The transport industry continues to face a cloud of uncertainty. The surge in demand caused by the COVID-19 pandemic sparked a significant stock rally, but it was swiftly followed by a freight recession, overcapacity in ocean shipping and trucking, and now a sector rebound amid a robust economy.
All companies involved in global trade are grappling with various challenges in 2024: declining freight orders, the introduction of new vessels, delays at the Panama Canal due to drought, ongoing diversions in the Red Sea likely to persist into the latter half of the year, and the looming threat of a strike at East Coast ports.
The Dow Jones Transportation Average has remained stagnant this year but has seen a 7.6% increase over the past 12 months up to the end of February. A recent report from consulting firm AlixPartners suggests that investors should adopt a long-term perspective when dealing with transport companies.
“Ocean carriers and trucking companies have seen a decline from their previous highs, but considering the track record of some of these firms, there are hidden gems in this beleaguered sector that can withstand and endure,” remarked Marc Iampieri, global co-leader of the shipping, logistics, and infrastructure practice at AlixPartners and one of the authors of the report.
“While weaker players may falter during this period, companies with ample cash reserves are better equipped to weather the storm. Cash affords them flexibility.”
Drawing from his experience working with Fortune 100 companies, Iampieri emphasized the importance of examining the sector from a historical standpoint. He stressed that the freight industry operates in cycles and should thus be assessed in terms of its long-term prospects.
“Sometimes, we become too myopic,” he noted. “Investors must consider the broader context and assess how companies will navigate through periods of lower volumes. It’s crucial to recognize the resilience demonstrated by these companies over the past few years.”
In 2023, the sector faced its fair share of challenges, marked by widespread layoffs and bankruptcies. From the collapse of Yellow to troubles at heavily funded startups aiming to disrupt the sector with technology, such as Convoy—a logistics startup backed by Jeff Bezos—that folded, and at Flexport, where there was a 20% reduction in the workforce and a high-profile executive departure that saw a CEO recruited from Amazon exit.
According to Iampieri, fixed tech costs, coupled with a freight recession and pressure on margins due to higher wages, contribute to a company’s cost structure. These factors underscore the importance for investors to focus on companies with tangible assets of real value. “Technology aids logistics managers in decision-making by providing visibility into their supply chain, but the cost of technology and its maintenance, even when outsourced to a third party, becomes a fixed expense,” he explained.
“These costs have escalated to such an extent that they cannot be easily scaled down.” The report emphasizes the need for closer collaboration between third-party logistics providers—companies that handle logistics processes and order fulfillment for other businesses—and freight forwarders, which act on behalf of shippers.
It suggests that in some cases, these relationships may evolve into acquisitions, while in others, partnerships and strategic agreements will be vital for building resilience and sustaining profitability. The report notes that short-term rate volatility will continue to benefit subsectors that thrive on uncertainty, such as brokers.
During the pandemic, ocean carrier reserves swelled due to surging rates and the massive volume of freight being transported. In the years 2022-2023, some of these reserves were utilized by ocean carriers for expansion efforts and dividend increases. Historic profits were also channeled into building and expanding vessel fleets.
“Ocean carriers are sitting on a significant amount of cash, enabling them to engage in acquisitions at lower valuations due to the poor balance sheet management of other companies,” observed Iampieri. “They can essentially acquire these companies for a bargain.”
While major shipping companies have issued cautious outlooks to investors, particularly led by Maersk, Iampieri remains optimistic about the sector. He points out that the shipping disruptions in the Red Sea are benefiting ocean carriers, despite the increased bunker fuel costs. “The Red Sea diversions are advantageous for ocean carriers. I am more bullish on the carriers than ever before. Why? Because the longer route benefits them. If there were no conflict, rates would have dropped substantially,” he asserted.
The key uncertainty lies in the duration of the diversions and the extent of surcharges that ocean carriers can impose.
“This presents an opportunity for them to recoup their additional expenses and then some,” remarked Iampieri. “As long as they can levy those fees, it is beneficial. If it persists for a year, it’s a positive.”
Ocean freight rates have been decreasing following a temporary peak due to the Red Sea disruptions, initially affecting Europe and then North America. According to Freightos, transatlantic rates surged by 54% since mid-December to $1,862 per 40-foot container last week, but certain carriers are deferring additional planned surcharges. Shipping from Asia to the East Coast of North America is pricier compared to the West Coast, and with new ocean contracts set to be inked next week, shippers must consider the slower transit times and the risk of a labor strike at East Coast ports when making decisions.
Although the rate hikes may be brief, shippers shouldn’t become complacent. “Shippers aiming to mitigate the impact of higher rates and reduce operational risks will need to lessen their reliance on ocean transport—and that necessitates a contingency plan,” the report advised.
One such contingency plan could involve redirecting freight back to the West Coast. During labor disputes and extensive port congestion on the West Coast amid the pandemic, more freight was diverted to East Coast and Gulf of Mexico ports. These regions have steadily gained market share from the West Coast ports, with shippers also benefiting from investments in port infrastructure. However, the West Coast is poised to handle a greater volume of trade.
Paul Brashier, vice president of drayage and intermodal at ITS Logistics, anticipates at least a 25% increase in containers arriving at the ports of Los Angeles and Long Beach. “They are seeking additional capacity for ground storage and cross-docking,” Brashier explained. “As we approach contract season, customers planning on the Non-Vessel-Operating Common Carrier (NVO) and carrier side are searching for extra space to store containers.”
“The infrastructure at West Coast ports has been strengthened,” noted Iampieri. “While volumes may not reach the levels seen during the pandemic, freight rates are lower compared to the East Coast.”
Despite the market cooling off since the robust days of 2021-22, there are still opportunities for equity investors seeking both short-term gains and long-term value plays, as highlighted in AlixPartners’ report:
“Fixed-income investors will find opportunities in distressed debt. With earnings multiples returning to more reasonable levels and ample cash available, financial investors and strategic acquirers alike are actively seeking opportunities, contributing to what is likely to be a robust deal flow in 2024 and 2025. The primary risks are the uncertain macroeconomic outlook and global geopolitical tensions.”
