COVID-19 has accelerated changes in the retail industry and how we shop. Bricks and mortar stores are closed and curbside pickup is not always convenient, so more goods are being purchased online and delivered to consumers’ doorsteps.
The questions for financial advisors and investors are whether the recent bump in e-commerce is a temporary or long-term trend – and whether it could be a boon for transportation and logistics companies.
“The pandemic has created the situation in which people are turning online for the things they need. As everyone becomes more comfortable with it, they will continue to use it and e-commerce growth will be fast-tracked,” says Mona Nazir, equity research analyst, transportation and infrastructure, at Laurentian Bank Securities Inc. in Montreal.
“Any company that has exposure to last-mile delivery services will be well-positioned as the economy picks up,” she says.
Nick Corcoran, equity research analyst with Acumen Capital Finance Partners Ltd. in Calgary, says that consumers who have turned to online shopping out of necessity will stick with it.
“I see the shift as more than a blip,” Mr. Corcoran says.
It’s unclear how the year will play out for global shipping giants such as United Parcel Service Inc. (UPS-N) and FedEx Corp. (FDX-N). Both have suspended financial guidance for now. FedEx did so in mid-March and UPS followed with the release of its first-quarter earnings on April 28. UPS reported that its mix of pick ups and deliveries between homes and businesses have changed from an even split before the pandemic to roughly 70 per cent in favour of home deliveries, which are less profitable because the packages are smaller and these deliveries require more truck miles and stops per route.
As such, UPS reported a 13 per cent decline in year-over-year profit on slightly higher revenue. It cut investment and trimmed share buybacks, but stated that its dividend is safe for now.
Ms. Nazir and Mr. Corcoran say there two Canadian companies in the transportation logistics space that deserve a look. One is Mississauga-based Cargojet Inc. (CJT-T), which controls more than 80 per cent of Canada’s overnight air cargo market. The other is Montreal-based TFI International Inc. (TFII-T), Canada’s largest trucking company.
Both pay dividends and have seen big share price gains in the past two months. Cargojet’s shares are up by about 86 per cent and TFI International’s are up by around 55 per cent from their mid-March lows.
Cargojet has relationships with UPS, FedEx and Canada Post and moves goods for retailers like Amazon.com Inc. and Walmart Inc., which cannot ship point-to-point in Canada. Cargojet picks up their goods destined for Canada and delivers it to 14 Canadian cities overnight. Shippers and couriers take over from there to distribute the goods locally.
Cargojet, which had revenue of $486.6-million in 2019, formed a strategic alliance with Amazon in August of last year. Amazon may eventually buy 14.9 per cent of Cargojet if Amazon meets certain shipping volumes over the next seven-and-a-half years.
Ms. Nazir says Cargojet’s recent positive performance is directly related to the increase in online shopping stemming from COVID-19. Specifically, this trend has generated a 15- to 20-per-cent increase in its core overnight domestic cargo service.
Looking ahead, Mr. Corcoran sees room for Cargojet to grow even in a weak economy. He also sees more opportunity for Cargojet to rent its planes to customers such as the federal government for medical supplies, including masks and other personal protective equipment.
“I see no signs of either of these trends slowing,” Mr. Corcoran says.
While Air Canada (AC-T) is trying to move more freight to compensate for the loss of passenger traffic, the planes are configured differently than cargo planes are and, as a result, are able to carry less goods and are less economic, he says.
Walter Spracklin, equity research analyst at RBC Capital Markets, was also bullish on Cargojet in a recent research note, saying the company “represents our single best idea in transportation today.”
TFI International, with revenue of $5.2-billion in 2019, is also well positioned because of its strong management and the reach and scale of its North American network, Mr. Spracklin writes in another research note. He says TFI International’s management expects a difficult second quarter, but sees recovery throughout the balance of the year.
Ms. Nazir says TFI International has done all the right things, including trimming its workforce, cutting pay for executives and reducing capital expenditures.
TFI International’s business segments include moving full and partial truck loads, courier and package delivery and logistics. It provided an update for the first half of April, which showed that full truckload revenue was down by 20 per cent and revenue from less-than-full truckloads was down by 39 per cent. Package and courier revenue, which are skewed toward business-to-business deliveries, were down by 30 per cent. The bright spot was logistics and so-called last mile revenue, which was 12 per cent higher, primarily due to e-commerce demand.
Ms. Nazir says both Cargojet and TFI International have solid prospects, though the run-up in Cargojet’s stock has her rating it as a “hold.” She rates TFI International as a “buy.”
"As the economy picks up, any company that has exposure to e-commerce demand is well-positioned," she says.
Adam Mayers is a contributing editor to the Internet Wealth Builder investment newsletter.