Deutsche Bank Transport Outlook: Top Picks For 2012 To Navigate Market Volatility

Deutsche Bank on Airfreight and Surface Transportation: Key Thoughts And Assumptions As We Begin 2012

Deutsche analyst says, "Relative Strength In U.S. Domestic Growth: A Positive For Transportation Stocks: A theme we consistently heard from investors at the end of 2011 is the desire to own U.S.-domestic exposure. Most transports fit this bill well, and we believe companies with primarily U.S.-based exposure will benefit from sector rotation given a challenging environment in Europe and concerns over a potential slowing in Asia. While our coverage universe is predominantly U.S.- based, transportation companies have some exposure to international macroeconomic trends as international airfreight shipments (FedEx (NYSE: FDX) and UPS (NYSE: UPS)) and U.S. export coal demand (primarily CSX Corp (NYSE: CSX) and Norfolk Southern (NYSE: NSC)) will gyrate with global demand. With generally minimal international exposure, we believe sector rotation will favor transportation companies with secular growth stories. Our favorite “Buy Domestic” stocks are: J.B. Hunt (Nasdaq: JBHT), Union Pacific (NYSE: UNP), and UPS. We believe JBHT offers significant exposure to secular intermodal growth and on-highway freight conversions while UNP gives investors leverage to continued improvement in rail pricing without coal risks. While UPS has material international exposure (Europe represents an estimated 14% of total package revenue) with an asset-intensive air and ground small package network throughout Europe and Asia, we believe market share gains are insulating the company from material international weakness. We note that UPS’ European small package average daily volume was up 4.0% y/y in Q3 2011 despite broad European weakness. Moreover, UPS is poised to benefit from an effective duopoly in the U.S. Domestic Small Package marketplace as both it and FDX have benefited from a very solid pricing environment since DHL’s exit during the recent downturn that should drive strong U.S. domestic margin expansion over the next several years."

"Pairing Of Securities Is Likely An Attractive Strategy Given Expected Volatility: We believe the pairing of securities that have been highly correlated will provide an attractive opportunity for investors given ongoing volatility. We see Hold-rated Knight Transp (NYSE: KNX) and Heartland Express (Nasdaq: HTLD), Buy-rated Old Dominion (Nasdaq: ODFL) and Hold-rated CNW, and Hold-rated LSTR and CH Robinson (Nasdaq: CHRW) as well as Buy-rated UNP against either Buy-rated CSX or Hold-rated NSC as good examples. While the rails are all exposed to broader manufacturing and retail trends, we believe UNP is best positioned for 2012 given the expected tailwind from legacy pricing, easier network performance comparisons, as well as the fact that it has no material export coal exposure like Buy-rated CSX and Hold-rated NSC. Export coal could prove to be a headwind in 2012. Within our trucking coverage we prefer Hold-rated KNX to Hold-rated HTLD given valuation and more challenging gains on sales of used equipment for HTLD. We also prefer Buy-rated ODFL to Hold-rated CNW given ODFL’s stronger performance, more disciplined pricing strategy, and greater growth potential. Within our logistics universe, we see Hold-rated Landstar (Nasdaq: LSTR) as better positioned than Hold-rated CHRW near-term given strong demand for flatbed and a relatively balanced supply/demand for dry van freight in Q4 and expected cost inflation for CHRW."

NOTE - The full report included the downgrades of Con-way (NYSE: CNW) and Landstar (Nasdaq: LSTR) from Buy to Hold. The firm sees a more balanced risk/reward equation at current levels.

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