Transportation

Transportation Stocks Set To Double (CAL, ITWO, KSU, OSG, R)

Over the past week 24/7 Wall St. has picked several stocks from major sectors that are likely to double off of their lows.  This group focuses on the transportation sector with the picks being Continental Airlines, Inc. (NYSE: CAL), i2 Technologies, Inc. (NASDAQ: ITWO), Kansas City Southern (NYSE: KSU), Overseas Shipholding Group Inc. (NYSE: OSG), and Ryder System, Inc. (NYSE: R).

We have more details on why we like these over peers, but there are several suppositions in our opinions here. The time frame is by the end of 2010, which is meant to coincide with some form of economic recovery next year.  A number of the credit and financial issues facing the markets will be in place for the near-term or longer.  The other assumption used for choosing the stocks is a market bottom of roughly 600 on the S&P 500.  Unfortunately, there is also the added risk of energy costs and now a new emissions “cap-and-trade” tax to consider.

Continental Airlines  is our possible double stock pick of the major legacy airline carriers.  AMR Corp. (AMR) is too volatile in expectations, and the other legacy carriers have been involved in mergers that will take a long time to integrate.  Just for disclosure purposes, it is very possible that there is some home field turf advantage mentally as this is one of the biggest carriers in Houston (and has hub operations from NYC/NJ as well). The company has not been immune to wild fuel prices or to the recession, but it has been able to maintain its balance sheet better than many carriers.  It has fought the urge to merge on more than one occasion.  If another acquisition occurs in the legacy space in the next 18 months, it is likely that Continental would be the prey.  As with most airlines, you can pick apart the books and every item besides cash and debt is something that is up for interpretation.  It continues to add international routes and has slowed growth domestically and cut lower profit routes.  We also want to note that a recent crash in upstate New York was technically a crash of a partner rather than a company operated flight.  A double from lows would put this at $13.00.  We are very skeptical about  “analyst estimates” for any quarter (let alone 2010) but those estimates are still $4.65, and that is down from $7.00 less than 2 months ago.

i2 Technologies, Inc. (NASDAQ: ITWO) is a software company.  But it is a supply chain management software company that is involved in the transportation of goods.  It also serves aerospace, auto, chemicals, consumer, defense, energy, industrial, metals, pharma, technology and  telecom compnaies.  Ryder (see below) uses its system as well.  We featured this stock in our “Special Situation Newsletter” in late-January at $6.17 because this one has actually been a busted merger.  It has also been beaten up in the recession.  But this could actually be acquired when things normalize as Oracle, Microsoft, SAP, H-P, and others start looking for deals in the space.  Shares sit at $7.60 and a double would take it to $11.00 from lows.  Its 52-week high is $14.60 and this was a $20+ stock just two years ago.  i2 currently trades at under 2-times tangible book value (with low ratios of goodwill and intangibles), has manageable debt, and trades at well-under 1-times revenue.  Again, this is not a transportation stock in the absolute classic sense, but we can’t really think of it is a little software company that just writes lots of “1’s and 0’s” either.

Kansas City Southern (NYSE: KSU) is our possible double in the rail sector.  We could have probably just as easily picked Warren Buffett’s Burlington Northern (NYSE: BNI) or Union Pacific (NYSE: UNP), but Kansas City Southern seems to offer slightly more leverage compared with forward estimates and it has a smaller market cap of $1.35 billion and is  actively traded.  What makes this also more attractive for a NAFTA trade is that it has Mexican operations.  Whether that could be monetized outside of the company is something to debate.  In just the last 75-days it has seen its 2010 earnings estimates cut by 25% and that is after prior cuts before that.  A double in KSU from lows is technically just north of $26.00, and amazingly enough that would put the stock at less than half of its 52-week high of $55.90.

Overseas Shipholding Group Inc. (NYSE: OSG) is perhaps a riskier play than a good old fashioned shipper of goods across the high seas.  It transports crude oil and petroleum products.  It certainly has not been immune to the woes of energy nor the woes of international trade.  OSG also recently posted a loss although that was after goodwill charges.  Earnings from operations  in 2008 was listed as $10.65 EPS. up from $6.16 EPS in 2007.   If the economic recovery starts to be seen and this stock sees more action, then you don’t have to multiply a fraction of those numbers very often to still have a dirt cheap forward P/E ratio.   A double from recent lows for us is also still under analyst targets of today even after all the cuts they have made.   The analysts have also slashed 2009 and 2010 earnings in almost half just in the last 75-days and even more than that before.  A double from recent lows would put this stock at around $40.00, which is still less than 50% of its $87+ highs of 2008.  It also has a high dividend, although we are discounting that this analysis.  It has expanded into adjacent carrier markets so it is not a pure-play energy transporter any longer, although many still think of it as a black gold shipper.  We could have easily thrown a dart at DryShips (DRYS) or another much more leveraged player that could double in a month, but that isn’t our game.  Nordic American Tanker (NAT) is the go-to safe stock, but a call for a double there is not as likely considering its low leverage and that would be “too bullish” even in the game of picking companies which could double.

Ryder System, Inc. (NYSE: R) is a hybrid stock transportation stock that could double.  The company operates in three different segments of fleet management solutions, supply chain solutions, and dedicated contract carriage.  You have seen its trucks on the road and it also  operates fleets  for companies.  Where Ryder gets interesting is that it could double off of lows with an economic recovery, but there is also an asset and break-up play here in the story with the operating segments.  The current price is fine for its tangible book value, but we wish it had a lower debt level even if that is just an unfortunate twist to trucking and transport stocks.  Technically, Ryder has to only go to $38.00 to be a double from lows, but we are using the $20.00 mark of 5 trading days ago as the low.  So we would expect hat Ryder could hit $40.00 by the end of 2010.  This does get the stock above 10-times forward earnings of about $3.30 EPS, but that number for 2010 earnings has been cut down from $5.00 EPS in less than 90 days and even more than that before.  A price of $40.00 is barely more than half of its 52-week high of $76.64 and that would still be less than the average analyst target prices.  We considered YRC Worldwide (YRCW) for this pick, but it is so leveraged that it has already doubled and it is still much riskier in our mind.

Again, there are suppositions here and the time frame is out to the end of 2010.  But just to let you know how beaten up this sector, the Dow Jones Transportation Average is down over 50% from last year and it is so far under the 200-day moving average that these stocks on a rally or turn in the economy could move massively.  This is also (historically) the first group you get confirmation of a new market direction change.

JON C. OGG
March 17, 2009