July 1, 2025 • 41 mins
Earnings growth for transportation and logistics providers will be driven by when the freight cycle will finally turn. The uncertain economic backdrop has made calling the cycle increasingly difficult for market participants. In this Talking Transports podcast, Ravi Shanker, managing director and lead North American freight transportation and airlines analyst at Morgan Stanley, joins Lee Klaskow, Bloomberg Intelligence senior transportation and logistics analyst, to share his insights about what could be in store for 2Q earnings and the rest of the year. They touch upon the truckload, less-than-truckload, railroad, intermodal parcel, forwarding and freight brokerage subsegments. Shanker remains optimistic about truckload rates this year, which is driving his overweight rating on most carriers in the space. He also discusses rail consolidation, airlines, autonomous trucking, technology and which stocks he prefers heading into earnings.
See omnystudio.com/listener for privacy information.
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:07):
Hi everyone, this is Lee Claska when We're Talking Transports.
Welcome to the Bloomberg Intelligence Talking Transports podcast. I'm your host,
Lee Klasgow, Senior Freight transportation and logistics analysts at Bloomberg Intelligence,
Bloomberg's in house research on of almost five hundred analysts
and strategists around the globe. Before diving in a little
public service announcement, your support is instrumental to keep bringing
(00:29):
great guests and conversations to you, our listeners, and we
need your support. So please, if you enjoy this podcast,
share it, like it and leave a comment. Also, if
you have any ideas for future episodes or just want
to talk transports, please hit me up on the Bloomberg terminal,
on LinkedIn or on Twitter at Logistics Lead. Now onto
our episode I'm very excited to have with us today.
(00:50):
Robbie Shanker Back onto the podcast. Robbie is a managing
director and lead analyst for North American Freight transportation and
Airlines for Morgan Stanley. He's been with Morgan Stanley for
over twenty years and has been covering transports since twenty sixteen.
Prior to covering transports, Robbie led coverage of North American Autos.
Welcome back to the podcast, Robbie.
Speaker 2 (01:12):
Thanksuy, Always a pleasure to be here.
Speaker 1 (01:15):
And I want to congratulate you. You are the first
guest to be on the Talking Transport podcast three times,
so I know that that's a big honor for you.
Speaker 2 (01:25):
It is absolutely a big honor for me.
Speaker 3 (01:27):
I don't know if I get a T shirt, but
if not, I'll make one for myself.
Speaker 1 (01:31):
Okay, well, we'll send you a pad with Bloomberg on it.
So I wanted to have you on again because you
know we're coming up on the second quarter earning season.
Obviously it's a busy time for everybody trying to figure
out what's going on. What major trends are you looking
at going into two Q earning season.
Speaker 3 (01:50):
Yeah, I think we continue to remain on cycle watch.
I think we have been for over three years now.
But what at this time last year was a will
it want it on upcycle versus down cycle is more
of a post tariff implications type cycle watch. Recall that
(02:13):
I think when I was on your show Lasting in January,
I was talking about a tale of two.
Speaker 2 (02:18):
Halves in twenty twenty five, where we would.
Speaker 3 (02:21):
See a robust first half as we restocked ahead of
tariff deadlines in the second half of the year. Clearly
that's not what happened. We were taken by surprise by
the timing, the magnitude, and the volatility of the tariff
announcements and that has led to a much choppier first
(02:41):
half than we had expected. But with the current ninety
day tariff window, we have seen an uptick in activity
in the last month or so, whether it's our TLFi
index or trucks pot RAITs, and the question is how
long will that sustain. We'll be see a second surge
(03:02):
towards the end of the second half of the second quarter,
and will that continue beyond the ninety day window or
will we see a cliff post that ninety first day.
I think these are the debates that are out there
right now, and obviously we're going to be we continue
to track broad macro geopolitical headlines as well.
Speaker 1 (03:23):
So obviously there's a lot of uncertainty because the geopolitical
risks and effects on the freight markets. So like, are
you bullish on any sub segments because they've been really
you know, underperforming the broader markets, Whether if you're looking
at the LTL Space, truckload space parcel carriers. The only
ones that really been outperforming a little bit have been
(03:44):
the rails. But that's just just barely.
Speaker 2 (03:48):
I think that's fair. I think for those who have
been following my research over.
Speaker 3 (03:52):
The years, I'm generally a glass holf full guy, and
I'm generally a.
Speaker 2 (03:57):
High conviction guy.
Speaker 3 (03:59):
But it's very hard to have conviction in this kind
of environment, with constantly changing headlines and honestly the rules
of the game constantly changing. And if it is this
hard for me sitting here on Wall Street, can imagine
the average CFO or logistics manager out there how they're
(04:21):
going to be making even short term inventory management decisions,
let alone longer term strategic decisions on near sharing or
anything else.
Speaker 2 (04:34):
So in this world of kind of.
Speaker 3 (04:36):
Extreme volatility, I continue to believe that we will be
set up for a reasonably robust.
Speaker 2 (04:44):
Second half of the year.
Speaker 3 (04:46):
Now, all bets are off if the consumer slips into
a recession. And there are some very smart economists and
others out there who say that we have not yet
felt the impact of tariffs on the consumer, and that
happens in the back half of the year. So if
you are going to see the first broad based consumer
recession we've had since two thousand and eight. It's hard
(05:07):
to be bullish anything, but in all but that scenario,
I think you can be bullish select parts of the
transportation space. I think pretty much all of trucking, both
TL and LTL, but primarily TL I think will lead
us into that restock up cycle, especially if it's driven
(05:29):
by the consumer side. LTL will follow when it spreads
into the industrial and markets. We continue to like the
Canadian railroads as the best rail growth stories out there.
We are neutral with a cautious bent on the US rails,
and some of that is also reflecting the fact that
(05:49):
the market appears to have kind of founded defensive hideout
and the US rails yere to day looking at the
relative stock performance, and we continue to remain structurally bear
the intermodal companies, the freight forwarders and brokers, as well
as the parcels. So I think if you think there's
going to be a fairly robust back half driven by
(06:13):
consumer strengths, you should be long trucking.
Speaker 1 (06:16):
It's interesting, so you're you're pretty optimistic on the second
half in terms of demand, and I guess that you
think that rates are going to go higher. So for
the truckload carries, what are you modeling for rates to
do in the second half.
Speaker 3 (06:29):
Look, we've already seen spot rates up about eight percent
in a month in the past month, and I think
there are some indications in the markets preparing for a
pretty robust July and August as well, which would be
kind of countersignical. But obviously the cycle and seasonality does
not matter in the environment we are in right now,
(06:53):
and so our cure model continues to expect a double
digit increase in sport rates over the next six months.
And it's interesting that even in this extremely choppy environment,
the tls appear to have got low single digits, if
(07:13):
not mid single digit rate increases to.
Speaker 2 (07:15):
The first half of the year.
Speaker 3 (07:17):
I say that's actually a better outcome than people were thinking,
you know, probably twelve months ago, maybe even nine months ago.
And I think that can push into high single digits
when you start the first phases of twenty twenty six
mid season towards the back half of the year. So
(07:38):
I think if you are looking for an up cycle,
it's more of a twenty twenty six story at this point.
And I think if everything goes to plan, you should
be looking for sport rates comfortably double digits, if not
twenty percent up from here, and contract rates.
Speaker 2 (07:57):
Up mid to high single digits.
Speaker 3 (07:59):
Okay, this is especially true if you see some kind
of supply side catalyst, which you might get into in
a second, but you know, if whether it's the English
enforcement or other issues, if you see a kind of
other supply side catalyst, that could squeeze the cycle even
more so.
Speaker 1 (08:16):
From a demand standpoint. So you're so like I've been, like,
you know, hearing from a lot of folks that you know,
maybe this peak season and back to school season might
like merge, we might have more of a plateau. But
after that plateau, because people are trying to get ahead
of you know, the ninety day tariff window, isn't there
just going to be another air pocket that that we're
(08:38):
going to have to deal with? Or you think that
the demand is going to be more on the industrial
side of of the market, which has been very slow and.
Speaker 4 (08:49):
Relatively speaking, Yeah, look, I think that's a very plausible
scenario that we have a pretty decently strong two Q
and then it just falls off a cliff because we
just pulled forward all our demand for a peak season,
and we don't really have any major holiday related restocking.
(09:12):
Even if we actually do have a pretty decent holiday season,
that is a scenario, and that is a risk.
Speaker 3 (09:18):
But my view is that I don't think two Q
has been nearly as strong or consistent as bran broad
based as it should have been. If you had seen
again broad based restalking across even in the entire consumer environment,
(09:38):
if it hadn't spread to industrials, I think you'd have
seen a much stronger two Q than you actually did.
