Transportation & Logistics
History doesn’t repeat, but it rhymes. Mark Twain just didn’t realize he was talking about freight equity cycles. While the Covid-19 recession was unlike anything I’ve seen in my five major freight cycles, there were important similarities. We saw meaningful capacity reduction across all spectrums of rail, cargo airline and truck, as well as a dramatic reduction in business inventories, lower interest rates, significant government stimulus, and green shoots that occurred as they should, setting the table for a multi-year runway of economic growth. Now almost two years removed from the onset of Covid-19, we are shifting from a recovery mindset toward that of economic expansion. Despite very strong demand, this cycle ‘rhymes’, but differs in that we continue to have a constrained ability to add labor or capacity, and supply chain challenges have created inflation for many freight modes, but have also allowed for margin expansion and the ability to price above inflation. While the near-term economic outlook continues to see many sectors within manufacturing constrained in their ability to increase production to meet demand and the pace of eventual recovery is still uncertain in the face of higher inflation and soon to be rising interest rates, many of our expansion trip-wires are firing the way they should be. Each downturn results in a change in behavior on the other side of recovery. In this cycle, we are looking at secular trends of (1) De-Urbanization; (2) near-shoring of supply chains; (3) ecommerce has advanced 2-3 years ahead of schedule, resulting in new consumption and logistics patterns that are spurring new industries; (4) De-carbonization is accelerating; (5) global trade is re-opening; and (6) most important in differentiating our thesis - we don’t believe capacity will come back as quickly as investors believe – and therefore, we will be looking at an extended freight profit cycle this time around that investors have been hesitant to accept. Our top picks are (1) UBER – a frontline beneficiary of a post-Covid normalization and on-demand delivery; (2) CMI– a global beneficiary of de-carbonization and a return in economic activity at the front end of a multi-year vehicle replacement cycle; and (3) XPO – based in part on a dislocation in valuation relative to its peer group and strong underlying fundamentals in the LTL group with a CEO focused on value creation.
- Cummins Inc. (CMI)
- Uber Technologies, Inc. (UBER)
- XPO Logistics, Inc. (XPO)
Jeffrey A. Kauffman