1、North America Equity Research19 February 2019 Transportation&Logistics4Q18 Review:Themes,FAQs,and Top PicksAirfreight&Surface TransportationBrian P.Ossenbeck,CFA AC(1-212)622-Bloomberg JPMA OSSENBECK J.P.Morgan Securities LLCSanket P Parab(1-212)622-J.P.Morgan India Private LimitedCaleb B Hogan(1-21
2、2)622-J.P.Morgan Securities LLCLacey-Ann Wisdom(1-212)622-9566lacey-J.P.Morgan Securities LLCSee page 17 for analyst certification and important disclosures,including non-US analyst disclosures.J.P.Morgan does and seeks to do business with companies covered in its research reports.As a result,invest
3、ors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.Investors should consider this report as only a single factor in making their investment The majority of transportation and logistics stocks kept pace with the industrial and cyclical s
4、napback to begin 2019,but we find sentiment is increasingly focused on company specific drivers exiting 4Q18 earnings.Against this backdrop,we expect concerns over the cycle peak will continue weighing on a wider range of companies other than truckers after broad indicators of freight activity turne
5、d negative for the first time in almost two years.Other risks to watch entering the winter conference season include a potential inventory overhang and the inevitable rise of perceived disruptionby new tech-based competition as freight volumes fall.Precision scheduled railroading remains the driving
6、 force for the rails although during our recent time on the road we found an increasing number of investors were not sticking around for the execution of PSR plans.Highlights of key sector FAQs and themes are listed below with more details inside the note including:summaries of top picks NSC,CSX,CP,
7、FDX and XPO(page 4),scorecard of stock-specific calls from our previews(page 5),most frequently asked investor questions(pages 6-12),and key sector themes(pages 13-16).FAQ#1:Will freight volumes drop in 2Q19 after the tariff pull-forward?There is abundant evidence that freight was brought in ahead o
8、f multiple rounds of tariffs.California ports and warehouses remain congested while truckload activity ramps up in a seasonally soft period to handle the extra workload.Quantifying the potential freight volume impact remains difficult since the March 1 deadline might shift further to the right and p
9、rolong the seemingly inevitable inventory destocking which was not a focal point of 4Q18 earnings calls.Soybeans appear at risk of permanently losing share in the export market even if trade relations normalize.FAQ#2:Where are expectations and sentiment on NSC post-investor day?The outlook on Norfol
10、k remains mixed which is consistent with our preview highlighting the risk that management could not pull off goldilocks guidance.The 2021 targets were deemed aggressive and therefore not attainable,but slower progress to lower goals would have been branded as lacking PSR commitment.The topline outl
11、ook does strike us as ambitious but we expect the truckload market will provide a lift into 2020 while we estimate structural cost improvement needed to reach the 2021 target implies catching up with CSX not reaching parity on operating efficiency.FAQ#3:What is the updated regulatory outlook for tru
12、cking?We expect regulations remain a headwind through 4Q19 when the hours of service flexibility is likely finalized after being fast tracked”by the DOT.However,the tide could turn heading into year-end as the ELD mandate reaches implementation in mid-Dec 2019 when the exemption for older devices ex
13、pires.The drag on effective capacity will not be expected based on our conversations with inspectors,regulators and device providers.Moreover,our initial estimate of a 1-3%reduction could be conservative if the amount of tractors affected is closer to recent industry estimates of 40-50%.FAQ#4:Could
14、another polar vortex have an impact similar to 2014-2015?Transportation is subject to adverse weather conditions,but at this point we do not expect another winter storm would trigger a capacity squeeze like 2014-2015.Conditions could change(and this is an outdoor sport)but in 2014 Chicago had one of
15、 the largest snowfalls on record,the Southeast was hit with an ice storm,and winter conditions did not let up through 2015 across most of the Northeast.In addition,the rail networks are likely more resilient after recovering from service issues in early 2018 and with the current focus on PSR-driven
16、efficiency gains.2North America Equity Research19 February 2019Brian P.Ossenbeck,CFA(1-212)622- FAQ#5:Will rail partners be disrupted by PSR implementation in 2019?This common perception likely helped lower expectations on intermodal and shortline stocks ahead of 4Q18 earnings.We believe a kinder,ge