We wrote a note, say a titled the window of
opportunity is now the day of the ninety day tariff suspension,
and that note kind of discussed a scenario where like
(09:59):
LU could broken supply chains if everybody tried to build
like a year or multiple years of inventory in nineteen days.
Speaker 2 (10:09):
In that scenario, I would be concerned about a cliff.
Speaker 3 (10:13):
I think what we have seen so far has been
an initial pent up demand pop and then a little
bit of a semi lull in June, potentially followed by
a little bit of a surgery and in July. I
don't think that is enough to drive an air pocket
or a cliff in the back half of the year,
(10:34):
especially if the consumer stays robust and let's say get
some level of inflation relief and interest rate relief and
tax rate relief, that should continue the d stock through
the back half of the year and into twenty six.
But we're very much dealing with scenario analyses here, right.
(10:54):
I mean, there's a scenario where we go into a
proper recession back half of the year. There's a scenario
where the overall macro is fine, but transports has a recession.
If we pulled forward and restocked into q uh and
there's a scenario where everything was pretty great. And so
that's also why the stocks in the market are somewhat
bereft of direction at the moment.
Speaker 1 (11:14):
Right. You know, I love to have the cell side
on the podcast because you know, they're able to talk
about buy holed cell where that's something we don't do
Bloomberg Intelligence. So you know, so what within the truckload space,
who's your favorite name and why.
Speaker 3 (11:28):
So Night continues to remain are a favorite name within
transports overall and the trucking space simply because they're the biggest,
it's probably the most representative and liquid stock. And I
think the management team there also has built a reputation
over the years of trying to stay half a step,
if not one step, ahead of the cycle.
Speaker 4 (11:50):
UH.
Speaker 3 (11:51):
They also are going into this upcycle more diversified than
they've ever been UH and probably with more operating leverage
than they've ever had.
Speaker 2 (12:01):
So Nights are number one.
Speaker 3 (12:04):
Although we like pretty much all the lt ls, all
the tls, and all the lt ls in the space,
with the exception of XPO, where we continue to I mean,
we like the company, we like the management team, we
like what they're doing, but we are not a huge
fan of the valuation there and kind of what's a
price into the stock?
Speaker 1 (12:24):
Gotcha? Do you have a favorite LTL lesson truckload carrier
that you.
Speaker 3 (12:30):
I think ODFL is the highest quality name in the space,
but on a relative risk reward basis, I would say
ARC Best in TFI, although ARC Best is slightly smaller cap.
But I would say Night as well. I think a
lot of people still view Night as a TL, but
they're kind of almost a national lt L, and so
I would say NIGHT for both t L and lt L.
Speaker 1 (12:52):
So there's a lot of stuff going on in the
lt L space. FedEx Freight to announce that they're going
to spin off that company. Do you think that has
any real ramifications for the other players. Do you think,
you know what is a very rational pricing environment. Do
you think there maybe some of the players could lose
some discipline because of that spin out.
Speaker 2 (13:14):
I think that.
Speaker 3 (13:14):
Remains to be seen. First of all, I think that
spinout is still some time off. We'll see what FedEx
plays today in case they somehow accelerate that transaction or something,
but it's still probably twelve months away. And I think
everything we've seen so far, from the fact that they
have signed a long term operational agreement with FedEx Parcel,
(13:38):
the fact that the CEO that they announced last month
is an existing like the former head of the LTL
business and part of the current top management team of FedEx,
even the fact that they haven't changed the name. There
are very few spin off examples in history where the
(13:58):
spin co keep the name of the old cop. Usually
you try to distance yourself as much as possible from
your previous guys, to the market things you are completely independentity.
But the new entity is still going to be called
FedEx Freight, and I think all of that signals that
not much is really going to change in our view
(14:19):
from an operating standpoint for either FedEx Parcel or for
FedEx Freight, and from a go to market strategy. If anything,
FedEx is going to be hiring FedEx Freight is going
to be hiring three hundred new salespeople.
Speaker 2 (14:33):
It's probably one of the.
Speaker 3 (14:35):
First instances in corporate history where a company that is
by far the industry leader in the space is suddenly
on day's zero, going to end up having an all
new sales force of people who've never worked there before
or never done that before.
Speaker 2 (14:51):
And it's going to be interesting to see how they
actually deal with that.
Speaker 3 (14:54):
But I don't think that there's going to be much
change in LTL market dynamics as a result of this.
I'm paying much closer attention to how sticky LTL TL
conversion is. I'm paying a lot closer attention to how
much excess capacity is in the LTL space right now
(15:17):
and how is that deployed by the existing players. I'm
paying attention to what Amazon is doing, not so much
as Amazon kind of taking share in the market, as
much as is Amazon going to It's going to run
an LTL operation out of its existing warehouses instead of
cross dogs, and that I think would be fairly transformative
(15:39):
for the LTL space if you don't need a network
of cross dogs to do lter anymore. So I think
those our factors that I think are likely to be
more transformational to the LTL outlook raw than what fex
is doing.
Speaker 1 (15:54):
Gotcha okay? And on the truckload side before before we
leave the truckload area, is there a name that you're
negative on or you're pretty much neutral to positive on
all the names that you cover?
Speaker 3 (16:07):
Now, we think the rising tide will lift all the
boats in the space. We have an equal weight rating
on Heartland, which is our lowest ranked DL in our coverage,
But I'd say overall be a pretty bullish trucking as
a whole.
Speaker 1 (16:20):
Now, you know, I don't follow Heartland. I used to
a long long time ago. But aren't they the most
leverage to the cycle given the fact that they really
don't do anything else besides.
Speaker 2 (16:30):
Truckload correct But at the same time they do very
little spots.
Speaker 3 (16:34):
They kind of they have their own little kind of
moat and their own little niche, and they kind of
run the business. I would say they kind of stick
to their knitting rather than being super dynamic and kind
of blowing with the wind, and so that makes them
a great stock to own and great earnings algorithm.
Speaker 2 (16:55):
For certain parts of the cycle.
Speaker 3 (16:56):
But again you're probably going to see more pork to
the cycle at more dynamic and more spot exposed tls
out there.
Speaker 1 (17:05):
So you're underweight both FedEx and UPS. FedEx is reporting
at the close todays. We don't need to talk about
it because that's not going to have much of a
shelf life for us. But kind of structurally, why so
negative on the parcel providers. I mean, they have been
underperforming the markets, but what's driving that call for you?
Speaker 3 (17:23):
Look, we have been long term structural underweights and the
parcel names largely because most simply put, I think e
commerce parcel delivery is just a very challenged business. I
think you and I and most listeners of your podcast
are probably never going to pay for shipping ever again
for something they buy online because we're basically conditioned to
(17:44):
getting free shipping for something we buy online. And at
the same time, the cost of delivering our packages has
been steadily going up a because of general inflation.
Speaker 2 (17:56):
But also because of service levels.
Speaker 3 (17:58):
What used to be afford delivery window is now a
one day or a same day delivery window. What used
to be a five day week service is now a
seven day week service. They now need to go to
many more addresses in the US, They need to keep
investing in their network, kind and tech, and so when
the pricing power overall is low and the investments needed
(18:24):
to drive that are high, that puts a lot of
pressure on returns overall. At the same time, you've seen
the competitive structure change in this industry with the emergence
of Amazon Logistics and a lot of small, mom and
pop and regional players. In addition to let's say the
(18:44):
re emergence of the US Post Office, you've seen e
commerce supply chains entirely change. We wrote a big report
on the regionalization of the Parson delivery market last year
and how a long haul, high speed air and express
truck moves have been replaced by shorthaul, local truck and
(19:07):
van moves that completely changes their e commerce supply chain.
We just published a note on the rural opportunity here.
We think it's a brilliant dollar e commerce and retail
opportunity that's currently untapped, and the question is when Amazon
is putting four billion dollars into rural expansion and Walmart's
(19:30):
investing as well, it looks like UPS and FedEx are
maybe pulling back on capex somewhat.
Speaker 2 (19:36):
So I think there are multiple.
Speaker 3 (19:38):
Structural challenges in the space being a standalone e commerce
parcel delivery company.
Speaker 2 (19:48):
Now UPS and fedexs are obviously not standing still.
Speaker 3 (19:50):
They're making their own tech investments, They've made acquisitions, they're
pushing into healthcare. They're obviously taking a very close look
at costs.
Speaker 2 (19:59):
But ultimately, I think you need to solve your revenue problem.
Speaker 3 (20:04):
Uh and and that's what may take a little longer
than than than we think people may appreciate.
