Pointing to intermodal share gains versus other modes and inventories in need of significant replenishment, Wells Fargo WFC equity research analyst Allison Poliniak-Cusic has raised her price targets on intermodal providers Hub Group HUBG and J.B. Hunt JBHT.
"Our findings suggest that intermodal continues to grow as a share of the U.S. freight market (approaching ~20% of U.S. Rail freight revenue), while inventory levels within the U.S. still remain notably below levels seen before COVID-19," Poliniak-Cusic stated in a report to clients Friday. "We believe such a backdrop should lead to continued volume growth, along with a scarcity of assets, which will also help pricing power continue to improve throughout 2021 and into 2022."
Poliniak-Cusic's price target moved 25% higher to $81 per share for Hub as she increased the company's earnings estimates by 12% in 2021 and 25% in 2022. She expects contractual repricing and operational improvements to "lead to large positive earnings leverage and revisions to the upside."
The price target for J.B. Hunt increased by 4% to $174 per share.
J.B. Hunt announced last week at an investor conference that severe winter storms will have a $15 million to $20 million negative impact on operating income in the first quarter. The bulk of the earnings impact was related to its intermodal division.
Both names are rated "overweight" by Wells Fargo.
Noting an unwinding of port congestion on the West Coast, an increase in manufacturing output in the Asia-Pacific region, a long runway for inventory restocking and easy year-over-year comparisons to 2020, the report said intermodal volumes are poised for strong growth.
It pointed to the inventory-to-sales ratio, which remains well below its five-year average, as an indicator for continued strength in demand. The ratio for retailers remained near all-time lows at 1.28x in December, according to Census Bureau data. While up from the June low of 1.22x, it was still well below pre-pandemic levels of approximately 1.45x.
Additionally, a surge in e-commerce has prompted the need for more inventory. E-commerce fulfillment requires more inventory as products are forward deployed in warehouses that are closer to the consumer. That likely means inventories will be restocked to levels higher than in the past.
Rising diesel prices and elevated trucking costs have moved the cost-savings spread between intermodal and truck higher.
Chart: (SONAR: IMCSIF.USA) The intermodal contract savings index shows the percent savings of shipping via intermodal versus dry van truckload contract rates on identical origin-destination pairs.
"We continue to see encouraging intermodal volumes from the rails on the weekly carload update as they show sequential improvement every week for some time now," Poliniak-Cusic added. "We see this trend and intermodal as being one of the main drivers of a sustained freight recovery, and considering the tight trucking environment, both pricing and volumes should post significant upside as Q1 21 finishes off, continuing throughout peak season."
The National Retail Federation announced Monday that twenty-foot equivalent units handled at the major U.S. container ports it tracks increased 13% year-over-year in January, the busiest January in the dataset's almost 20-year history. The group is now forecasting container imports to increase 23.3% year-over-year in the first half of 2021. The comparisons to 2020 are favorable through the spring given the traffic declines recorded during the first couple of months of the pandemic.
Total intermodal traffic as reported by the Class I railroads was up 11% year-over-year during the fourth quarter. While the rate of growth has slowed so far in the first quarter (+7%), rail network outages due to the storms was likely the only detractor. Intermodal traffic was back above 11% in the most recent week.
Chart: (SONAR: ORAILDOML.USA) The blue area shows 2021 domestic loaded container volumes originated from points inside the U.S. The purple line shows the same data series for 2020.
While service headwinds on the railroads and a lack of container capacity plagued the mode throughout 2020, Poliniak-Cusic believes years of investment in precision scheduled railroading initiatives as well as other capital projects like new inland and near-dock intermodal terminals will begin to pay off for the mode moving forward.
The report also called out favorable intermodal-related catalysts for railroad Kansas City Southern KSU, noting its exposure to cross-border traffic and Mexican auto production. KSU's intermodal franchise is expected to be a key driver for revenue and profit over the next three to five years once near-term trade issues subside.
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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