17、ntler version of PSR will benefit intermodal providers which should have more time to adjust to lane rationalization.Increased communication is critical for both parties that cannot lean as heavily on the truckload market to recover lost volume and increase rates.In addition,GWR management is contin
18、uing to systematically benchmark operations and institute best practices across local railroads to offset PSR related shocks.Theme#1:Fear of the cycle peak is permeating to other pockets in the sector.The debate of whether or not the truck cycle peak was called too early has resurfacedafter strong 4
19、Q18 results,but we are more interested in watching if peak concerns continue rotating through other groups within the sector.For example,CHRW recovered but for a while was bogged down by record results.We believe rails are implicitly confirming the peak cycle concern as fewer disclose pricing trends
20、 during a year when renewals could start to drop below same store sales,which we expect would be viewed as a negative inflection point by the market.Theme#2:Disruption concerns rising as freight volume growth decelerates.The recent contraction in the Cass Freight and ATA load indices is notable in p
21、art because it ends the streak of nearly two years of YoY growth,but also because the decline came in December just as imports surged ahead of potential tariffs.Historically,long expansions such as 2017-2018 are not followed bursts of growth or mini-cycles.We expect a slowdown in freight volume will
22、 inevitably give rise to disruption concerns from freight-tech startups and other competing logistics companies,weighing primarily on the valuation of CHRW as well as FDX and UPS.Theme#3:Rail vs.rail competition is a looming risk in the East.In theory the more efficient network could take share from
23、 its regional peer in order to maintain a certain level of operating leverage if volume growth slows.In practice the example of CN vs.CP provides mixed results over the last sixteen years as there is no clear correlation between relative margin profiles and volumes.Any significant growth differentia
24、ls over this timeframe were explained by long term contracts changing hands and service issues.We do not expect CSX will turn aggressive in a slower market especially with NS attempting to yield up in order to hit its 2021 OR target.Theme#4:Rail capex required to support volume growth varies signifi
25、cantly.We expect the“right”level of investment will be debated as all railroads pursue PSR differently.Over the long term,the CN example suggests a more capital intensive path waits at the end of a successful PSR implementation.We also looked at relative rankings of Class I rail volume growth and ca
26、pex intensity to see which network consistently undershot or outgrew their investment profile.KSU came in as the most frequent rail to overinvest relative to growth when ranked against peers,while UP came in fairly balanced and often matching low investment with slow growth.Theme#5:Intermodal rates
27、growing faster than TL viewed with skepticism.Intermodal renewals increasing high-single digits in 2019 compared to truckload upmid-single digits was one a notable statement from several management teamsduring the quarter.Considering truckload renewals surpassed intermodal in 2018,the reverse playin
28、g out in 2019 would likely result in a normalization of the historical spread between the modes.Intermodal and truck rates historically exhibit a strong correlation and in our view a substantial improvement in rail service would be required for intermodal to consistently outpace truckload rate gains
29、.3North America Equity Research19 February 2019Brian P.Ossenbeck,CFA(1-212)622- Table of ContentsTop Picks in Transports&Logistics.4Illustrated 4Q18 Review.5Revisiting Accumulates and Avoids.5Most Frequently Asked Questions from 4Q18.6Top Themes from 4Q18.13Figure 1:North America Transportation and
30、Logistics Comp SheetSource:J.P.Morgan estimates,Bloomberg.Note:Canadian rail price targets and earnings estimates are in Canadian dollars,all estimates are on a calendar year basisJPMMkt CapPriceDec 19Implied%2 YearNet DebtCompanyTickerRating(Bn)2/15TargetReturnYTDQTD18E19E20E18E19E20EPEG18E19E20E18
31、E19E20Eto EBITDAParcelsFedExFDXOW$46.8$179.30$233.0029.9%11.1%11.1%11.9x 11.3x 10.1x$15.11$15.88$17.830.8x$15.34$15.58$17.946.8x6.9x6.3x1.9xUPSUPSN$95.1$110.87$122.0010.0%13.7%13.7%15.4x 14.6x 13.5x$7.20$7.60$8.221.2x$7.24$7.55$8.4011.7x 10.7x 10.0 x1.6xRailroadsCanadian National Railway CNR CNN$80.
