Deutsche Bank 2012-13 Economic Outlook: More Aggressive Basket: FDX, SWFT, And CSX

Deutsche Bank 2012-13 Economic Outlook

U.S. Exposure Preferred To European In 2012; No Hard Landing Expected In China

Deutsche analyst said, "DB sees a divergence between the growth rates of U.S. and developed global economies. While Global GDP (up 3.2% y/y in 2012E) is expected to exceed U.S. GDP (up 2.5% y/y), the outperformance is driven by emerging markets (up 5.7% y/y in 2012E). Deutsche bank currently anticipates Euroland GDP growth to decline 0.5% in 2012E. While there remains some risk that the issues in Europe will result in contagion, we believe U.S. growth will continue to improve steadily given low inventory levels and a bottoming housing market, in addition to potential tailwinds from a possible reacceleration of growth in China in the latter half of 2012E. Deutsche Bank’s forecast for Chinese GDP growth in 2012E stands at 8.3%, despite the expectation for slower growth in Q1 2012E (6.4% q/q [saar]). However, growth is anticipated to reaccelerate in H2 2012E, with q/q (saar) GDP growth rates of 10.0% and 9.7%, in Q3 and Q4 2012, respectively. The pick-up in growth is expected to occur as Chinese property valuations stabilize, monetary easing takes effect, and exports to Europe return to above recessionary levels. Domestically, Deutsche anticipates U.S. housing starts will increase to approximately 700k in 2012E, from its current estimate of 620k in 2011E (December housing starts not yet available), leading to the strengthening of construction related raw materials across transportation networks. We view a material pick-up in housing as one of the most potentially meaningful catalysts for our sector as a whole. Further, retail sales figures are anticipated to continue to show strength in 2012 after a resilient 2011 when consumers continued to exercise pent up demand despite an uncertain economic environment. We believe that freight carriers are poised to take advantage of recent strength in consumer confidence and lower initial jobless claims at the end of 2011. Figure 4 below looks at DB’s key economic forecasts for 2011-13E."

Transportation Sector Outlook: FDX, SWFT, and CSX are the stocks most likely to outperform into a strengthening economy

"For investors with a more upbeat outlook, we believe Buy-rated FedEx (NYSE: FDX), Swift Transportation (Nasdaq: SWFT), and CSX Corp (NYSE: CSX) will outperform in an economy that exhibits consistent solid growth. These are the more market levered companies as they have operational and/or financial leverage. FDX has significantly higher operating leverage (every 100bps change in margin adds over $15 to our price target versus $7 for UPS) as Air Express makes up a greater portion of its revenue. SWFT is the only pure-play truckload company with significant financial leverage that we cover, and its large fleet means small changes in TL rate (revenue/loaded mile, net of fuel) produce meaningful earnings growth and/or profit reductions. CSX has considerably more market leverage than many of its other rail competitors as export coal makes up a larger percentage of its revenue which is more economically sensitive."

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