The U.S. ISM Manufacturing PMI (Purchasing Manager Index) has been below 50 for almost two years now. Overproduction in the wake of COVID, high interest rates and an inventory destock have weighed on the manufacturing economy. But destocking can only continue for so long. The Fed has started to cut interest rates, leading to questions about when the manufacturing cycle may pick up again and, by extension, impacting transportation stocks. BofA Global Research’s proprietary Truckload Demand Survey has climbed back up to the average of the last three freight recessions, inventory levels are approaching historical balanced levels and excess truck capacity continues to exit the market. So it still may be a bit early to call a turn in manufacturing, but we note that other metrics watched by the Global Industrials Team suggest early signs of improvement. In our view, Transportation stocks are not pricing in a full recovery, and we’d expect to see upside to numbers as freight conditions improve.
Within Transports, truckload carriers and parcel shippers are most exposed to consumer shipments, but parcel shippers also get substantial revenues from business-to-business shipments. An uptick in manufacturing could help the group. The truck and rail subgroups certainly benefit from operating leverage, but truck and rail stocks aren’t inexpensive by historic standards as investors anticipate the freight rebound. Parcel carriers should see sizable volume leverage and potential multiple expansion as volumes return. Nevertheless, they do face other challenges, such as the scaling of low-cost shippers like Temu and SHEIN, which has hurt margins but aided volumes in the downturn. We’d like to see core business-to-business volume growth, led by a return to growth for small and medium-sized businesses, sustained pricing improvement (the carriers are launching general rate increases) and benefits from operating leverage to show the earnings potential before becoming more positive on the parcel group in total. Nevertheless, they remain one of the few large cap sectors that is trading below historical averages, which could provide additional leverage as volumes turn.
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