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Wolfe Research offered a broad review of transport stocks in a note to clients on Tuesday, including a number of upgrades and downgrades amid macroeconomic uncertainty.
The firm explained that as a recession is more than likely, it must be factored into forecasts.
“Transport stocks historically start outperforming at the onset of a recession,” the note explained. “So while we see clear EPS risk ahead, we’d expect multiples to start rising as estimates reset lower…So, risk/reward is starting to look a little more positive to us.”
Additionally, ahead of the busy second quarter earnings season, expectations must be reassessed not only for individual stocks, but overall sectors. To this end, rail stocks were viewed most bullishly.
“We think Rails are best positioned to grow earnings next year in a mild recession with continued pricing power and easy cost comps, so we retain our Market Overweight rating on the sector,” the note explained. “But as we shift to our recession playbook, we’re upgrading our sector rating on Trucking from Market Underweight to Market Weight, and lowering our sector rating on Airfreight & Logistics from Market Weight to Market Underweight.”
Ahead of a slate of anticipated earnings reports, the firm indicated it remains optimistic on earnings day performance across the space. In all, 19 beats are anticipated against 4 misses and 4 in-line reports across the coming earnings reports.
Wolfe was most confident in anticipating earnings day beats from Expeditors International of Washington (NASDAQ:EXPD), Covenant Logistics (CVLG), C.H. Robinson (NASDAQ:CHRW), ArcBest Corp. (ARCB), TFI International (TFII) and Canadian Pacific Railway (CP). However, misses are expected from CSX Corp. (CSX), Union Pacific (UNP), and Landstar System (LSTR).
Yet, C.H. Robinson was downgraded despite the expectation of strong earnings. The note explained that a move to a Hold-equivalent rating was made due to the expectation that the second quarter will be the peak for net sales at the logistics company.
Similarly, United Parcel Service (NYSE:UPS), Expeditors (EXPD), and Old Dominion Freight Line (ODFL) were all downgraded to a Sell-equivalent rating based upon “a mix of earnings and valuation risk.” By contrast, Knight-Swift Transportation Holdings (NYSE:KNX) was upgraded to a Hold-equivalent based upon a better risk/reward proposition.
Read more on Evercore’s upgrade of Knight Swift offered on Tuesday as well.