Speaker 1 (20:11):
Yeah, for those that are listening, if you if you
go back to the episode previous to this one, I
spoke with the CEO of clear Jet. They're a kind
of new parcel UH provider where it's really you know,
they're taking a narrow body capacity and putting parcels in
that and then using you know, gig economy folks to
(20:35):
do the final delivery. It's a pretty interesting model that
you know, really provides the service that FedEx and UPS
are at a lower cost. So for those that want
to learn more, I recommend taking a listen to that.
So is there anything Is there anything besides an increase
(20:56):
in demand that the parcel guys can do to really
show improvements, because you know, they're all doing their own
cost cutting and productivity measures and trying to change your
networks to be more receptive to B two C versus
B to B. But is it really just about volumes
for them?
Speaker 2 (21:17):
Not at all. It's not about an increase in demand.
Demand was never the problem.
Speaker 3 (21:22):
If anything, e commerce growth has been the one thing
that's that it can steadily count on this economy. I
think last year the overall e commerce kind of tam
grew ten percent year over year, kind of in in
a pretty dull macro environment, and so demand's.
Speaker 2 (21:39):
Not the issue.
Speaker 3 (21:40):
The issue is margin, a creative demand, and we think
that the slice of the pie that kind of meets
the incumbent parcels criteria for kind of doing returns could
be shrinking as more and more competitors and the market
(22:00):
enter the market. There's more kind of ship from store
and click and collect options, and ultimately it comes down to.
Speaker 2 (22:08):
Like you ask me, kind of what would change it?
Speaker 3 (22:11):
What would change it is that you and I should
be willing to start paying for something that we've got
for free for the last fifteen years. And until that changes,
it's kind of hard to see the revenue wind, you know,
change the direction from which it blows.
Speaker 1 (22:29):
All right, So changing gears a little bit. You know,
you spoke about railroads. You mentioned that the Canadians you prefer,
so I guess Canadian National and Pacific Kansas City. What's
driving that conviction for those two relative to its peers.
Speaker 3 (22:46):
I think they have very good networks within North America.
I think they have exposure to very good end markets
and multiple end markets. They don't have exposure to some
challenge gend markets like coal and domestic intromodel in the US,
and so all put together, including the investments that they've
(23:09):
made over the years, we think that they have the
capacity with their network and the end market is to
support growth that will drive double digit EPs growth over time.
I think it is going to be a slightly more
challenged growth environment within the US, although I'd say the
US rail EPs growth algorithm is a little bit TBD
(23:35):
because I think we go into this upcycle with a
very different setup than we've done the last i'd say
four or five up cycles, where I say, for the
first time in twenty years, all the rail CEOs are
aligned on the view that they need growth to drive
earnings rather than focusing on other areas like PSR or
(23:57):
cost cutting or never mind. The volumes will go off
for the price and a bunch of different things, and
so it'll be very interesting to see if they can
actually convert on that or not. And again it's just
like parcel, it's not just about volumes. Volumes actually have
been pretty decent the last couple of years, it's just
not dropped through to the bottom line. So the question is
(24:18):
are you able to get margin a creative volume growth
into the upcycle or not, especially because our data shows
us that the last three up cycles going back ten years,
the market has shown a tendency to pivot towards truck
rather than rail going into an up cycle because service
(24:39):
becomes a lot more important than price when you need
to restock your shelves on an expedited basis. So it
depends on sort of how this upcycle plays out as well.
But I would say pretty high confidence on the ability
of the Canadian rails to grow somewhat of a show
me story on whether US rail earnings growth will be
(25:03):
closer to mid single digits or high single digits or
load double digits.
Speaker 1 (25:08):
You know, you mentioned domestic inner model in the US,
and that was you know, I guess from what you said,
a headwind for the US carriers given their exposure to it.
I'm just curious. You know, if the truckload market improves
like you know you think it is in the second half,
isn't that good for domestic innermodel demand and rates?
Speaker 2 (25:29):
Yes and no.
Speaker 3 (25:30):
I think it depends on how and why the market improves. Again,
we've seen the last three upcycles going back ten years,
truck spot rates in each case hit new record highs
in some cases up to twenty thirty forty percent. Contract
rates were high single digits, double digits, And yet truck
took a lot of share from rail because in an
up cycle where you need to restock on an expedited basis,
(25:55):
you don't as a shipper, don't really care about price.
You care more about service, and rock, as we all know,
is significantly faster and more flexible than rail. Now, make
no mistake, I think rail and domestic infromodal will also
benefit from the rising tide, but I think it will
be a third or fourth derivative benefit. And I'm not
(26:16):
sure either the cycle will extend or if there's the
scale of the benefit they will see. When you consider
the offsets from fuel prices, mix and the three and
a half percent labor inflation, they sort of locked into
if that's going to be enough to drive the bottom line.
Speaker 1 (26:39):
Right and the rails. Did you know during the last
I guess trucking peak during the pandemic, they really missed
out on an opportunity to take more volumes just because
they just didn't have enough people on the ground to
operate the networks. So in the US, do you have
a RRO that that you that you that you like?
(27:00):
Were you kind of neutral to underweight on those?
Speaker 3 (27:04):
So we are neutral on Union Pacific and CSX and
we have an underweight rating on Norfolk Southern. We think
that that Union Pacific, you know, probably is viewed as
a you know, a cyclical core holding, almost like a behamoth.
Like if you are a large investor who actually investment cyclicals,
you almost have to own Union Pacific by default. And
(27:25):
so I'd say, you know, that's probably the auder.
Speaker 1 (27:27):
Of preference and what's driving the underweight on Norfolk Southern.
Speaker 2 (27:32):
Again, I think they are doing all the right.
Speaker 3 (27:34):
Things, and I think, you know, I obviously like the
fact that they brought john or there. I think they
are absolutely focused on productivity and service. I'm just not
sure how much dry powdered there still is. Kind of
our numbers have shown clearly that Norfolk Southern. I don't
think Norfolk Southern really has a cost problem. I think
it has a revenue problem. They have had the lowest
(27:54):
costs per car load of any North American Class one
railroad in the last ten years. They also cut the
most during the PSR years. But they also have the
lowest revenue per carload of any North American classman railroad,
and I think that's probably the bigger issue. So again,
my problem is not so much with the company or
the management team or as much as it is with
(28:18):
market expectations and what's priced into the stock presk.
Speaker 1 (28:22):
So within the rail industry, I'm hearing more and more
about consolidation again for some crazy reason. What are your
thoughts on consolidation. Do you think it's a probability that
we'll see it anytime soon?
Speaker 2 (28:36):
Your word's not mine on the crazy reason.
Speaker 3 (28:39):
But yeah, we can go into the genesis of where
the speculation came out and such. But I think everybody
knows that it is going to be very, very hard
to do real M and A in North America unless
the STV changes its rules. And I think the jury
is out and it's anybody's guests on the ability and
(29:01):
willingness of the STB to change those rules to get
any transactions through.
Speaker 1 (29:07):
And barring those rules, I mean, obviously we would all
understand up from a cost standpoint, the benefit for a
merger between like a Union Pacific with a Eastern rail
like a like a CSX or a Norfolk Southern. But
do you think there's real benefits for the shippers, because
that's what you know, the regulators really care about.
Speaker 3 (29:29):
Uh. Yeah, And I think that's why those rules were
originally made looking at kind of the potential slashed risk
of downstream follow on mergers as well. And again, it'll
be interesting and I think somewhat surprising if the STV
just decided to go back on those rules.
Speaker 2 (29:50):
But yeah, I think.
Speaker 3 (29:54):
You saw in the case of the last reel Amnate transaction,
although that was pretty unique with CPKC kind of revenue
synergy number was a lot higher than the cost entergy number.
I think that sort of needs to be the case
for any transaction going forward.
Speaker 2 (30:07):
Uh And and you're going to need.
Speaker 3 (30:09):
To sell the prospect of better service with fewer interchange interchanges. Again,
I think there needs to be a lot of show
me in that process.
Speaker 2 (30:20):
Gotcha, okay?
Speaker 1 (30:22):
And so you know you're underweight C. H. Robinson. We
recently had their CEO Dave Boseman on the podcast, and
you're also underweight expeditors a freight forwarder. Could you just
explain why you're so negative on the non asset guys.
Speaker 3 (30:43):
Sure, so, on the forwarding side of the business, we
think that there's still some frath to give up, not
post pandemic as much as you know, post Red Sea disruptions,
although kind of recent headlines notwithstanding. But I think by
their own admission, there is some kind of almost over
earning in the last couple of years to give up
(31:05):
as conditions they're normalized. But it's it's mostly on the
NASA business that kind of, you know, are some of
our concerns. Now again, I'll give the management team all
the credit in the world for taking out a lot.
