How To Analyze The Transportation Industry

By Ryan C. Fuhrmann AAA

The transportation sector refers to the general category of stocks relating to the transportation of goods or customers. The transportation sector is vast and comprises a wide range of individual industries, including major and regional airlines (also known collectively as air services), railroads, shipping firms, ocean freight haulers, trucking and firms more indirectly related to transportation such as supply chain management firms and other logistics providers.

Transportation Industry Overview

In aggregate, the value added by the transportation industry as a percentage of U.S. GDP was 3% as of 2012. This average has been steady since approximately 1998. As you might imagine, the sector is economically sensitive and driven primarily by overall economic trends in the U.S. and world. When consumers and businesses spend less, the transportation industry suffers. Conversely, transportation firms see increases in activity when the economy is improving or in full swing at the business cycle's peak.

The Key Players

Each industry in the transportation sector contains a few key, dominant players. The Dow Jones Transportation Index is a leading sector index that contains 20 “blue chips” or dominant, bellwether firms, which are listed below:

Ticker Company
NYSE:ALK Alaska Air Group
Nasdaq:CHRW C.H. Robinson Worldwide
NYSE:CSX CSX Corp.
NYSE:CNW Con-way
NYSE:DAL Delta Air Lines
Nasdaq:EXPD Expeditors International of Washington
NYSE:FDX FedEx
NYSE:GMT GATX
Nasdaq:JBHT J.B. Hunt Transport Services
Nasdaq:JBLU JetBlue Airways
NYSE:KSU Kansas City Southern
NYSE:KEX Kirby
Nasdaq:LSTR Landstar System
NYSE:MATX Matson
NYSE:NSC Norfolk Southern
NYSE:R Ryder System
NYSE:LUV Southwest Airlines
NYSE:UNP Union Pacific
NYSE:UAL United Continental Holdings
NYSE:UPS United Parcel Service

Additionally, the S&P Transportation Select Industry index provides information about the sector. The average market capitalization for the 42 key players in the index is $9 billion and ranges from $400 million to $82 billion. This indicates the sector is diverse overall, though the top players in the Dow Jones Transportation Index exert outsized influence on total sector trends.

S&P TRANSPORTATION SELECT INDUSTRY INDEX
Number of Constituents 42
Inception Date June 18, 2006
CONSTITUENT TOTAL MARKET CAP [US$ MILLIONS]
Maximum Market Cap
81,926.05
Minimum Market Cap
423.22
Mean Market Cap
8,861.79
Median Market Cap
2,543.45

 

Important Industry Data

The most important data in the transportation industry helps investors gain insight into the movement of goods across the globe. For instance waterway tonnage, as tracked by the U.S. Army Corps of Engineers Navigation Data Center, indicates the monthly tonnage volume of goods traveling across the ocean and other major bodies of water, including the Great Lakes region. Sources such as the Association of American Railroads (AAR) Weekly Rail Traffic Summary provide statistics on the percent change in monthly rail carloads and intermodal units. A review of September 2013 railroad statistics details a 14.4% jump in the transport of petroleum and petroleum products - confirming the increased popularity of hydraulic fracturing, or fracking across the United States.

In similar fashion, truck tonnage indices provided by the American Trucking Association let investors and analysts track activity across the nation’s highways. The sale of U.S. No. 2 diesel prices is another way to track the trucking of goods, though in a more indirect manner because of the need to extrapolate fuel usage into actual goods shipments. But overall, increased trucking bodes well for trucking firms and the economy in general. The Institute for Supply Management (ISM) provides manufacturing details and reported in October 2013 that supplier deliveries grew a very modest 0.2%, but the pace of deliveries is slowing and has been doing so for a couple of months straight.

Factors Analysts and Investors Need to Know

Michael Porter’s five competitive forces model is a great way to analyze any industry. Applying it to a specific segment of the transportation industry, the airline space, easily demonstrates why it is such a difficult business to compete in. Suppliers' bargaining power is immense because two firms, Boeing (NYSE:BA) and Airbus, provide the bulk of large aircraft to the world’s major airlines. Planning costs can easily run into the tens of millions of dollars and make switching costs quite high. Rivalry among existing players is very intense, because airline travel is basically a commodity where rivals compete primarily on price. The threat of substitutes is also high and consists of any type of travel, though this is less of a concern for long-haul flights where there are really no substitutes to the speed and convenience of traveling by airplane. The only real positive from a competitive perspective is the limited bargaining power of the millions of individual flyers that have little collective ability to demand improved airline service and on-time flights.

It is also important for investors and analysts to track industry trends. For instance, at one point airlines that traveled to and from Taiwan faced a shortage of airport slots at mainland Chinese cities, which indicated that economic activity between the two countries remained robust and indicated an investment opportunity to an astute investor. Also in the airline space, mergers among large players have historically come across opposition from antitrust regulators who fear that individuals will be exposed to higher prices and worse service with too much consolidation (and supplier power) in the airline industry. And when firms in the automotive space have their investment grades lifted by credit rating firms, this generally indicates strength in the domestic and global automotive industry.

A Brief Example

Returning briefly to the airline industry, on Sept. 9, 2013, United Airlines reported that its revenue per passenger mile, or key determinant of flying traffic, decreased 0.5% while consolidated capacity, a measure of available seat miles, fell 1.4% in August. The data confirmed that overall economic activity remained tepid as the global economy tried to shake off the recession caused by the credit crisis. In a presentation to investors around the same time, United Airlines detailed that the industry is transforming in the midst of anemic GDP growth, which is being driven by less fragmentation (more consolidation), capacity discipline that is helping maintain seat pricing, and the addition of new revenue streams such as charging for checking bags or obtaining more comfortable seats. Firms that operate international flights also have an advantage because these are highly profitable and coveted routes. Yet despite the strong industry trends, airlines are still highly dependent on economic growth, making analyzing leading indicators and other business activity, such as across other transportation firms, an important part of the overall analysis.

The Bottom Line

The transportation sector consists primarily of transporting goods across the global economic supply chain. A secondary service consists of transporting individuals around the world through airlines, railroads, boats, cars and any other transportation mode. The Dow Jones Transportation Index is a great way to gain insight into the dominant industry players that compete in every main industry within the transportation sector. By gaining an awareness of the bellwether firms and trends that affect these players, investors and analysts can gain an edge by analyzing the sector and looking to profit from understanding it.

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