3 Air-Freight & Cargo Stocks to Keep an Eye On Amid Demand Woes

Industry Overview - The Zacks Transportation - Air Freight and Cargo industry provides air delivery and freight services, with companies offering specialized transportation, logistics, and supply-chain solutions such as freight forwarding, customs brokerage, and fulfillment [3] - The industry's performance is closely tied to the health of the economy, with leading players like FedEx transporting millions of packages daily across the globe [3] - Some companies operate both ground and air fleets, while others focus on air transportation services for passengers and cargo or cater to entities outsourcing air cargo lifting requirements [3] Key Challenges - The industry faces persistent supply-chain disruptions, a challenging macroeconomic environment with inflation-induced high interest rates, weaker-than-expected demand, and declining package volumes [1] - Economic uncertainty prevails despite signs of cooling inflation, with increased inflation readings in October and September leading to market volatility and dampening prospects for industry stocks [4] - Sluggish economic growth and inflationary pressures are likely to hurt consumer spending, negatively impacting industry participants [4] - A significant demand slowdown, particularly in Asia and Europe, is hurting shipping volumes and the results of key players like UPS, which trimmed its full-year 2024 revenue forecast to $91.1 billion from $93 billion [5][6] Positive Trends and Opportunities - Despite challenges, the industry still has growth potential, especially for operators targeting growth opportunities and operating efficiency initiatives [2] - Companies like UPS, GXO Logistics, and Air Transport Services Group are leveraging cost-cutting efforts and growth trends to their advantage [2] - With economic activities recovering from pandemic lows, more companies are allocating increasing cash piles through dividends and buybacks, reflecting financial strength and confidence [7] - UPS raised its quarterly cash dividend to $1.63 per share in 2024, with expected dividend payments of $5.4 billion for the year [7] Industry Performance and Valuation - The Zacks Air Freight and Cargo industry carries a Zacks Industry Rank 174, placing it in the bottom 30% of 250 Zacks industries [8] - The industry has underperformed the S&P 500 and the broader Transportation sector, declining 0.9% over the past year compared to the S&P 500's 31.5% rally and the sector's 11.9% appreciation [11] - Based on the trailing 12-month enterprise value-to-EBITDA (EV/EBITDA) ratio, the industry is trading at 10.85X, lower than the S&P 500's 18.65X and the sector's 12.02X [13] - Over the past five years, the industry's EV/EBITDA ratio has ranged from 6.64X to 13.58X, with a median of 9.97X [14] Key Companies to Watch - United Parcel Service (UPS): The company has robust free cash flow generation, leading to increased shareholder-friendly activities like dividends and buybacks [17] - UPS's earnings surpassed the Zacks Consensus Estimate in three of the last four quarters, with an average beat of 1.5% [18] - GXO Logistics: The company is strengthening its logistics capabilities, benefiting from increased e-commerce, automation, and outsourcing [20] - GXO's earnings surpassed the Zacks Consensus Estimate in two of the last four quarters, with an average miss of 0.2%, and its shares have risen 8.2% over the past year [20] - Air Transport Services Group (ATSG): The company is modernizing and expanding its fleet, expecting to end 2024 with 149 aircraft (129 freighters and 20 passenger planes) compared to 129 at 2023-end [23] - ATSG's earnings surpassed the Zacks Consensus Estimate in two of the last four quarters, with an average miss of 6.9% [24]