Speaker 2 (31:17):
Of cost in in the last eighteen months.
Speaker 3 (31:20):
They do appear to be very focused on technology and productivity,
uh and using AI tools to kind of deliver that
operating leverage, which is not something usually talk about when
it comes to an asset light company. Like, they don't
have assets, so they don't really have operating leverage, except
that they're people are their assets, and so if they
(31:40):
can figure out a way to either give them the
tools or kind of you know, use tools in their
stead uh tech tools, I mean, they can kind of
deliver some opening leverage there. Again, I think, much like Norfolk,
I think that the market you know, maybe overestimating the
sustainability of some of the game they've had the last
few years. I mean, they have taken out a lot
(32:02):
of cost kind of I think what's happened in sh
Robins so far is a little closer to PSR rather.
Speaker 2 (32:09):
Than a transformation in the way they do business.
Speaker 3 (32:15):
Now, maybe I'm wrong, and maybe they will kind of
show a tremendous amount of growth in the number of
transactions per head count using some of their AI tools
and automation when the upcycle shows up.
Speaker 2 (32:28):
But again I think that remains a show me story.
Speaker 3 (32:32):
And in the meanwhile, I continue to think that digitization
is not a genie that you can put back in
the model. On the asset light side, we have already
seen a lot of this digitization bring price transparency, transaction, automation,
the ability of small tech startups to penetrate the space
(32:54):
very quickly, the ability of large shippers to vertically integrate
into the space. We think others within the UH trucking
and transportation ecosystem can verticalate vertically integrate into the space
over time. And so I think all of that probably
makes this a more competitive, lower margin business.
Speaker 2 (33:16):
UH.
Speaker 3 (33:16):
And usually kind of you know, technology adoption brings price deflation,
and I think that's a risk to.
Speaker 2 (33:24):
The structural rest to the brokers over time.
Speaker 3 (33:27):
At the same time, UH kind of depending on how
the cycle plays out, if there's a quick uh sudden
surge and spot rates UH, that could put broker margins
under pressure until they can reprice for it.
Speaker 2 (33:40):
UH.
Speaker 3 (33:41):
And also our surveys have shown that shippers have a
preference to move to asset based carriers who have more
visibility and certainty UH in their truck supply, especially given
UH some of these you know headlines around fraud uh
and some of the obviously the driver headlines around availability
(34:03):
with English proficiency and such. If shippers are concerned about
the availability of truck supply in enough cycle, they will
move towards acid based carriers.
Speaker 2 (34:12):
That's what's happened in past cycles.
Speaker 3 (34:14):
Our surveys have shown that's what's going to happen to
cycle as well, and so both margins and share could
cyclically come under pressure if there's a sudden up cycle
as well.
Speaker 1 (34:24):
Gotcha, you mentioned AI When it comes to technology, do
you think AI is going to be more impactful for
one sub segment of freight transportation and also just to
dovetail on that with regards to technology autonomous trucking, your
thoughts on when it's going to come sure?
Speaker 2 (34:47):
So on the.
Speaker 3 (34:47):
First point, yeah, I think we wrote one of the first,
if not the first report on the Street on AI
and freight transportation back in twenty twenty three, I think
it was.
Speaker 2 (34:57):
And yeah, look, I think.
Speaker 3 (35:00):
Freight transportation is probably the largest industry in the world,
with an over one trillion dollar time in the US
and like six trillion dollar time globally.
Speaker 2 (35:11):
That doesn't make anything.
Speaker 3 (35:12):
We just move everybody else's stuff from point A to
point B that makes this entire industry one giant process function,
and technology is very good at improving the efficiency, productivity,
sustainability off process functions. And so I think there's no
(35:35):
industry in the world that benefits from technology, whether it
is and I'm going to throw every single tech buzzword
of the last decade at you, like you think of AI,
machine learning, autonomous blockchain, even humanoid robots, and automation, which
is an area that we're very focused on and written
(35:56):
a lot of research on. I think freight transportation is
going to be one of the biggest fisheries of that.
Obviously as an industry a very large employer, but not
necessarily an employment of choice, especially for a lot of
young people, and there is going to be a driver
shortage over the years. It is a dangerous job in
(36:17):
many cases, whether it's truck driving or railroads or in warehouses.
And so that's where I think AI and automation can
really step in and add value. And I think it
can be up and down the transportation valuation. But let's
say particularly focused on the asset light guys, and particularly
focused on anything to do with truck driving or warehousing.
(36:40):
On the latter question again, I think autonomous trucking is here.
I think Aurora has obviously launched commercial driver lest operations
in Texas in the end of April and they're doing
over one thousand miles of driverlest running every week and
generating revenues on that. They will start serial commercial production
(37:02):
in towards the end of next year or early twenty
twenty seven.
Speaker 2 (37:07):
And when that happens, I think anybody.
Speaker 3 (37:09):
In this industry can go out there and buy a
truck that can drive itself. So I think you when
we talk to folks across the industry, whether it's carrier,
shippers or brokers, there are a lot more enthused about
autonomous trucking.
Speaker 2 (37:24):
And like I know, we've been talking about autonomous trucking.
Speaker 3 (37:27):
For over ten years now, but when we first started
talking about it, there was a lot of eyebrows raised,
followed by a lot of laughter and a lot of
not in my lifetimes, which became a lot of not
in my careers.
Speaker 2 (37:41):
Now we don't get that.
Speaker 3 (37:42):
Now it's taken very seriously and it's a very credible thing. Obviously,
you still need the industry to partake of the technology
in a big way. For that to happen, someone needs
to go to a carrier and toss them.
Speaker 2 (37:58):
The keys to a pack.
Speaker 3 (38:00):
Or Volvo or Dameler or any other brand truck and say,
here's this truck that's going to go drive itself. Go
drive it or go put it into operations, depending how
we're going to use it and when they see it
for themselves, I think this industry will be full of
fast followers, gotcha.
Speaker 1 (38:19):
And you know I don't cover airlines. I'm more concerned
about the movement of stuff versus people, But I know
you cover them. So what's your favorite airline?
Speaker 3 (38:26):
And why we are very bulished the US airline space
We have been pretty much since the trough of the pandemic.
I think travel is now considered a staple for most households.
Like we do a monthly consumer survey here Morgan Stanley,
and travel has been consistently rated as the third highest
(38:48):
spending in tent category off only groceries and household staples
for high end consumers and number one spending.
Speaker 2 (38:55):
In tent category.
Speaker 3 (38:56):
And I think that's structural, and I think that's not
going to change anytime soon. So very strong demand. At
the same time, this industry is premiumizing. I think that
is a very very important trend. The US airline industry
basically saw price deflation for like three decades, over three
(39:16):
decades going into the pandemic, and in the last decade
in particular, this industry almost a race towards commoditization, where
the low cost carriers were growing very quickly and the
mainline carriers were launching basic economy products to try to
compete with the low cost carriers, and so it was
(39:36):
sort of a race to the bottom on fares, and
experience for the average flyer coming out of the pandemic
has been the exact opposite. There's been this push to
like everybody wants to fly in the front of the plane,
everybody wants to access the lounge before takeoff, everybody wants
a premium credit card to get the free check back
(39:57):
and the early boarding. And so this industry is premiumizing
to the point where you are now seeing the low
cost carriers introduce a first class product for the first time,
open lounges for the first time, fly to exotic destinations,
and try to penetrate international markets for the first time.
Speaker 2 (40:17):
And that's very good for this industry.
Speaker 3 (40:18):
Over all, in addition to the fact that supply remains
structurally constrained at least on peak levels because of aircraft availability,
pilot availability, gate availability, ATC capacity, maintenance capacity, and none
of those things are fixing themselves any time soon. So
we like the US airline industry as a whole. We
(40:41):
actually have no underweight rated stocks in the US airlines
right now, but our top three picks are Alaska, Delta,
and United. But we also like Americans, Southwest and Sun Country.
Speaker 1 (40:55):
All right, great, well, Robbie, I really want to thank
you for your time and insights today. I think we're
coming up on the hour, so thank you so much
for joining us.
Speaker 2 (41:04):
Absolutely, thanks for having me.
Speaker 3 (41:06):
Lee.
Speaker 2 (41:06):
Hope to be back soon.
Speaker 1 (41:08):
You sure, we'll do check the mail and I want
to thank you for tuning in. If you liked the episode,
please subscribe and leave a review. We've lined up a
number of great guests for the podcast, so please check
back to your conversations with C speed executives, shippers, regulators,
and decision makers within the freight markets. Also, if you
want to learn more about the freight transportation markets, check
(41:31):
out our work on the Bloomberg Terminal at Bigo and
on social media. This is Lee Klaskow signing off, and
thanks for talking transports with me.
