Supply chain crunch: Transport stocks have ‘had an incredible stretch,’ analyst says

Ken Hoexter, BofA Securities Managing Director in the U.S. Equity Research team covering Airfreight & Surface Transportation and Shipping, joins Yahoo Finance Live to discuss the supply chain outlook for 2022, freight shipping, and the rise in trucking labor.

Video Transcript


- Welcome-- welcome back. We want to get a quick check of the market here because it's a tale of haves and have-nots. So on the WIFI Interactive, I'm looking at the Dow up nearly 1%, 329 points-- as you can see on your screen-- at session highs, but look at the NASDAQ. The NASDAQ down 1.2%, extending its losses-- you can see- at its session lows right now.

But one sector that is green today is the transports and, in fact, they've been on fire for about the last year. A number of these stocks hit record highs within the last 30 minutes. That would be Union Pacific, JB Hunt, C.H. Robinson. And just taking a look at a one year view of these stocks, you can really see the outsized performance and we want to discuss that with our next guest. That is Ken Hoexter, senior transportation analyst at Bank of America Global Research. And thank you for joining us today, Ken. Just, your reaction to the general strength that we've been seeing in the transports over the last year.

KEN HOEXTER: Well, look. I mean, we certainly heard a lot about what's going on in supply chain over the past year-- the disarray of the entire supply chain, the backlogs at the West Coast ports, to blockage in the Suez Canal, to the shortage of truck drivers, labor, rising inflation rates and so that drove the transport stocks up over 40% last year so topping the S&P 500 as a group. The trucks we had ranged between truckload and less than truckload. You mentioned C. H. Robinson and some of the forwarders, intermodal companies up over anywhere from 40% to 113% so a great performance by those companies.

In contrast, the railroads that you mentioned, a couple of hitting some new highs today. The railroads actually were up, but underperformed the S&P for only the second time in the past 22 years. So they've had an incredible stretch, but just slightly underperformed. But the transport as a group really did very well. Again, given the demands, given the ability to really raise pricing so we saw that flow through and outweigh the increase in costs and labor costs.

JULIE HYMAN: Hey, Ken. It's Julie, here. Speaking about costs and speaking about pricing, I know you guys have various rate indicators that you watch and it seems like those rates are, sort, of steadying to some extent, at least on the charts in your most recent note. So what does that tell us about how 2022 is going to go? Not just-- I'm curious about what it means for these companies, but also, what it implies about shipping more broadly.

KEN HOEXTER: Yeah. Great. And I forgot to say, good morning and Happy New Year to everybody. Thank you for having me on.

Julie, great question. I mean, when think about what's going on in our survey, our survey-- we survey over about 1,500 trucks shippers every two weeks and the demand indicator, which measures the shippers' view of demand in the market, has cooled off a bit. It's come down into the upper 60s, down from its all-time peak of 78 a couple of months ago. But it tells us that we're still elevated, we're still above the long-term historical average, but it definitely has come off of those peaks.

So things are starting to loosen up a little bit. They're not as tight. We're seeing that on the capacity indicator, which suggests that the shippers are seeing a little bit more capacity availability. We're seeing that on the pricing. As you mentioned, pricing is coming off of its all-time highs and is coming down a little bit, but again, it's still very, very elevated historically.

So as we're looking at the 2022, we're seeing right now, shipping rates from Asia into the US on the vessels at near all-time highs, although, again, it's come off as peak shipping season has wrapped up now. We're seeing trucking rates that are going to be negotiated somewhere between March and May historically. They're likely to be up at least double-digits into 22. We've seen the LTL carriers pull forward their general rate increases. Those are coming in at high levels, about 5.9%, year over year.

So you're seeing the trend of the tight market continue because, as I mentioned, we're still at highs even though we've rolled off the peaks, but we're still likely to see that pricing levels continue to flow through as we reprice into '22 contracts.

- And Ken, I'm looking at one of your charts here. It's exhibit 11-- correlation between the Bank of America truck indicator and the ISM Index and we got the latest ISM manufacturing print a little bit ago. 58.7-- a little bit of a disappointment there-- but what I'm interested in is there any kind of leading indicator here? What is your data telling you about where manufacturing prices are going?

KEN HOEXTER: Well, the demand indicator would have absolutely explained that 58 dip because we've seen-- as I mentioned-- our survey go from a peak of 78 all the way down to 66, more than 12 points down. That would absolutely suggest that the ISM demand views of those shippers is coming off of their peaks and so that was fully expected, I think, based on our surveys over the last couple of weeks leading right into November and December. So that fully answers, kind of, the shippers' view has softened a little bit as we move forward.

I think when we look at the tightness of the supply chain and what happened in '21 with the extreme disarray in the supply chain, the one thing you want to worry about is the demand as we go through '22. So Julie asked before about pricing. I think pricing will remain strong. The one unknown part of this is what's going to happen with demand. As I mentioned, demand has certainly come off its peaks and it's come down a little bit, but it is still elevated relative to historical levels.

So as long as we see that demand hold up, then we're going to be OK as we move through '22. If we start to see that demand indicator maybe fall into the 50s or even lower, then obviously, we would reassess truly, in terms of the state of the supply chain, but right now, we're still seeing-- like I said-- an elevated level of that demand and that should carry through and at least the pricing, we know is going to be pretty solid for the transport carriers into '22 given the tightness that we're seeing in the market.

JULIE HYMAN: So it sounds like the picture you're painting, Ken, is maybe a very gradual return to normalization, but still a relatively robust environment. So if that's the case, who's going to be poised to outperform this year or is it a case where you're going to get a, sort of, broad outperformance or do you think there are going to be real winners and losers?

KEN HOEXTER: Well, given the transport market is still so tight, I think what we've, kind of, highlighted through the survey, through our weeklies is that the demand is coming off of that peak level, but is still elevated so we should still see a tight supply chain. We are going to see a return to normalization. We could see some of the stocks that the truckers have moved to historically low multiples in anticipation of that pricing rolling over. They did that about a year, a year and a half ago. So the truckers are poised to continue that outperformance as long as this pricing remains as strong as it is. That carries through from truckers like Knight-Swift, to JB Hunt, to Schneider, to some of the less than truckload carriers that we throw out there.

And then over to the railroads. I mentioned, they underperformed last year. We should see the return of interest there as if their volumes are able to flip from negative carloads that we saw through most of the back half-- that was a little surprising as we saw some of the commodities dip down. If we see a return of some of that, we should see some of the railroads. As was mentioned earlier, they're hitting some new highs. Right now, we continue to see that strength given the relative underperformance last year.

- Yeah. And worth reiterating here that a number of the names that we've been talking about, like JB Hunt and Union Pacific, had been hitting fresh, fresh record highs as we've been talking here. Great to talk to you. Look forward to having you back here and sharing your thoughts. Ken Hoexter, senior transportation analyst at Bank of America Global Research.

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