Fundamentals in Transportation Sector Still Strong

Transportation is a cyclical business; if the economy isn’t growing, there likely aren’t many raw materials and finished products to move around the country. In this anemic economic environment, the transportation sector has been largely overlooked.

Nevertheless, many corners of the transportation sector are performing quite well. In particular, the railroad industry has been the top-performing subsector by a wide margin.

While high fuel costs have weighed on the trucking industry, they have served to push an increasing volume of freight to the relatively fuel-efficient railroads. According to the Association of American Railroads, total railcar loadings rose by 1.7 percent last month, marking the third consecutive month of such gains.

Particularly impressive was the fact that carloads of automobiles and auto parts accounted for the lion’s share of those gains, up by more than 11 percent from the prior month. That statistic dovetails with reports that major automakers posted double-digit gains in US sales growth for the month of September. General Motors Co. (NYSE: GM) reported an almost 20 percent surge in US sales during September, for example, while Volkswagen (OTC: VLKAY) reported a 36 percent boost.

On the energy front, loadings of petroleum productsand coal jumped by 19.4 percent and 1.1 percent from the prior month, respectively.

In another bullish sign for the transportation sector, US industry continues to perform well despite concerns over a weak domestic economy.

The Institute for Supply Management’s Manufacturing Index has remained around 50 for 26 consecutive months. This index is a diffusion index, so a reading above 50 indicates growth in the sector, while a reading below 50 indicates contraction. Meanwhile, data from the Federal Reserve show that industrial production and capacity utilization are at three-year highs.

So while anxiety about a possible recession might be weighing on the transportation sector, the data don’t indicate that a recession is imminent.

Regardless of the overall economic data, iShares Dow Jones Transportation Average (NYSE: IYT) declined by more than 20 percent between July and early October. While the exchange-traded fund (ETF) has rebounded, it remains more than 11 percent below its July high.

But the fundamentals of the stocks in the ETF’s underlying index are stabilizing. All of the railroads held in the ETF, including Union Pacific Corp (NYSE: UNP) and Norfolk Southern Corp (NYSE: NSC), have reported improving earnings throughout the year as freight volumes have increased. The ETF’s heavy 30 percent allocation to this industry means that continued strength in the railroads should drive its returns.

But even the trucking industry, which has a 24 percent allocation in the ETF, has been strengthening despite economic headwinds. J.B. Hunt Transport Services (NSDQ: JBHT), the fund’s largest trucking position, reported record revenues in the third quarter, largely due to its intermodal operations.

Intermodal freight transportation involves moving cargo via multiple modes of transportation. For instance, J.B. Hunt’s trucks pick up cargo for the initial leg of the journey before transferring that cargo to a railroad for the next leg of its journey. The trucking company’s intermodal loads jumped by 15 percent during the third quarter.

As the US economy grows, albeit slowly, I expect the stocks in the transportation sector to continue their advance.