Hi everyone, this is Lee Claska when We're Talking Transports.
Welcome to the Bloomberg Intelligence Talking Transports podcast. I'm your host,
Lee Klasgow, Senior Freight transportation and logistics analysts at Bloomberg Intelligence,
Bloomberg's in house research on of almost five hundred analysts
and strategists around the globe. Before diving in a little
public service announcement, your support is instrumental to keep bringing
(00:29):
great guests and conversations to you, our listeners, and we
need your support. So please, if you enjoy this podcast,
share it, like it and leave a comment. Also, if
you have any ideas for future episodes or just want
to talk transports, please hit me up on the Bloomberg terminal,
on LinkedIn or on Twitter at Logistics Lead. Now onto
our episode I'm very excited to have with us today.
(00:50):
Robbie Shanker Back onto the podcast. Robbie is a managing
director and lead analyst for North American Freight transportation and
Airlines for Morgan Stanley. He's been with Morgan Stanley for
over twenty years and has been covering transports since twenty sixteen.
Prior to covering transports, Robbie led coverage of North American Autos.
Welcome back to the podcast, Robbie.
Speaker 2 (01:12):
Thanksuy, Always a pleasure to be here.
Speaker 1 (01:15):
And I want to congratulate you. You are the first
guest to be on the Talking Transport podcast three times,
so I know that that's a big honor for you.
Speaker 2 (01:25):
It is absolutely a big honor for me.
Speaker 3 (01:27):
I don't know if I get a T shirt, but
if not, I'll make one for myself.
Speaker 1 (01:31):
Okay, well, we'll send you a pad with Bloomberg on it.
So I wanted to have you on again because you
know we're coming up on the second quarter earning season.
Obviously it's a busy time for everybody trying to figure
out what's going on. What major trends are you looking
at going into two Q earning season.
Speaker 3 (01:50):
Yeah, I think we continue to remain on cycle watch.
I think we have been for over three years now.
But what at this time last year was a will
it want it on upcycle versus down cycle is more
of a post tariff implications type cycle watch. Recall that
(02:13):
I think when I was on your show Lasting in January,
I was talking about a tale of two.
Speaker 2 (02:18):
Halves in twenty twenty five, where we would.
Speaker 3 (02:21):
See a robust first half as we restocked ahead of
tariff deadlines in the second half of the year. Clearly
that's not what happened. We were taken by surprise by
the timing, the magnitude, and the volatility of the tariff
announcements and that has led to a much choppier first
(02:41):
half than we had expected. But with the current ninety
day tariff window, we have seen an uptick in activity
in the last month or so, whether it's our TLFi
index or trucks pot RAITs, and the question is how
long will that sustain. We'll be see a second surge
(03:02):
towards the end of the second half of the second quarter,
and will that continue beyond the ninety day window or
will we see a cliff post that ninety first day.
I think these are the debates that are out there
right now, and obviously we're going to be we continue
to track broad macro geopolitical headlines as well.
Speaker 1 (03:23):
So obviously there's a lot of uncertainty because the geopolitical
risks and effects on the freight markets. So like, are
you bullish on any sub segments because they've been really
you know, underperforming the broader markets, Whether if you're looking
at the LTL Space, truckload space parcel carriers. The only
ones that really been outperforming a little bit have been
(03:44):
the rails. But that's just just barely.
Speaker 2 (03:48):
I think that's fair. I think for those who have
been following my research over.
Speaker 3 (03:52):
The years, I'm generally a glass holf full guy, and
I'm generally a.
Speaker 2 (03:57):
High conviction guy.
Speaker 3 (03:59):
But it's very hard to have conviction in this kind
of environment, with constantly changing headlines and honestly the rules
of the game constantly changing. And if it is this
hard for me sitting here on Wall Street, can imagine
the average CFO or logistics manager out there how they're
(04:21):
going to be making even short term inventory management decisions,
let alone longer term strategic decisions on near sharing or
anything else.
Speaker 2 (04:34):
So in this world of kind of.
Speaker 3 (04:36):
Extreme volatility, I continue to believe that we will be
set up for a reasonably robust.
Speaker 2 (04:44):
Second half of the year.
Speaker 3 (04:46):
Now, all bets are off if the consumer slips into
a recession. And there are some very smart economists and
others out there who say that we have not yet
felt the impact of tariffs on the consumer, and that
happens in the back half of the year. So if
you are going to see the first broad based consumer
recession we've had since two thousand and eight. It's hard
(05:07):
to be bullish anything, but in all but that scenario,
I think you can be bullish select parts of the
transportation space. I think pretty much all of trucking, both
TL and LTL, but primarily TL I think will lead
us into that restock up cycle, especially if it's driven
(05:29):
by the consumer side. LTL will follow when it spreads
into the industrial and markets. We continue to like the
Canadian railroads as the best rail growth stories out there.
We are neutral with a cautious bent on the US rails,
and some of that is also reflecting the fact that
(05:49):
the market appears to have kind of founded defensive hideout
and the US rails yere to day looking at the
relative stock performance, and we continue to remain structurally bear
the intermodal companies, the freight forwarders and brokers, as well
as the parcels. So I think if you think there's
going to be a fairly robust back half driven by
(06:13):
consumer strengths, you should be long trucking.
Speaker 1 (06:16):
It's interesting, so you're you're pretty optimistic on the second
half in terms of demand, and I guess that you
think that rates are going to go higher. So for
the truckload carries, what are you modeling for rates to
do in the second half.
Speaker 3 (06:29):
Look, we've already seen spot rates up about eight percent
in a month in the past month, and I think
there are some indications in the markets preparing for a
pretty robust July and August as well, which would be
kind of countersignical. But obviously the cycle and seasonality does
not matter in the environment we are in right now,
(06:53):
and so our cure model continues to expect a double
digit increase in sport rates over the next six months.
And it's interesting that even in this extremely choppy environment,
the tls appear to have got low single digits, if
(07:13):
not mid single digit rate increases to.
Speaker 2 (07:15):
The first half of the year.
Speaker 3 (07:17):
I say that's actually a better outcome than people were thinking,
you know, probably twelve months ago, maybe even nine months ago.
And I think that can push into high single digits
when you start the first phases of twenty twenty six
mid season towards the back half of the year. So
(07:38):
I think if you are looking for an up cycle,
it's more of a twenty twenty six story at this point.
And I think if everything goes to plan, you should
be looking for sport rates comfortably double digits, if not
twenty percent up from here, and contract rates.
Speaker 2 (07:57):
Up mid to high single digits.
Speaker 3 (07:59):
Okay, this is especially true if you see some kind
of supply side catalyst, which you might get into in
a second, but you know, if whether it's the English
enforcement or other issues, if you see a kind of
other supply side catalyst, that could squeeze the cycle even
more so.
Speaker 1 (08:16):
From a demand standpoint. So you're so like I've been, like,
you know, hearing from a lot of folks that you know,
maybe this peak season and back to school season might
like merge, we might have more of a plateau. But
after that plateau, because people are trying to get ahead
of you know, the ninety day tariff window, isn't there
just going to be another air pocket that that we're
(08:38):
going to have to deal with? Or you think that
the demand is going to be more on the industrial
side of of the market, which has been very slow and.
Speaker 4 (08:49):
Relatively speaking, Yeah, look, I think that's a very plausible
scenario that we have a pretty decently strong two Q
and then it just falls off a cliff because we
just pulled forward all our demand for a peak season,
and we don't really have any major holiday related restocking.
(09:12):
Even if we actually do have a pretty decent holiday season,
that is a scenario, and that is a risk.
Speaker 3 (09:18):
But my view is that I don't think two Q
has been nearly as strong or consistent as bran broad
based as it should have been. If you had seen
again broad based restalking across even in the entire consumer environment,
(09:38):
if it hadn't spread to industrials, I think you'd have
seen a much stronger two Q than you actually did.
We wrote a note, say a titled the window of
opportunity is now the day of the ninety day tariff suspension,
and that note kind of discussed a scenario where like
(09:59):
LU could broken supply chains if everybody tried to build
like a year or multiple years of inventory in nineteen days.
Speaker 2 (10:09):
In that scenario, I would be concerned about a cliff.
Speaker 3 (10:13):
I think what we have seen so far has been
an initial pent up demand pop and then a little
bit of a semi lull in June, potentially followed by
a little bit of a surgery and in July. I
don't think that is enough to drive an air pocket
or a cliff in the back half of the year,
(10:34):
especially if the consumer stays robust and let's say get
some level of inflation relief and interest rate relief and
tax rate relief, that should continue the d stock through
the back half of the year and into twenty six.
