While many analysts are divided over whether the freight rebound that began in 2009 will continue as a linear expansion or fizzle out during 2010, Stifel Nicolaus Analyst John Larkin is placing his bets on the latter.
“Our view is that there are a number of one-time items that are making things a little bit better than they otherwise would be. Those items include stimulus programs, such as Cash for Clunkers; the $8,000 first-time homebuyer credit; the discount rate being close to zero; all of the liquidity that the Fed has pumped into the marketplace; the $800 billion stimulus program, etc.; all of which propped the economy up,” said Larkin, noting that while transport stocks are performing better, volumes are still 10%-15% below their peak.
“As we get out into the second half of 2010, and as we withdraw some of the stimulus – and as people begin to realize that the unemployment rate is still hovering in close to 10%, and begin to realize that there are tax increases embedded in the health care reform law, and begin to realize that the Bush tax cuts are about to expire – it’s not clear to me that we’re going to have a straight shot up economically,” he added.
Larkin favors railroad players CSX (CSX) and Norfolk Southern (NSC), as well asset-light, logistics companies Landstar (LSTR), C.H. Robinson (CHRW) and Forward Air (FWRD), although he finds it difficult to justify a “buy” rating on the last three.
“There is a difference between companies we like as companies, and companies that we think are undervalued, because we like virtually all the companies in the space. Unfortunately, the sell side has been so promotional of how wonderful everything is going to be going forward that these stocks are at pretty high valuations,” he said. “We would like to recommend them, but at these prices we are going to try and wait for a better entry point.”
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