32、6$111.38$119.006.8%10.2%10.2%20.6x 17.8x 16.0 x$5.40$6.27$6.951.8x$5.50$6.40$7.0013.4x 11.9x 11.1x1.8xCanadian Pacific RailwayCP CNOW$37.9$270.72$337.0024.5%11.8%11.8%19.0 x 16.3x 14.5x$14.21$16.60$18.650.9x$14.53$16.31$18.20 13.2x 11.9x 11.1x2.4xCSX CorpCSXOW$59.2$72.54$86.0018.6%16.8%16.8%19.0 x 1
33、7.1x 15.3x$3.82$4.25$4.750.5x$3.84$4.25$4.7511.7x 11.4x 11.0 x2.2xGenesee&WyomingGWRN$4.9$82.73$88.006.4%11.8%11.8%22.1x 18.8x 16.5x$3.74$4.41$5.030.9x$3.87$4.44$4.8910.8x 10.0 x8.9x3.4xKansas City SouthernKSUN$10.9$107.54$122.0013.4%12.7%12.7%18.1x 16.0 x 14.0 x$5.95$6.73$7.661.3x$5.97$6.72$7.6010.
34、4x9.6x8.8x1.9xNorfolk Southern CorpNSCOW$48.9$182.87$214.0017.0%22.9%22.9%19.8x 17.5x 15.4x$9.24$10.45$11.900.7x$9.52$10.80$12.24 12.0 x 11.2x 10.4x2.1xUnion Pacific CorpUNPN$123.1$170.24$177.004.0%23.2%23.2%21.6x 18.7x 16.6x$7.87$9.08$10.280.9x$8.00$8.92$10.13 13.5x 12.6x 11.9x2.0 xTruckload Carrie
35、rs&BrokersC.H.Robinson WorldwideCHRWN$12.6$91.45$94.002.8%8.8%8.8%19.9x 18.2x 17.1x$4.60$5.03$5.340.8x$4.74$4.98$5.2013.8x 12.6x 11.9x1.0 xEcho GlobalECHOOW$0.7$25.40$28.0010.2%24.9%24.9%14.2x 13.9x 13.4x$1.78$1.83$1.890.2x$1.88$1.87$2.008.6x8.3x7.5x1.6xHeartland ExpressHTLDUW$1.7$20.84$15.00(28.0%)
36、13.9%13.9%24.9x 21.5x 20.8x$0.84$0.97$1.000.8x$0.86$0.88$0.968.4x7.4x6.9x-0.8xKnight-SwiftKNXN$5.9$33.53$36.007.4%33.7%33.7%13.2x 12.2x 11.5x$2.54$2.74$2.920.2x$2.56$2.70$2.906.5x5.8x5.4x0.9xSchneider NationalSNDRN$4.1$22.96$22.00(4.2%)23.0%23.0%15.1x 13.5x 12.9x$1.52$1.71$1.770.4x$1.55$1.70$1.806.0
37、 x5.2x4.7x0.0 xU.S.XpressUSXOW$0.5$9.43$11.0016.6%68.1%68.1%5.6x6.4x6.1x$1.68$1.47$1.54N/A$1.68$1.49$1.604.5x3.9x3.4xN/AWerner EnterprisesWERNUW$2.4$34.46$32.00(7.1%)16.7%16.7%14.8x 13.2x 12.9x$2.33$2.61$2.670.3x$2.33$2.59$2.555.5x4.9x4.6x0.2xLogistics<LRyder SystemRUW$3.4$64.43$57.00(11.5%)34.9%3
38、4.9%11.1x 10.5x9.6x$5.79$6.16$6.720.7x$5.78$6.13$6.445.0 x5.2x4.8x3.3xXPO LogisticsXPOOW$5.7$51.97$78.0050.1%(8.9%)(8.9%)15.7x 13.1x 10.6x$3.32$3.98$4.920.4x$3.19$3.95$5.196.2x5.5x4.5x2.7xIntermodalJ.B.HuntJBHTN$12.4$113.59$118.003.9%22.4%22.4%21.0 x 18.1x 16.4x$5.40$6.26$6.930.7x$5.64$6.44$6.9210.7
39、x9.4x8.7x1.0 xHub GroupHUBGN$1.6$45.73$52.0013.7%23.4%23.4%16.3x 14.2x 13.2x$2.80$3.23$3.470.4x$2.91$3.25$3.469.1x7.2x6.6x1.2x9.2%19.7%19.7%17.0 x 15.1x 13.8x0.7x9.4x8.6x7.9x9.9%11.0%11.0%16.6x 14.9x 13.5x0.7x17.5%17.5%10.3%15.4%15.4%13.4x 12.1x 11.1x0.7x20.0%12.4%12.4%13.6x 12.9x 11.8x9.3x8.8x8.1x1
40、3.0%15.6%15.6%20.0 x 17.4x 15.5x12.1x 11.2x 10.5x(0.3%)27.0%27.0%15.4x 14.1x 13.5x7.6x6.9x6.3x19.3%13.0%13.0%13.4x 11.8x 10.1x5.6x5.3x4.6x8.8%22.9%22.9%18.7x 16.2x 14.8x9.9x8.3x7.6xEV/EBITDAGroup AverageLogisticsIntermodalConsensus P/E and EPSS&P 500Industrials ETFDJ TransportsParcelsRailsTruckloadJ
41、PM EPS4North America Equity Research19 February 2019Brian P.Ossenbeck,CFA(1-212)622- Top Picks in Transports&Logistics#1:NSC Committed to precisionManagement issued operating ratio and topline targets that were viewed as better than expected or too aggressive,depending on the perspective.We recogniz
