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Tuesday, September 12, 2006

Transportation Beat

By William Trent, CFA of Stock Market Beat

In its latest Investment Survey, Value Line expects truckers to ease off the gas.
Stocks in the Trucking Industry have surged in recent weeks, even though the outlook for the economy is somewhat less than rosy, and earnings expectations for the next few quarters for most carriers have weakened. Based on this price momentum, the industry is now ranked near the top for Timeliness. As such, the group ought to perform relatively well over the next six to 12 months. Investors should be careful, however. These equities might be subject to a sharp sell-off if earnings prove to be disappointing or if expectations for the economy worsen. Currently, Value Line is forecasting moderating gross domestic product growth over the next 12 to 18 months.

They seem to prefer the airlines.

The Air Transport Industry is experiencing a strong bottom-line upturn, thanks to a favorable market environment. Several factors are combining to spur healthy industry revenue growth at the passenger airlines. This growth is more than offsetting the negative impact of elevated jet fuel costs. Favorable trends include rising flight demand, limited capacity expansion, increased occupancy rates, and climbing price yields. The recent terrorist threat in London has not had a notable negative effect on demand for commercial flights.

On the operating cost line, carriers are reaping the benefits of cost reductions and efficiency gains. Energy costs are manageable, but they are difficult to predict. Also, many airlines have large interest expense burdens. Still, most companies here are poised for a widening of margins, and substantial share-net profits, this year. Moreover, several large carriers are poised for a return to profitability, after a challenging 2005. The Air Transport Industry is now one of the more highly ranked for Timeliness in our universe.

We have a hard time playing the higher-beta airlines as many are just now coming out of bankruptcy and given our belief that oil prices will continue to act as a headwind. We’ve been wrong before, but so have 90% of the people who ever bought an airline stock. Although Pinnacle Airlines (PNCL) made the cut for our Watch List, the recent headlines have done nothing to reverse our opinion on the airlines:

Mesaba says it may stop flying if workers won’t reduce pay

Northwest recalling 1,131 laid-off flight attendants to work

The author may hold a position in the securities discussed. A current list of the author's holdings is available here.

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