Tightening Regulations And Capacity Pressure Ground Transportation - Todd C. Fowler - KeyBanc Capital Markets Inc.
December 21, 2011 - The Wall Street Transcript has just published Transportation and Logistics Report offering a timely review of the sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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Todd C. Fowler is a Vice President and Equity Research Analyst with KeyBanc Capital Markets Inc. With the company since June 2006, his research coverage is focused on transportation and logistics companies. Mr. Fowler previously worked for FTN Midwest Securities Corp., where he was an Associate Analyst responsible for coverage of companies primarily in the transportation and aerospace and defense industries. In their May 2011 best brokerage analysts survey, the Financial Times/StarMine recognized Mr. Fowler as the number two earnings estimator in the air freight and logistics sector for 2010. This is his third Financial Times/StarMine award. Mr. Fowler earned a B.S. degree in accounting from the University of Dayton in Ohio.
TWST: Overall, how are the truckload, less than truckload, intermodal and logistics areas doing?
Mr. Fowler: We are generally positive on most sectors going into 2012, but particularly in the full truckload market. What we experienced through most of 2011 is relatively balanced full truckload capacity following several years of downsizing by carriers to match supply with demand. It feels like we reached equilibrium, and for most of this year, the truckload market has been pretty balanced. That balance created opportunities for rate improvement, and we think most industry participants realize it won't take much of an increase in demand to drive more meaningful capacity shortages.
So when we look ahead to 2012, if we expect some growth in the economy, particularly in the main drivers of truckload freight such as housing and retail with unemployment moving down a little bit in the past couple of months, we think those trends should have favorable implications for truckload capacity dynamics. Tight truckload capacity should also have favorable implications for intermodal, which has had another year of strong growth, and we are seeing pricing momentum in the less than truckload space.
TWST: Who are your favorite names and why?
Mr. Fowler: As we mentioned, we feel good about truckload as we go into 2012 given the capacity dynamics that we are seeing. We're cognizant there probably will be some cost pressures, but we think they will be more than offset with rate increases. Specific truckload names we like include Werner Enterprises (WERN) and Knight Transportation (KNX). Werner operates one of the largest truckload fleets, so they have leverage to an improving pricing environment, but they also have company-specific initiatives focused on improving their cost profile, which we expect to drive some margin improvement this cycle. This is a good management team with a good balance sheet, which also supports our outlook on the stock. Knight's a name that is out of favor with the Street and an underperformer this year.
They have been impacted by some company-specific issues, including investments related to growth initiatives impacting margins, while the installation of electronic on-board recorders negatively impacted their utilization. Also, they have more exposure to the western United States, which wasn't the strongest market this year. We think if investors understand these issues going into 2012 - it's not anything structural with the company, they have easy comparisons as they anniversary some of these issues - we would expect to see the stock perform better especially as fundamentals improve. And I have to mention Old Dominion (ODFL) on the less than truckload side. They have consistently outperformed for the past several quarters and really demonstrate solid execution. Even though they've had a good run, we think there is more upside as industry fundamentals improve and as they gain share. So they are a best-in-class name, but hard not to mention when talking about top ideas.
TWST: Are there any names in the asset-light or the logistics space that you like as well?
Mr. Fowler: Our favorite asset-light idea is Landstar (LSTR). Landstar operates an owner-operator model, and approximately one-third of their revenue is flatbed. We think it's somewhat counterintuitive that flatbed, which is traditionally construction, both residential and nonresidential, as well as machinery type shipments and steel, would be strong. But that market probably experienced the greatest reduction in capacity during the last cycle. So we continue to hear that flatbed fundamentals have been particularly strong for most of this year, really reflecting the fact that a lot of capacity has exited that market. And with 30% of revenue concentrated in flatbed market, Landstar is one of our top asset-light ideas we like going into 2012.
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