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The Zacks Transportation - Air Freight and Cargo industry has been grappling with persistent supply-chain disruptions, a challenging macroeconomic environment characterized by inflation-induced high interest rates, a weaker-than-expected demand environment, and the consequent weakness in package volumes.

Despite the above-mentioned challenges, we believe that the space still has fuel left in the tank, especially for operators targeting growth opportunities and operating efficiency initiatives. Cost-cut efforts to drive the bottom line are commendable as well.

Companies like United Parcel Service (UPS - Free Report), GXO Logistics (GXO - Free Report), and Air Transport Services Group (ATSG - Free Report) have been leveraging these trends to their advantage.

About the Industry

The companies belonging to the Zacks Transportation - Air Freight and Cargo industry provide air delivery and freight services. Most players in the space are involved in offering specialized transportation and logistics services.

Some participants offer a range of supply-chain solutions, such as freight forwarding, customs brokerage, fulfillment, returns, financial transactions, and repairs. The well-being of the companies in this industrial cohort is directly proportional to the health of the economy.

Leading industry players, including FedEx, transport millions of packages each day across the globe. Apart from operating a ground fleet of multiple vehicles, some companies maintain an air fleet. While some players focus on providing air transportation services for passengers and cargo, others deliver services to entities that outsource air cargo lifting requirements.

3 Key Trends to Watch in the Transportation-Air Freight & Cargo Industry

Economic Uncertainty Prevails: Despite signs of cooling inflation, we are not out of the woods. Increased inflation readings for October and September have resulted in a return of volatility to the U.S. equity markets.

With inflation acting as a foe, risks associated with an economic slowdown and geopolitical tensions may dampen the prospects of stocks belonging to this industrial cohort. Sluggish economic growth and inflationary woes are likely to hurt consumer spending. These do not bode well for industry participants.

Demand Slowdown Acts as Grave Concern: Due to the decline in shipping demand, particularly in Asia and Europe, volumes are being hurt. Lackluster volumes are hurting the results of key industry players like UPS. United Parcel Service trimmed its full-year 2024 revenue view last month to $91.1 billion from the $93 billion mentioned earlier.

The trimmed revenue forecast highlights that UPS does not expect shipping activities to be buoyant in the final quarter of 2024 due to the slowdown in online sales in the United States, apart from the softness in global manufacturing activities.

Strong Financial Returns for Shareholders: With economic activities gaining pace from the pandemic lows, more companies are allocating their increasing cash pile through dividends and buybacks to pacify long-suffering shareholders. This underlines their financial strength and confidence in their businesses.

Among the Transportation – Air Freight and Cargo industry players, UPS’ board of directors raised its quarterly cash dividend to $1.63 per share in 2024. For 2024, United Parcel Service expects to make dividend payments of $5.4 billion.

The Zacks Industry Rank Indicates Bearish Trends

The Zacks Air Freight and Cargo industry, housed within the broader Zacks Transportation sector, currently carries a Zacks Industry Rank #174. This rank places it in the bottom 30% of 250 Zacks industries.

The group’s Zacks Industry Rank, the average of the Zacks Rank of all member stocks, indicates sunny near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.

The industry’s position in the bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Before we present a few stocks from the industry that investors can retain in their portfolios, let's look at the industry’s recent stock market performance and the valuation picture.

The Industry Lags S&P 500 & Sector

The Zacks Air Freight and Cargo industry has underperformed the Zacks S&P 500 composite and the broader Transportation sector over the past year. The industry has declined 0.9% over this period against the S&P 500’s rally of 31.5%, as well as the broader sector’s appreciation of 11.9%.

One-Year Price Performance

Image Source: Zacks Investment Research

The Industry's Valuation

On the basis of the trailing 12-month enterprise value-to-EBITDA (EV/EBITDA), a commonly used multiple for valuing Transportation-Air Freight and Cargo stocks, the industry has recently been trading at 10.85X compared with the S&P 500’s 18.65X. This is also lower than the sector’s trailing 12-month EV/EBITDA of 12.02X.

Over the past five years, the industry has traded as high as 13.58X, as low as 6.64X, and at the median of 9.97X.

Enterprise Value-to-EBITDA Ratio (TTM)

Image Source: Zacks Investment Research

Image Source: Zacks Investment Research

3 Transportation-Air Freight & Cargo Stocks to Keep a Tab On

Presented below, we have picked three companies in the space to take a closer look at. Each stock carries a Zacks Rank #3 (Hold) rating.

United Parcel Service

Investors in UPS are likely appreciative of the company's efforts to reward its shareholders through dividends and buybacks. Robust free cash flow generation by UPS is a major positive and often leads to an uptick in shareholder-friendly activities.

Even though the demand for online shopping has slowed from the pandemic peak with the reopening of the economy, the figures are still impressive. UPS’s earnings outshined the Zacks Consensus Estimate in three of the last four quarters and missed once, with the average beat being 1.5%.

Price and Consensus: United Parcel Service

Image Source: Zacks Investment Research

GXO Logistics

We are impressed by GXO Logistics’ efforts to strengthen its logistics capabilities. Increased e-commerce, automation, and outsourcing are serving the company well.

The company's earnings surpassed the Zacks Consensus Estimate for earnings in two of the last four quarters, missed once, and met in the other, with the average miss being 0.2%. The stock's shares have risen 8.2% over the past year.

Price and Consensus: GXO Logistics

Image Source: Zacks Investment Research

Air Transport Services

Air Transport Services is well-served by initiatives to modernize and expand its fleet. The company expects to end 2024 with 149 aircraft (129 freighters and 20 passenger planes) in service, whereas it reported 129 at 2023-end. We are also impressed by its efforts to reward shareholders through buybacks.

The stock's earnings surpassed the Zacks Consensus Estimate for earnings in two of the last four quarters and missed twice, with the average miss being 6.9%.

Price and Consensus: Air Transport Services

Image Source: Zacks Investment Research

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