INDUSTRIALS OVERVIEW
PM:
Coverage team:
KJ Chua
Brandon Liu
Jacobo Ochoa
Joe Matten
Michael Straka
Sreyas Misra
AIRLINES
Jacobo Ochoa
Highlights
• Expanding rapidly (83.82% in the past year)
• Market Cap of $197.56 billion
• Revenues highly dependent on oil prices
• Worldwide airline industry used $210 billion of oil in 2013
• Fuel accounts for 30% of operating expenses (the largest cost)
• Also affected by pathogen epidemics and terrorism
• U.S. market dominated by four airlines: American Airlines, Delta Airlines,
United Airlines, and Southwest Airlines
• Stocks are currently rising rapidly due to low oil prices
Airline equities have routinely outperformed the S&P 500
in the past year
Reasons for Growth
• Improving economy and more travel, both business and leisure
• Dropping oil prices
• American Airlines and U.S. Airways merger
• Higher fares
Return on Equity Comparisons
Return on Equity
50.00%
45.00%
40.00%
35.00%
30.00%
29.22%
25.00%
20.13%
20.00%
15.00%
12.42%
11.32%
10.00%
5.00%
0.00%
Airlines
Construction & Engineering
Airlines
Construction & Engineering
Road & Rail
Road & Rail
Automobiles
Automobiles
Airline Margins
• Aggregate Gross Margin TTM: 54.35%
• Aggregate Operating Margin TTM: 9.65%
Most airline stocks move together in the short run
AIR FREIGHT
Joe Matten
Market Overview
• a system of transporting cargo by aircraft, aka air cargo
• Largest 5 Companies (by air freight cargo volume):
• FedEx Express - largest volume & largest dedicated fleet
• UPS Airlines - recently announced large investment in fleet
• DHL Aviation - 12% of world market; leader in Europe; privately owned
• Cathay Pacific Cargo – Hong Kong; growth opportunity as China grows
• Korean Air Cargo – Part of largest airline in S. Korea; recently announced large investment
in fleet
Market Trends
• Air Freight is a growing industry
(Cargo)
(Capacity)
(%age of Capacity)
• Q3 earnings are up due to lower oil prices and increased consumer demand
• Demand expected to rise in Q4
Recent Market News
• 8/13/14 – Cathay’s net profit for the six months ended June 30 was 347 million
Hong Kong dollars (US$44.8 million) compared with a first-half net profit of
HK$24 million a year earlier
• 11/10/14 – Korean Air Lines Co.’s Q3 operating profit up 50% from a year
earlier due to drop in oil prices.
• Earnings expected to improve further in the Q4 on lower fuel costs, a weaker yen and
increased cargo traffic toward the end of the year.
Domestic Charts
Weak profit Lower
Earnings Forecast
Lawsuit
Earnings
growth
Strong
Earnings
Regional Trends (Cargo & Capacity Growing)
• Asia Pacific – iPhone 6; +5.7% FTK/+5.6%
•
•
•
•
•
AFTK
Europe – weak Eurozone, sanctions on
Russia, Air France strike -1.6% FTK/+1.2%
AFTK
North America – Strong business activity
+5.4%FTK/ -0.02% AFTK
Middle East – Demand grew by 10.1%.
+17.0% FTK/+14.5% AFTK
Latin American - +0.3% FTK/+1.7% AFTK
African – Volatile regional trade volumes
+11.5% FTK/-1.3% AFTK
However, revenue growth is slowing
Market Trends Continued
• Largely affected by macro outlook, consumer spending, & oil prices
• Slowing global macro environment  hit on consumer spending
• Yields for cargo are fairly low due to overcapacity in the market
• Companies making large capital investments in fleet  Margins are getting
squeezed
Thesis
• Air Freight looks good (oil and Q4 shopping), but only for a shorter time
horizon than Blyth’s 3-5 year horizon.
• Freight yields have declined at an average rate of 2.3%
• per year over the past 20 years.
• Cargo revenue represents approximately 14% of total air traffic revenue on
average (up to 35% for some airlines).
• Continuing industrywide declines in yield for cargo reflect productivity gains,
technical improvements, and intense competition (which is increasing)
• Decreasing yields along with slowing global macro environment  Don’t
invest
LOGISTICS & SHIPPING
Brandon Liu
Notable trends in shipping
• Trucking capacity issues: freight rates remained pretty flat in 2013 and 2014
while volume rose
• Rising costs for drivers, equipment and maintenance  pushed smaller companies into
bankruptcy
• “Freight rate hikes by as much as 5% to 8% before 2014 is over” – Fleetowner.com
• New regulations are hampering productivity
• Far East importing raw materials and exporting manufactured goods at an
accelerating clip
• growth in demand for air and ocean shippers looks good
• Investors typically stay away from shipping because of its cyclical nature
(follows the business cycle)
• might be interesting due to increased demand for US natural gas…
• …but also depends on the development of export capabilities
Trends in transportation
• Stocks: very fast growth
• Low oil prices and low interest
rates  investor confidence
• China is currently stockpiling
oil  may be an eventual
correction in demand
Trends in transportation
• Uncertainty with trucking capacity 
interest in maritime and air freight
• However, there have also been
shifts from air to ocean freight
• Air cargo industry lost 5.4 million metric
tons of cargo to container lines between
2000 and 2013
• as shippers opted for slower but cheaper
transit via the ocean
General trends in international trade
• Steady growth in
international trade  paired
with tech advancements +
expanding market demands
Consequently, on the logistics side, there has been
steady growth in 3rd party logistics providers (3PL)
• “Non-asset-based” shippers
• serve as shipping coordinators & use their own technology and systems…
• …but use other shippers’ assets to handle the physical delivery
• Business model: steadier earnings growth and less volatile share prices
• Some interesting companies: "non-asset-based" shippers:
• Landstar System1
• C. H. Robinson Worldwide
•  posting consistent gains + impressive histories of growth
1http://www.thestreet.com/story/12867810/1/why-landstar-system-lstr-stock-is-higher-today.html
3rd party logistics
• Looks very promising
• Trends in big data, analytics:
• The expansion of global trade requires more interconnected management systems
• Big data will improve global supply chain performance and help quantify risk
• Centralization of information systems allows for more swift response to market events
• Looking at companies that have traditionally done well may not be as good of
an indicator of future performance
• Researching tech and systems expansion of these 3PLs may be a better indicator of their
future performance