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Which Transport Market Is Best?

Added on by Lee Ho Fook.
forward air.jpg

Be sure to check out our detailed stock analysis (click here). Forward Air  (NASDAQ: FWRD) is a little-known transport company for air-freight forwarders and air-cargo carriers. The stock is in the small-cap space and appears to be offering investors a solid investment opportunity. 

The reason Forward Air looks intriguing? First, it has a solid balance sheet. The company has a current ratio of over 6, and over $3.70 in cash per share. Its net current asset asset value per share is $5.00, meaning its current assets well outpace its total liabilities. 

The valuation is also compelling. Forward has a 15% return on equity and is trading with a P/E of around 20 times. Compare this to the industry average of 40 times P/E and Forward's five-year average of 30 times, and the stock is cheap on a relative and historical basis. 

What's more, revenue is expected to be up 10% in 2013 and another 11% in 2014. The company is a major provider of transportation and logistics services in North America. Its keys businesses involve time-definite surface transportation and air freight. Going forward, its airport-to-airport segment is expected to be one of the biggest growth drivers. 

Despite a decline in EPS during 2Q, year-over-year, from $0.48 in 2Q 2012 to $0.45 in 2Q 2013, the company did manage to see increasing volumes. It also expects revenue in 3Q to be up at least 10% year-over-year. 

Ground transportation

One of the other big benefactors of the rebounding economy should be the ground transporters. Con-way (NYSE: CNW) provides transportation, logistics and supply-chain management services. The company expects to improve capacity utilization to lead to a more profitable mix of businesses. This includes shutting down various under-performing businesses. 

Earlier this month, Con-way posted 2Q EPS of $0.67, compared to $0.66 for the same period last year, beating consensus forecasts of $0.59. This came on the back of lower transportation costs. It appears that the restructuring initiatives the company  implemented a few years back are taking hold.

Con-way has managed to lower its debt from $980 million at the end of 2009 to $760 million as of the end of 2Q, all the while maintaining a solid cash position -- over $400 million in cash as of the end of June. 

The company hopes to start returning that cash to shareholders in the near future. Over the past 20 quarters, it has paid a steady $0.10 dividend, and it's due for an increase. The current dividend payout is less than 25% of earnings. 

Market leader

J.B. Hunt Transport Services (NASDAQ: JBHT) is another major cargo transporter, providing truckload, intermodal, and contract-carriage services to customers across a diverse set of industries. J.B. has a fleet of some 9,160 tractors, and contracts with over 1,700 owner operators. 

Revenue is expected to grow by 10% in 2013 as the company sees strength in its intermodal segment. Intermodal involves container transports, the ones you also see on ships and trains that can transport a variety of items. The company used to be a pure truckload operator, which is a mature and competitive market, but this segment accounted for only 10% of 2012 revenue. 

One of the big initiatives of J.B. is to develop its dedicated contract services, which will focus on that "final mile" part of the delivery. This segment tends to be high margin and involves making the actual deliveries to customers. It currently only operates in 2% of the total final-mile market. J.B. does have a solid history of paying dividends, but its yield is still only 0.8%. 

Bottom line

The domestic shipping market is likely to grow with the economy, especially the air-logistics operators. Why? Many customers have traded down to cheaper delivery methods, but as the broader economy grows so too should the air-shipping market. What's more is that another driver of the growth in air-logistics companies should be increasing demand in developing economies; in this case, ground- transport companies are less effective with intercontinental transport. 

Forward pays a modest 1% dividend yield with around 10% of its current market cap covered by cash on the balance sheet. Although the stock trades at a P/E ratio in excess of 20 times, it's still well below major peers:

All in all, Forward appears to be a solid bet on the air-transportation industry. The ground-transport industry appears to be flooded with various niche operators that include J.B. Hunt, Con-Way, Ryder and Old Dominion, while Forward appears to be in a league of its own.