For travel and airline stocks, the global pandemic triggered a debilitating reversal of fortune from which a recovery will take years.
But for companies in the business of moving stuff, rather than people, it’s a much different story.
The sudden acceleration of the retail shift from bricks and mortar to online has been a windfall for transportation and logistics companies.
In Canada, the main beneficiaries have been names such as TFI International Inc. and Cargojet Inc., which have returned 127 per cent and 141 per cent, respectively, since their lows in March. Resilient consumer spending in North America is also helping support the recovery in rail traffic.
“Despite transportation companies across the board having been impacted by a significant slowdown in B2B business, the pull-forward in online shopping and shifting consumer behaviour has benefited companies with e-commerce exposure,” Mona Nazir, an analyst focusing on transportation and infrastructure stocks for Laurentian Bank Securities, said in an e-mail.
For transportation companies in the sweet spot of the pandemic economy, lasting shifts in consumer behaviour should represent tailwinds into the foreseeable future.
Cargojet chief executive officer Ajay Virmani said as much last month after disclosing the best quarterly results the company has ever had.
When airlines effectively ground to a halt in March amid a vast idling of the global economy, nearly 40 per cent of global air cargo capacity vanished overnight. The freight that normally travels in the bellyholds of passenger aircraft was stranded.
Cargojet, which controls more than 80 per cent of Canada’s overnight air cargo market, saw a surge in demand for charter flights as a result, initially in large part to transport personal protective equipment on behalf of Canadian governments.
As for consumer products, Cargojet said some of its customers, including retailer Amazon.com Inc. and Canada Post Corp., are handling Black Friday-level volume on a regular basis.
Mr. Virmani predicted that the company will “continue to benefit from reduced cargo capacity worldwide as passenger airlines struggle to return the belly capacity to pre-COVID-19 levels for several years to come.”
In the second quarter, Cargojet posted adjusted earnings before interest, taxes, depreciation and amortization of $91-million – nearly double the Bay Street forecast.
According to RBC Dominion Securities analyst Walter Spracklin, explosive e-commerce activity and demand for cargo charters should sustain Cargojet in the near future, with even another potential windfall tied to an eventual COVID-19 vaccine.
“We expect the need for nationwide distribution of a potential vaccine to layer on a whole new level of demand for Cargojet’s air freight capacity,” Mr. Spracklin wrote in a note.
Canada’s largest trucking company has also hitched itself to the e-commerce boom. Prior to the pandemic, TFI International’s package and courier segment was heavily skewed toward business-to-business shipments for traditional retail, which helps explain why the stock declined by nearly 50 per cent in February and March.
An aggressive repositioning has increased consumer shipments from about 10 per cent of TFI’s total package and courier volumes prepandemic to more than 30 per cent.
“Management has been able to quickly achieve density in key markets, and therefore has been able to profitably serve e-commerce shippers,” Mr. Spracklin wrote.
The spike in online purchasing, however, couldn’t save the second quarter for Canada’s railways, which both realized substantial declines in profits and freight volumes. On an earnings call in July, Canadian National Railway Co. CEO Jean-Jacques Ruest called it the “toughest quarter of his career.”
But Canadian freight volumes have been steadily rising since bottoming out in May, and both CN and Canadian Pacific Railway Ltd. are emerging with leaner cost structures.
And recent results from giants such as FedEx Corp. and United Parcel Service Inc. suggest that a recovery in intermodal container traffic is building, according to Martin Roberge, a portfolio strategist and quantitative analyst at Canaccord Genuity.
As a group, Canadian and U.S. railroads are trading at a rare discount to the rest of the market – “not a bad valuation proposition given an improving fundamental backdrop,” Mr. Roberge wrote.
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Tim Shufelt