bankruptcy of Consolidated Freightways, the third-largest LTL outfit in the U.S. Since ConFreight chose to liquidate rather than reorganize, its removal from the market has created a $2 billion revenue opportunity for the remaining LTL companies and should help fuel strong growth as they position themselves to gain pieces of this business.
DRIVERS AVAILABLE. So, the LTL outlook has improved. Corridore says the ConFreight dissolution should enhance carriers' ability to raise prices. Capacity has also shrunk as weak players have been pushed out of business. The consolidation means that the industry's chronic driver shortage -- which put upward pressure on wage and benefit costs -- has eased.
Corridore expects total shipment volumes to rise slightly in 2002, following a decline in 2001 related to the slow economy. Profits were slammed in 2001, dropping about 49%, but they should see a strong recovery this year as rates are expected to increase on firming demand and leaner inventories. Corridore feels these truckers are poised for further robust earnings growth in 2003.
The truckload (TL) segment -- those companies that carry shipments exceeding 10,000 pounds -- has also undergone major consolidation in the past few years through mergers and bankruptcies. Corridore says the trend may accelerate if economic improvement does not materialize in the near future. However, since driver shortages have also eased in this group, this provides some room to cut costs. Corridore expects cargo rates to rise modestly in 2002 and 2003.
The analyst's current favorites in the trucking group are Landstar System (LSTR) and Yellow Corp. (YELL), both of which are ranked 5 STARS (buy).
S&P Relative Strength Rankings
These industries carry 12-month relative strength rankings of "5" as of Sept. 27, 2002 -- meaning that they're in the top 10% of the 114 industries in the S&P Super 1500 (the combined S&P 500, S&P MidCap 400, and S&P SmallCap 600) based on prior 12-month price performance.
Largest Company (Market Cap.)
S&P STARS* Rank
Air Freight & Logistics/Industrials
Apparel, Accessories & Luxury Goods/Consumer Discretionary
Casinos & Gaming/Consumer Discretionary
Harrah's Entertainment (HET)
Consumer Electronics/Consumer Discretionary
Harman International (HAR)
Fertilizers & Agricultural Chemical/Materials
IMC Global (IGL)
KB Home (KBH)
Housewares & Specialties/Consumer Discretionary
Fortune Brands (FO)
Managed Health Care/Health Care
Metal & Glass Containers/Materials
Yellow Corp. (YELL)
*S&P's ranking system for the appreciation potential of stocks over a 6- to 12-month period: 5 STARS (buy), 4 STARS (accumulate), 3 STARS (hold), 2 STARS (avoid), 1 STAR (sell). Stovall is chief sector strategist for Standard & Poor's