In Raising The Outlook On Three Stocks, Cowen Declares: Freight Market Isn't Dead

A less-than-truckload (LTL) company, a truckload carrier and an intermodal provider were all singled out for stock upgrades Wednesday by Cowen & Co. in a report bluntly titled "The death of freight has been greatly exaggerated."

ArcBest ARCB , Covenant Transportation CVTI and Hub Group HUBG  all had their stock ratings upgraded to "outperform" by Cowen & Co. And while the valuations of the companies relative to broader markets were a key factor in the upgrades, the transportation team at Stifel led by Jason Sidel made clear that the pessimism surrounding the current freight market has been overdone.

At the root of Cowen's more optimistic view is that any freight benchmark in 2019 is going to look worse than its corresponding number in 2018. Implicit in that message is that equity markets are reflecting that rather than underlying strength.

As Cowen notes, public company management has been warning investors since late last year that numbers in 2019 were not going to compare well to any earnings or other freight data from 2018. The Cowen report quotes management statements from recent earnings calls, such as Landstar LSTR management saying "year-over-year comparisons will remain difficult at least through the first nine months of 2019, given the outstanding performance of 2018 and the softening freight environment that began in late 2018."

But Cowen's recommendation is that a lot of the comparisons should be viewed as not indicative of the underlying market. "Looking at the 2019 data compared to larger stretches of time puts the 2018 data into perspective as unique outliers, and shows that the 2019 data isn't nearly as bad as people are making it out to be," the report said.

The Cowen report cites its own Chainalytics-Cowen Freight Indices and notes that spot rates, while down from last year, are up 5 percent compared to a 2017 baseline. "Similarly, contract rates, while only up 3.1 percent year-over-year compared to 21.3 percent in mid-2018, are still up close to 20 percent when indexed to January 2017, highlighting that things aren't as bad as the simply year-over-year figures would indicate," the report said. Demand trends, the Cowen report said, are above or close to the five-year trend.

(FreightWaves' Outbound Tender Volume Index, a reflection of the demand for trucking, has recently shown some softness but rebounded in the last few days.)

The usual freight demand villains of the Chinese trade war and a tough winter/spring are cited as fleeting causes of current weakness. Produce season has been delayed by bad weather; it also means that "one can understand why the market for charcoal for barbecues or gardening supplies hasn't been as robust as usual."

The end result of these observations is that both ArcBest and Covenant were raised by Cowen to Outperform from Market Perform. Both had been reduced to Market Perform by Cowen about one and one-half years ago. And, Cowen notes, they have underperformed an S&P 500 that's up about 12 percent since then.

LTL carrier ArcBest's stock, at about $27.70 Wednesday near 2:00 p.m., is just slightly above its 52-week low. Its 52-week high is $52.45. Just in the last month, according to Barchart, it's down about 5.1 percent.

But Cowen was complimentary of ArcBest's strategy, citing more business in managed transportation and "other asset-light offerings," which should help get it an expanded multiple. "We are impressed with management's ability to cross-sell among their traditional LTL product and some of these newer offerings," the report said. But the stock's price/earnings ratio is about 8, and that is near ArcBest's three-year and five-year lows. Cowen assumes the multiple will get to 11X and has projected earnings per share of $3.60 for the year. The end result – a price target of $40.

As far as truckload carrier Covenant, it also has a P/E about 8 and that's significantly below a three-year and five-year average PE of 15X to 16X, Cowen said. "We are increasingly positive on the company's non-trucking businesses including brokerage and warehousing," Cowen said.

Covenant was the one significant trucking company that gave an earnings warning for the first quarter. But Cowen said it sees stronger "trends" at Covenant for March, April and the second quarter to date.

As for Hub Group, it is a beneficiary of efficiency gains posted by Class 1 railroads, according to Cowen. "As rail services continue to improve, in part driven by (precision railroading) initiatives at their two major rail partners, HUBG stands to benefit," the report said. It repeated what the company's management has told investors – each day of improvement in rail service saves HUBG $10 million.

And it isn't getting hit by a decline in trucking rates…yet. "We note that while a continuing decline in trucking prices does ultimately mean that more intermodal freight will move back to the highway, HUBG won't necessarily lose this business, as their truck brokerage, logistics and dedicated operations comprised 43 percent of 1Q19 revenue," the report said. Cowen also said that while HUBG's financial performance this year is better than last year's – unlike Covenant and ArcBest – its valuation near 11X revenue is still well below its normal three-year and five-year average of about 18.

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