But we're very much dealing with scenario analyses here, right.
(10:54):
I mean, there's a scenario where we go into a
proper recession back half of the year. There's a scenario
where the overall macro is fine, but transports has a recession.
If we pulled forward and restocked into q uh and
there's a scenario where everything was pretty great. And so
that's also why the stocks in the market are somewhat
bereft of direction at the moment.
Speaker 1 (11:14):
Right. You know, I love to have the cell side
on the podcast because you know, they're able to talk
about buy holed cell where that's something we don't do
Bloomberg Intelligence. So you know, so what within the truckload space,
who's your favorite name and why.
Speaker 3 (11:28):
So Night continues to remain are a favorite name within
transports overall and the trucking space simply because they're the biggest,
it's probably the most representative and liquid stock. And I
think the management team there also has built a reputation
over the years of trying to stay half a step,
if not one step, ahead of the cycle.
Speaker 4 (11:50):
UH.
Speaker 3 (11:51):
They also are going into this upcycle more diversified than
they've ever been UH and probably with more operating leverage
than they've ever had.
Speaker 2 (12:01):
So Nights are number one.
Speaker 3 (12:04):
Although we like pretty much all the lt ls, all
the tls, and all the lt ls in the space,
with the exception of XPO, where we continue to I mean,
we like the company, we like the management team, we
like what they're doing, but we are not a huge
fan of the valuation there and kind of what's a
price into the stock?
Speaker 1 (12:24):
Gotcha? Do you have a favorite LTL lesson truckload carrier
that you.
Speaker 3 (12:30):
I think ODFL is the highest quality name in the space,
but on a relative risk reward basis, I would say
ARC Best in TFI, although ARC Best is slightly smaller cap.
But I would say Night as well. I think a
lot of people still view Night as a TL, but
they're kind of almost a national lt L, and so
I would say NIGHT for both t L and lt L.
Speaker 1 (12:52):
So there's a lot of stuff going on in the
lt L space. FedEx Freight to announce that they're going
to spin off that company. Do you think that has
any real ramifications for the other players. Do you think,
you know what is a very rational pricing environment. Do
you think there maybe some of the players could lose
some discipline because of that spin out.
Speaker 2 (13:14):
I think that.
Speaker 3 (13:14):
Remains to be seen. First of all, I think that
spinout is still some time off. We'll see what FedEx
plays today in case they somehow accelerate that transaction or something,
but it's still probably twelve months away. And I think
everything we've seen so far, from the fact that they
have signed a long term operational agreement with FedEx Parcel,
(13:38):
the fact that the CEO that they announced last month
is an existing like the former head of the LTL
business and part of the current top management team of FedEx,
even the fact that they haven't changed the name. There
are very few spin off examples in history where the
(13:58):
spin co keep the name of the old cop. Usually
you try to distance yourself as much as possible from
your previous guys, to the market things you are completely independentity.
But the new entity is still going to be called
FedEx Freight, and I think all of that signals that
not much is really going to change in our view
(14:19):
from an operating standpoint for either FedEx Parcel or for
FedEx Freight, and from a go to market strategy. If anything,
FedEx is going to be hiring FedEx Freight is going
to be hiring three hundred new salespeople.
Speaker 2 (14:33):
It's probably one of the.
Speaker 3 (14:35):
First instances in corporate history where a company that is
by far the industry leader in the space is suddenly
on day's zero, going to end up having an all
new sales force of people who've never worked there before
or never done that before.
Speaker 2 (14:51):
And it's going to be interesting to see how they
actually deal with that.
Speaker 3 (14:54):
But I don't think that there's going to be much
change in LTL market dynamics as a result of this.
I'm paying much closer attention to how sticky LTL TL
conversion is. I'm paying a lot closer attention to how
much excess capacity is in the LTL space right now
(15:17):
and how is that deployed by the existing players. I'm
paying attention to what Amazon is doing, not so much
as Amazon kind of taking share in the market, as
much as is Amazon going to It's going to run
an LTL operation out of its existing warehouses instead of
cross dogs, and that I think would be fairly transformative
(15:39):
for the LTL space if you don't need a network
of cross dogs to do lter anymore. So I think
those our factors that I think are likely to be
more transformational to the LTL outlook raw than what fex
is doing.
Speaker 1 (15:54):
Gotcha okay? And on the truckload side before before we
leave the truckload area, is there a name that you're
negative on or you're pretty much neutral to positive on
all the names that you cover?
Speaker 3 (16:07):
Now, we think the rising tide will lift all the
boats in the space. We have an equal weight rating
on Heartland, which is our lowest ranked DL in our coverage,
But I'd say overall be a pretty bullish trucking as
a whole.
Speaker 1 (16:20):
Now, you know, I don't follow Heartland. I used to
a long long time ago. But aren't they the most
leverage to the cycle given the fact that they really
don't do anything else besides.
Speaker 2 (16:30):
Truckload correct But at the same time they do very
little spots.
Speaker 3 (16:34):
They kind of they have their own little kind of
moat and their own little niche, and they kind of
run the business. I would say they kind of stick
to their knitting rather than being super dynamic and kind
of blowing with the wind, and so that makes them
a great stock to own and great earnings algorithm.
Speaker 2 (16:55):
For certain parts of the cycle.
Speaker 3 (16:56):
But again you're probably going to see more pork to
the cycle at more dynamic and more spot exposed tls
out there.
Speaker 1 (17:05):
So you're underweight both FedEx and UPS. FedEx is reporting
at the close todays. We don't need to talk about
it because that's not going to have much of a
shelf life for us. But kind of structurally, why so
negative on the parcel providers. I mean, they have been
underperforming the markets, but what's driving that call for you?
Speaker 3 (17:23):
Look, we have been long term structural underweights and the
parcel names largely because most simply put, I think e
commerce parcel delivery is just a very challenged business. I
think you and I and most listeners of your podcast
are probably never going to pay for shipping ever again
for something they buy online because we're basically conditioned to
(17:44):
getting free shipping for something we buy online. And at
the same time, the cost of delivering our packages has
been steadily going up a because of general inflation.
Speaker 2 (17:56):
But also because of service levels.
Speaker 3 (17:58):
What used to be afford delivery window is now a
one day or a same day delivery window. What used
to be a five day week service is now a
seven day week service. They now need to go to
many more addresses in the US, They need to keep
investing in their network, kind and tech, and so when
the pricing power overall is low and the investments needed
(18:24):
to drive that are high, that puts a lot of
pressure on returns overall. At the same time, you've seen
the competitive structure change in this industry with the emergence
of Amazon Logistics and a lot of small, mom and
pop and regional players. In addition to let's say the
(18:44):
re emergence of the US Post Office, you've seen e
commerce supply chains entirely change. We wrote a big report
on the regionalization of the Parson delivery market last year
and how a long haul, high speed air and express
truck moves have been replaced by shorthaul, local truck and
(19:07):
van moves that completely changes their e commerce supply chain.
We just published a note on the rural opportunity here.
We think it's a brilliant dollar e commerce and retail
opportunity that's currently untapped, and the question is when Amazon
is putting four billion dollars into rural expansion and Walmart's
(19:30):
investing as well, it looks like UPS and FedEx are
maybe pulling back on capex somewhat.
Speaker 2 (19:36):
So I think there are multiple.
Speaker 3 (19:38):
Structural challenges in the space being a standalone e commerce
parcel delivery company.
Speaker 2 (19:48):
Now UPS and fedexs are obviously not standing still.
Speaker 3 (19:50):
They're making their own tech investments, They've made acquisitions, they're
pushing into healthcare. They're obviously taking a very close look
at costs.
Speaker 2 (19:59):
But ultimately, I think you need to solve your revenue problem.
Speaker 3 (20:04):
Uh and and that's what may take a little longer
than than than we think people may appreciate.
Speaker 1 (20:11):
Yeah, for those that are listening, if you if you
go back to the episode previous to this one, I
spoke with the CEO of clear Jet. They're a kind
of new parcel UH provider where it's really you know,
they're taking a narrow body capacity and putting parcels in
that and then using you know, gig economy folks to
(20:35):
do the final delivery. It's a pretty interesting model that
you know, really provides the service that FedEx and UPS
are at a lower cost. So for those that want
to learn more, I recommend taking a listen to that.
So is there anything Is there anything besides an increase
(20:56):
in demand that the parcel guys can do to really
show improvements, because you know, they're all doing their own
cost cutting and productivity measures and trying to change your
networks to be more receptive to B two C versus
B to B. But is it really just about volumes
for them?
Speaker 2 (21:17):
Not at all. It's not about an increase in demand.
Demand was never the problem.
