There’s Still an Opportunity in Shipping Stocks
The transports industry has endured a rollercoaster ride in recent years. After experiencing a stock rally during the Covid boom, the sector faced a freight recession, overcapacity in shipping and trucking, and various challenges related to global trade movements. Despite these headwinds, a sector rebound is now underway in a strong economy. This presents an opportunity for investors to consider the long game with transport companies.
The Dow Jones Transportation Average has remained flat this year but has gained 7.6% in the past 12 months. According to a report from consulting firm AlixPartners, investors should focus on transport companies that have proven their resilience. While some companies may struggle during this time, those with sufficient cash reserves can weather the storm and potentially come out stronger. The ability to adapt and the availability of cash provide a strategic advantage in a cyclical industry like freight.
The freight industry faced its fair share of challenges in 2023, including layoffs and bankruptcies. Companies like Yellow and startups such as Convoy and Flexport encountered significant hurdles. This underscores the importance of evaluating companies that possess real assets with tangible value. While technology certainly helps logistics managers make informed decisions, it also comes with fixed costs that can be burdensome.
The report emphasizes the need for third-party logistics providers and freight forwarders to establish closer ties with ocean carriers. Building partnerships and strategic agreements will be crucial for maintaining profitability and building resiliency. Short-term rate volatility can work in the favor of subsectors that thrive on uncertainty, such as brokers.
The pandemic led to an increase in ocean carrier reserves due to soaring rates and substantial freight volume. Ocean carriers can utilize this excess cash to acquire companies at lower valuations, taking advantage of poor balance sheet management among competitors. Maersk, a major shipping company, has provided cautious outlooks to investors. However, the shipping disruptions in the Red Sea act as a tailwind for the sector, compensating for increased bunker fuel costs.
The duration of these disruptions and the surcharges that ocean carriers can apply remain uncertain. Nevertheless, this situation presents an opportunity for carriers to recover incremental costs and potentially boost profits. Although ocean freight rates have been declining since the peak caused by Red Sea issues, there is always a need for shippers to have a backup plan to de-risk their operations and mitigate the impact of higher rates.
Moving freight back to the West Coast could be a viable alternative. Despite the East Coast and Gulf of Mexico ports gaining market share during the labor strife and port congestion, the West Coast is expected to receive a higher volume of trade. Investments in infrastructure have strengthened the West Coast ports, and freight rates are generally lower compared to the East Coast.
Overall, both short-term rewards and long-term value plays exist for equity investors in the shipping sector. Fixed-income investors may find distressed debt opportunities, while financial investors and strategic acquirers have ample opportunities in the current market. However, it’s important to consider the uncertain macroeconomic outlook and global geopolitical tensions as potential risks.
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