U.S. Transportation_2025 Outlook_ Gradual Cycle Turn Points To Modest Growth; Focus On Idiosyncratic Drivers

Summary of U.S. Transportation Outlook - January 2025 Industry Overview - The freight activity backdrop is expected to remain muted in 2025, with limited visibility for a rebound in industrial activity [17][20] - Railroad industrial markets are projected to see 0% to 1% volume growth, with slight growth in chemicals but weakness in metals and forest products [17][20] - Consumer and retail freight may face headwinds from elevated container imports in 2024 and rising inventory levels, potentially leading to declining container imports in the second half of 2025 [17][20] - A gradual tightening in the truckload market is anticipated, supporting 3% to 5% contract pricing gains [17][20] Key Companies and Forecasts Top Picks - CPKC: Expected to deliver mid-to-high single-digit revenue growth and 10% to 15% EPS growth, with attractive entry points due to tariff concerns [22][23] - UPS: Limited downside to EPS expectations, with improving revenue per piece performance anticipated to continue into 2025 [22][23] - CHRW: Expected to leverage technology for gross margin expansion and achieve truckload volume growth at or above market levels [22][23] EPS Estimates Adjustments - Railroads: EPS estimates for major railroads have been lowered due to weaker growth expectations: - NSC: EPS reduced by 3% [3] - CSX: EPS reduced by 4% [3] - UNP: EPS increased from $2.74 to $2.79 due to better volume performance [6] - LTL Companies: EPS estimates for ODFL, SAIA, and XPO have been trimmed, reflecting weaker volume performance: - ODFL: EPS reduced by 4% [3] - SAIA: EPS reduced by 8% [3] - XPO: EPS reduced by 8% [3] Valuation Insights - Parcel and railroad companies are trading at a 7% discount to their five-year average forward P/E, while truckload and LTL companies are trading at significant premiums [4][20] - UPS and CNI are noted to have the steepest discounts at approximately 13% [4] - The average P/E for railroads is 18.4x, while for parcel companies, it is 13.5x, indicating varying levels of valuation attractiveness across sectors [35] Market Dynamics - The truckload market is expected to see gradual tightening, supporting margin improvements of 100 to 200 basis points [20] - Intermodal volumes may face risks due to elevated container imports in 2024, leading to cautious outlooks for intermodal relative to truckload [20] - LTL companies may experience significant earnings leverage once there is a durable pickup in freight demand and pricing [10][20] Conclusion - The U.S. transportation sector is facing a challenging environment with muted growth expectations across various segments, particularly in railroads and LTL. However, select companies like CPKC, UPS, and CHRW are positioned to capitalize on specific market dynamics, presenting potential investment opportunities despite the overall cautious outlook.