Speaker 3 (21:22):
If anything, e commerce growth has been the one thing
that's that it can steadily count on this economy. I
think last year the overall e commerce kind of tam
grew ten percent year over year, kind of in in
a pretty dull macro environment, and so demand's.
Speaker 2 (21:39):
Not the issue.
Speaker 3 (21:40):
The issue is margin, a creative demand, and we think
that the slice of the pie that kind of meets
the incumbent parcels criteria for kind of doing returns could
be shrinking as more and more competitors and the market
(22:00):
enter the market. There's more kind of ship from store
and click and collect options, and ultimately it comes down to.
Speaker 2 (22:08):
Like you ask me, kind of what would change it?
Speaker 3 (22:11):
What would change it is that you and I should
be willing to start paying for something that we've got
for free for the last fifteen years. And until that changes,
it's kind of hard to see the revenue wind, you know,
change the direction from which it blows.
Speaker 1 (22:29):
All right, So changing gears a little bit. You know,
you spoke about railroads. You mentioned that the Canadians you prefer,
so I guess Canadian National and Pacific Kansas City. What's
driving that conviction for those two relative to its peers.
Speaker 3 (22:46):
I think they have very good networks within North America.
I think they have exposure to very good end markets
and multiple end markets. They don't have exposure to some
challenge gend markets like coal and domestic intromodel in the US,
and so all put together, including the investments that they've
(23:09):
made over the years, we think that they have the
capacity with their network and the end market is to
support growth that will drive double digit EPs growth over time.
I think it is going to be a slightly more
challenged growth environment within the US, although I'd say the
US rail EPs growth algorithm is a little bit TBD
(23:35):
because I think we go into this upcycle with a
very different setup than we've done the last i'd say
four or five up cycles, where I say, for the
first time in twenty years, all the rail CEOs are
aligned on the view that they need growth to drive
earnings rather than focusing on other areas like PSR or
(23:57):
cost cutting or never mind. The volumes will go off
for the price and a bunch of different things, and
so it'll be very interesting to see if they can
actually convert on that or not. And again it's just
like parcel, it's not just about volumes. Volumes actually have
been pretty decent the last couple of years, it's just
not dropped through to the bottom line. So the question is
(24:18):
are you able to get margin a creative volume growth
into the upcycle or not, especially because our data shows
us that the last three up cycles going back ten years,
the market has shown a tendency to pivot towards truck
rather than rail going into an up cycle because service
(24:39):
becomes a lot more important than price when you need
to restock your shelves on an expedited basis. So it
depends on sort of how this upcycle plays out as well.
But I would say pretty high confidence on the ability
of the Canadian rails to grow somewhat of a show
me story on whether US rail earnings growth will be
(25:03):
closer to mid single digits or high single digits or
load double digits.
Speaker 1 (25:08):
You know, you mentioned domestic inner model in the US,
and that was you know, I guess from what you said,
a headwind for the US carriers given their exposure to it.
I'm just curious. You know, if the truckload market improves
like you know you think it is in the second half,
isn't that good for domestic innermodel demand and rates?
Speaker 2 (25:29):
Yes and no.
Speaker 3 (25:30):
I think it depends on how and why the market improves. Again,
we've seen the last three upcycles going back ten years,
truck spot rates in each case hit new record highs
in some cases up to twenty thirty forty percent. Contract
rates were high single digits, double digits, And yet truck
took a lot of share from rail because in an
up cycle where you need to restock on an expedited basis,
(25:55):
you don't as a shipper, don't really care about price.
You care more about service, and rock, as we all know,
is significantly faster and more flexible than rail. Now, make
no mistake, I think rail and domestic infromodal will also
benefit from the rising tide, but I think it will
be a third or fourth derivative benefit. And I'm not
(26:16):
sure either the cycle will extend or if there's the
scale of the benefit they will see. When you consider
the offsets from fuel prices, mix and the three and
a half percent labor inflation, they sort of locked into
if that's going to be enough to drive the bottom line.
Speaker 1 (26:39):
Right and the rails. Did you know during the last
I guess trucking peak during the pandemic, they really missed
out on an opportunity to take more volumes just because
they just didn't have enough people on the ground to
operate the networks. So in the US, do you have
a RRO that that you that you that you like?
(27:00):
Were you kind of neutral to underweight on those?
Speaker 3 (27:04):
So we are neutral on Union Pacific and CSX and
we have an underweight rating on Norfolk Southern. We think
that that Union Pacific, you know, probably is viewed as
a you know, a cyclical core holding, almost like a behamoth.
Like if you are a large investor who actually investment cyclicals,
you almost have to own Union Pacific by default. And
(27:25):
so I'd say, you know, that's probably the auder.
Speaker 1 (27:27):
Of preference and what's driving the underweight on Norfolk Southern.
Speaker 2 (27:32):
Again, I think they are doing all the right.
Speaker 3 (27:34):
Things, and I think, you know, I obviously like the
fact that they brought john or there. I think they
are absolutely focused on productivity and service. I'm just not
sure how much dry powdered there still is. Kind of
our numbers have shown clearly that Norfolk Southern. I don't
think Norfolk Southern really has a cost problem. I think
it has a revenue problem. They have had the lowest
(27:54):
costs per car load of any North American Class one
railroad in the last ten years. They also cut the
most during the PSR years. But they also have the
lowest revenue per carload of any North American classman railroad,
and I think that's probably the bigger issue. So again,
my problem is not so much with the company or
the management team or as much as it is with
(28:18):
market expectations and what's priced into the stock presk.
Speaker 1 (28:22):
So within the rail industry, I'm hearing more and more
about consolidation again for some crazy reason. What are your
thoughts on consolidation. Do you think it's a probability that
we'll see it anytime soon?
Speaker 2 (28:36):
Your word's not mine on the crazy reason.
Speaker 3 (28:39):
But yeah, we can go into the genesis of where
the speculation came out and such. But I think everybody
knows that it is going to be very, very hard
to do real M and A in North America unless
the STV changes its rules. And I think the jury
is out and it's anybody's guests on the ability and
(29:01):
willingness of the STB to change those rules to get
any transactions through.
Speaker 1 (29:07):
And barring those rules, I mean, obviously we would all
understand up from a cost standpoint, the benefit for a
merger between like a Union Pacific with a Eastern rail
like a like a CSX or a Norfolk Southern. But
do you think there's real benefits for the shippers, because
that's what you know, the regulators really care about.
Speaker 3 (29:29):
Uh. Yeah, And I think that's why those rules were
originally made looking at kind of the potential slashed risk
of downstream follow on mergers as well. And again, it'll
be interesting and I think somewhat surprising if the STV
just decided to go back on those rules.
Speaker 2 (29:50):
But yeah, I think.
Speaker 3 (29:54):
You saw in the case of the last reel Amnate transaction,
although that was pretty unique with CPKC kind of revenue
synergy number was a lot higher than the cost entergy number.
I think that sort of needs to be the case
for any transaction going forward.
Speaker 2 (30:07):
Uh And and you're going to need.
Speaker 3 (30:09):
To sell the prospect of better service with fewer interchange interchanges. Again,
I think there needs to be a lot of show
me in that process.
Speaker 2 (30:20):
Gotcha, okay?
Speaker 1 (30:22):
And so you know you're underweight C. H. Robinson. We
recently had their CEO Dave Boseman on the podcast, and
you're also underweight expeditors a freight forwarder. Could you just
explain why you're so negative on the non asset guys.
Speaker 3 (30:43):
Sure, so, on the forwarding side of the business, we
think that there's still some frath to give up, not
post pandemic as much as you know, post Red Sea disruptions,
although kind of recent headlines notwithstanding. But I think by
their own admission, there is some kind of almost over
earning in the last couple of years to give up
(31:05):
as conditions they're normalized. But it's it's mostly on the
NASA business that kind of, you know, are some of
our concerns. Now again, I'll give the management team all
the credit in the world for taking out a lot.
Speaker 2 (31:17):
Of cost in in the last eighteen months.
Speaker 3 (31:20):
They do appear to be very focused on technology and productivity,
uh and using AI tools to kind of deliver that
operating leverage, which is not something usually talk about when
it comes to an asset light company. Like, they don't
have assets, so they don't really have operating leverage, except
that they're people are their assets, and so if they
(31:40):
can figure out a way to either give them the
tools or kind of you know, use tools in their
stead uh tech tools, I mean, they can kind of
deliver some opening leverage there. Again, I think, much like Norfolk,
I think that the market you know, maybe overestimating the
sustainability of some of the game they've had the last
few years. I mean, they have taken out a lot
(32:02):
of cost kind of I think what's happened in sh
Robins so far is a little closer to PSR rather.
