Stock in trucking companies tends to gain when the economy is just starting to improve after a weak spell.
If logistics is the circulatory system of the economy, freight rates are like a blood test. Right now, they show a patient perking up after a nasty cold.
While the cost of shipping freight has been falling, things have been starting to improve. “Spot truckload rate momentum just recently hit a floor for the cycle,” wrote J.P. Morgan analyst Brian Ossenbeck in a Thursday report. “This metric is the best leading indicator for early cycle transport stocks.”
Early-cycle stocks are shares that rise the most when the economy is just starting to improve. Shares of trucking companies qualify because when investors see freight rates start to rise, expectations for earnings improve, with positive consequences for stock prices.
Later in an economic cycle, shipping costs flatten out and then fall as more truckers take to the roads to take advantage of higher rates. By that point, trucking stocks are at their peak, or even on the way down.
Freight rates are still declining year over year, but the pace of declines has slowed. Spot truckload rate momentum, the metric Ossenbeck cited, shows the rate of change.
He upgraded shares of
J.B. Hunt Transport Services
(ticker: JBHT) to Buy from Hold and lifted his target for the price to $204 a share from $200. Shares closed at $176.34.
Intermodal carriers are “likely through the worst year over year headwinds from normalizing accessorial fees while West Coast port labor negotiations continue making progress,” wrote Ossenbeck. “More importantly, spot truckload rate momentum just found the floor for this rate cycle.”
Intermodal carriers handle freight that travels by truck and rail. J.B. Hunt is a leader in the space.
Ossenbeck upgraded shares of
Schneider National
(SNDR) to Hold from Sell for the same reasons. He kept his target for the stock price at $29. The shares closed 0.8% higher at $26.45, while the
S&P 500
and
Dow Jones Industrial Average
lost 0.2% and 0.7%, respectively.
Norfolk Southern
(NSC), the railroad involved in the East Palestine, Ohio train derailment, got an upgrade to to Buy from Hold, while Ossenbeck raised his target for the stock price to $250 from $206, comfortably above the Thursday closing price of $210.31.
Rail and freight rates are linked, wrote Ossenbeck, and lines such as Norfolk that operate in the eastern U.S. face more competition from truckers. An additional plus, he said, is that investors are now less focused on the derailment, which had weighed on the stock.
As of Thursday afternoon, Norfolk stock was down about 17% since the Feb. 3 accident. Shares of
Union Pacific
(UNP) and
CSX
(
CSX
) were off about 6% and 3%, respectively, over the same span.
With the upgrade, about 52% of analysts covering J.B. Hunt stock rate shares Buy. The average Buy-rating ratio for stocks in the S&P 500 is about 53%. The average analyst price target for the stock is about $190 a share.
About 39% of the analysts covering Norfolk stock rate it Buy. The average analyst price target is about $236 a share.
The upgrade of Schneider to Hold doesn’t change the number of analysts rating the stock at Buy. The Buy-rating ratio is a bit above average at almost 60%, while the average analyst price target is $32.
Even if investors don’t back up the truck for logistics stocks, they can take some comfort in Ossenbeck’s observation that the worst of the slowdown for an industry that serves both manufacturing and the consumer economy has passed.
Write to Al Root at [email protected]
This content was originally published here.
