Shipping boomed in 2018 - but transportation companies' stocks plunged this year
- FedEx, UPS, and other logistics firms should be rocking the stock market right now, considering the ever-increasing popularity of e-commerce.
- But they have suffered in 2018.
- Analysts say it's because of downturns in Europe and because the trucking industry got too hot too quickly this year.
FedEx's earnings call on Tuesday provided a confusing juxtaposition.
CEO Fred Smith enthused about a peak holiday season, noting the company recently had seen its busiest days on record.
But FedEx also announced buyouts and that they would slash their 2019 profit target. Morgan Stanley analysts wrote that they knew FedEx would cut their outlook, "but the magnitude of the FY19 cut was still jarring."
Freight transportation as a whole has flourished this year. The price for moving goods around shot up so much that Amazon Prime, General Mills, Tyson Foods, and other brands increased their prices this year. Some plan to do so next year too.
Trucking, which moves 71% of the freight in the US, has been particularly hot this year. Freight companies waited up to six months this year when ordering new trucks - even though the waitlist is typically just 10 weeks.
And the boon in e-commerce, along with a much more vibrant domestic economy, also means that there are more goods than ever to deliver. UPS delivered 20 million packages every day last year, up from 18.3 million per day in 2015.
Yet stocks at FedEx, UPS, and other logistics firms like XPO Logistics and J.B. Hunt have tumbled this year. Here's why.
International troubles
While the US economy has been doing well this year, the outlook in Europe and Asia has taken a downturn. That along with the impending trade war between the US and China led the International Monetary Fund to cut its growth forecasts for 2018 and 2019 in October.
"For both FedEx and UPS, their domestic market is fine," Kevin Sterling, managing director of Seaport Global Securities, told Business Insider. "The massive decline in Europe has really weakened both of these companies."
UPS has been slightly less affected by global market swings, as Sterling said it relies more on its domestic business. UPS said 21% of its business is US-based, while 79% is international.
FedEx is more reliant on foreign markets, but doesn't release those numbers. Helane Becker, managing director and senior research analyst at Cowen, estimated that about 30% of FedEx's business is international.
Further harming FedEx's stock, which this week had among its worst days in a decade, is their 2015 acquisition of Netherlands-based shipping company TNT. TNT suffered a cyberattack in 2017 that FedEx said cost them $100 million, and FedEx said express package volume in Europe has been "lower than expected."
"We're seeing that sentiment right now that the problem child is Europe and some China, but US domestic is still growing," Sterling said.
An over-heated market
Stormy outlooks in Europe and Asia don't quite affect trucking firms that only operate in the Americas, like J.B. Hunt, whose stock has fallen by 18% since Dec. 2017, or Knight-Swift, which has tanked by 42% over the same period.
Rather, it's a sign that trucking's famously cyclical market is finally taking hold after an incredibly hot year.
"Market valuations for most trucking and logistics stocks have been correcting," Matthew Young, an equity analyst at Morningstar, told Business Insider's Ethel Jiang. "It's become more obvious that freight demand and pricing gains will slow meaningfully in 2019."
In November, Class 8 truck orders dropped, according to ACT Research. This was the first year-over-year decline on truck orders since December 2016.
This downturn came quicker than any analysts had forecasted earlier this year. Both Steve Tam, vice president of ACT Research, and Don Ake, vice president at freight-equipment research group FTR, previously told Business Insider that they predicted freight growth to slow in the second half of 2019.
Analysts say these firms' poor performance might also be due to the truck driver shortage, which economists say have been a result of trucking firms not paying drivers enough.