Speaker 2 (32:09):
Than a transformation in the way they do business.
Speaker 3 (32:15):
Now, maybe I'm wrong, and maybe they will kind of
show a tremendous amount of growth in the number of
transactions per head count using some of their AI tools
and automation when the upcycle shows up.
Speaker 2 (32:28):
But again I think that remains a show me story.
Speaker 3 (32:32):
And in the meanwhile, I continue to think that digitization
is not a genie that you can put back in
the model. On the asset light side, we have already
seen a lot of this digitization bring price transparency, transaction, automation,
the ability of small tech startups to penetrate the space
(32:54):
very quickly, the ability of large shippers to vertically integrate
into the space. We think others within the UH trucking
and transportation ecosystem can verticalate vertically integrate into the space
over time. And so I think all of that probably
makes this a more competitive, lower margin business.
Speaker 2 (33:16):
UH.
Speaker 3 (33:16):
And usually kind of you know, technology adoption brings price deflation,
and I think that's a risk to.
Speaker 2 (33:24):
The structural rest to the brokers over time.
Speaker 3 (33:27):
At the same time, UH kind of depending on how
the cycle plays out, if there's a quick uh sudden
surge and spot rates UH, that could put broker margins
under pressure until they can reprice for it.
Speaker 2 (33:40):
UH.
Speaker 3 (33:41):
And also our surveys have shown that shippers have a
preference to move to asset based carriers who have more
visibility and certainty UH in their truck supply, especially given
UH some of these you know headlines around fraud uh
and some of the obviously the driver headlines around availability
(34:03):
with English proficiency and such. If shippers are concerned about
the availability of truck supply in enough cycle, they will
move towards acid based carriers.
Speaker 2 (34:12):
That's what's happened in past cycles.
Speaker 3 (34:14):
Our surveys have shown that's what's going to happen to
cycle as well, and so both margins and share could
cyclically come under pressure if there's a sudden up cycle
as well.
Speaker 1 (34:24):
Gotcha, you mentioned AI When it comes to technology, do
you think AI is going to be more impactful for
one sub segment of freight transportation and also just to
dovetail on that with regards to technology autonomous trucking, your
thoughts on when it's going to come sure?
Speaker 2 (34:47):
So on the.
Speaker 3 (34:47):
First point, yeah, I think we wrote one of the first,
if not the first report on the Street on AI
and freight transportation back in twenty twenty three, I think
it was.
Speaker 2 (34:57):
And yeah, look, I think.
Speaker 3 (35:00):
Freight transportation is probably the largest industry in the world,
with an over one trillion dollar time in the US
and like six trillion dollar time globally.
Speaker 2 (35:11):
That doesn't make anything.
Speaker 3 (35:12):
We just move everybody else's stuff from point A to
point B that makes this entire industry one giant process function,
and technology is very good at improving the efficiency, productivity,
sustainability off process functions. And so I think there's no
(35:35):
industry in the world that benefits from technology, whether it
is and I'm going to throw every single tech buzzword
of the last decade at you, like you think of AI,
machine learning, autonomous blockchain, even humanoid robots, and automation, which
is an area that we're very focused on and written
(35:56):
a lot of research on. I think freight transportation is
going to be one of the biggest fisheries of that.
Obviously as an industry a very large employer, but not
necessarily an employment of choice, especially for a lot of
young people, and there is going to be a driver
shortage over the years. It is a dangerous job in
(36:17):
many cases, whether it's truck driving or railroads or in warehouses.
And so that's where I think AI and automation can
really step in and add value. And I think it
can be up and down the transportation valuation. But let's
say particularly focused on the asset light guys, and particularly
focused on anything to do with truck driving or warehousing.
(36:40):
On the latter question again, I think autonomous trucking is here.
I think Aurora has obviously launched commercial driver lest operations
in Texas in the end of April and they're doing
over one thousand miles of driverlest running every week and
generating revenues on that. They will start serial commercial production
(37:02):
in towards the end of next year or early twenty
twenty seven.
Speaker 2 (37:07):
And when that happens, I think anybody.
Speaker 3 (37:09):
In this industry can go out there and buy a
truck that can drive itself. So I think you when
we talk to folks across the industry, whether it's carrier,
shippers or brokers, there are a lot more enthused about
autonomous trucking.
Speaker 2 (37:24):
And like I know, we've been talking about autonomous trucking.
Speaker 3 (37:27):
For over ten years now, but when we first started
talking about it, there was a lot of eyebrows raised,
followed by a lot of laughter and a lot of
not in my lifetimes, which became a lot of not
in my careers.
Speaker 2 (37:41):
Now we don't get that.
Speaker 3 (37:42):
Now it's taken very seriously and it's a very credible thing. Obviously,
you still need the industry to partake of the technology
in a big way. For that to happen, someone needs
to go to a carrier and toss them.
Speaker 2 (37:58):
The keys to a pack.
Speaker 3 (38:00):
Or Volvo or Dameler or any other brand truck and say,
here's this truck that's going to go drive itself. Go
drive it or go put it into operations, depending how
we're going to use it and when they see it
for themselves, I think this industry will be full of
fast followers, gotcha.
Speaker 1 (38:19):
And you know I don't cover airlines. I'm more concerned
about the movement of stuff versus people, But I know
you cover them. So what's your favorite airline?
Speaker 3 (38:26):
And why we are very bulished the US airline space
We have been pretty much since the trough of the pandemic.
I think travel is now considered a staple for most households.
Like we do a monthly consumer survey here Morgan Stanley,
and travel has been consistently rated as the third highest
(38:48):
spending in tent category off only groceries and household staples
for high end consumers and number one spending.
Speaker 2 (38:55):
In tent category.
Speaker 3 (38:56):
And I think that's structural, and I think that's not
going to change anytime soon. So very strong demand. At
the same time, this industry is premiumizing. I think that
is a very very important trend. The US airline industry
basically saw price deflation for like three decades, over three
(39:16):
decades going into the pandemic, and in the last decade
in particular, this industry almost a race towards commoditization, where
the low cost carriers were growing very quickly and the
mainline carriers were launching basic economy products to try to
compete with the low cost carriers, and so it was
(39:36):
sort of a race to the bottom on fares, and
experience for the average flyer coming out of the pandemic
has been the exact opposite. There's been this push to
like everybody wants to fly in the front of the plane,
everybody wants to access the lounge before takeoff, everybody wants
a premium credit card to get the free check back
(39:57):
and the early boarding. And so this industry is premiumizing
to the point where you are now seeing the low
cost carriers introduce a first class product for the first time,
open lounges for the first time, fly to exotic destinations,
and try to penetrate international markets for the first time.
Speaker 2 (40:17):
And that's very good for this industry.
Speaker 3 (40:18):
Over all, in addition to the fact that supply remains
structurally constrained at least on peak levels because of aircraft availability,
pilot availability, gate availability, ATC capacity, maintenance capacity, and none
of those things are fixing themselves any time soon. So
we like the US airline industry as a whole. We
(40:41):
actually have no underweight rated stocks in the US airlines
right now, but our top three picks are Alaska, Delta,
and United. But we also like Americans, Southwest and Sun Country.
Speaker 1 (40:55):
All right, great, well, Robbie, I really want to thank
you for your time and insights today. I think we're
coming up on the hour, so thank you so much
for joining us.
Speaker 2 (41:04):
Absolutely, thanks for having me.
Speaker 3 (41:06):
Lee.
Speaker 2 (41:06):
Hope to be back soon.
Speaker 1 (41:08):
You sure, we'll do check the mail and I want
to thank you for tuning in. If you liked the episode,
please subscribe and leave a review. We've lined up a
number of great guests for the podcast, so please check
back to your conversations with C speed executives, shippers, regulators,
and decision makers within the freight markets. Also, if you
want to learn more about the freight transportation markets, check
(41:31):
out our work on the Bloomberg Terminal at Bigo and
on social media. This is Lee Klaskow signing off, and
thanks for talking transports with me.
Host
Lee Klaskow
Popular Podcasts
United States of Kennedy
United States of Kennedy is a podcast about our cultural fascination with the Kennedy dynasty. Every week, hosts Lyra Smith and George Civeris go into one aspect of the Kennedy story.
Stuff You Should Know
If you've ever wanted to know about champagne, satanism, the Stonewall Uprising, chaos theory, LSD, El Nino, true crime and Rosa Parks, then look no further. Josh and Chuck have you covered.
Dateline NBC
Current and classic episodes, featuring compelling true-crime mysteries, powerful documentaries and in-depth investigations. Follow now to get the latest episodes of Dateline NBC completely free, or subscribe to Dateline Premium for ad-free listening and exclusive bonus content: DatelinePremium.com