42、e the topline targets appear ambitious this late in a freight and economic cycle,but we believe the last wave of the ELD implementation will help underpin Norfolks growth.The company appears fully committed to implementing PSR and we were encouraged by the steps already taken to improve network flui
43、dity and consistency which is apparent in recent operating metrics.Based on our benchmarking analysis,we remain confident the Norfolk network can achieve a sub-60%operating ratio by narrowing the performance gap with CSX to historical levels.#2:CSX FCF momentum buildingWe remain positive on CSX even
44、 though it appears a good chunk of the market has moved on to the next PSR iteration.The company is further adjusting its once separate intermodal network which should pay dividends through the cycle by narrowing the margin gap with merchandise and coal traffic.The tighter truck market expected in l
45、ate 2019/early 2020(see FAQ#3)should provide additional support for CSX and NS to offset what will likely be a declining coal market,although export met coal prices remain robust to start 2019.Ultimately,we expect CSX can command a higher multiple over time as free cash flow generation structurally
46、improves as a result of the recent PSR transformation.#3:CP Choppy start to 2019After a long year of poor weather,a train derailment in a tunnel,and protracted labor negotiations CP had a clear runway of easy comps to begin 2019.However,the recent Alberta production curtailments and derailment in B.
47、C.will make for a challenging start to the new year.We expect these hurdles will be transitory and CPs crude by rail contracts should provide some element of liquidated damages to offset the lost volume and we remain constructive on 2019.Unlike peers in the U.S.,CP does not have the same PSR potenti
48、al left but we see gradual OR gains supported by longer grain trains and new hoppers as well as a wide range of incremental improvements in back-office efficiency and maintenance operations.#4:XPO In the penalty boxThe recent lost business from its largest customer adds more pressure on XPO to deliv
49、er growth against increasingly volatile economic conditions in key markets such as the U.K.and France.Similar to FDX,we assume global growth recovers which makes current valuation attractive for XPO combined with the potential for management to buy another 25%of the company using leverage on the bal
50、ance sheet once saved for M&A that did not come to fruition in 2018.#5:FDX Turbulence continues Assuming global growth recovers still feels like a contrarian viewpoint and it underpins our thesis on FDX which needs a stronger macro environment to support the poor performance of the TNT integration t
