On August 10th, the U.S. Senate passed an 8-year $1.2 trillion cross-party infrastructure bill with a ratio of 69:30. The content focused on "hard" infrastructure projects, such as the 110 billion refurbishment of roads and bridges, and the renewal of rail transportation. 66 billion of the network, more than 100 billion of water supply infrastructure, 73 billion of updated power grids, and 65 billion of broadband networks.
The construction of roads, bridges, airports, railways and other buildings and facilities as well as the improvement of public transportation are key investment areas. When this good news comes out, many traders are also eagerly looking for those who are expected to benefit from them and whose previous gains have increased. Underlying stocks.
John Mowrey, chief investment officer of NFJinvestment Group, said he has been investing in companies such as railway operator NorfolkSouthern (NSC). Of course, given that the market is overvalued and worried that the Fed may hint that it will initiate a QE reduction policy earlier than expected in the next few weeks, some people are still cautious about adding new infrastructure positions across the board, which may trigger asset price volatility. James Advantage Funds' fund manager Barry James said, "We are currently in a hold-and-see period."
However, James still made some changes. He increased his holdings in e-commerce companies such as FedEx and Amazon, as he predicted that the infrastructure bill would shorten the delivery time of goods transported by road. James said, "We believe that we have passed the peak period of market profitability, but this bill may bring new catalysts to some companies."
1. How does the US Infrastructure Act generate beneficiaries?
Biden made a speech on the passage of a bipartisan infrastructure bill by the Senate. Biden said that the bill is vital to improving the livelihood of the American people, developing green energy to solve the climate crisis, and creating job opportunities. He expressed his gratitude for the support and efforts of the two parties. He is optimistic that the bill will be further submitted to the House of Representatives for voting.
Specifically, transportation facilities are a key investment area, which mainly includes the construction of roads, bridges, airports, railways and other buildings and facilities and the improvement of public transportation. Other investments mainly include the upgrade of national water supply systems, power facilities, and broadband networks.
The plan has two versions of 973 billion in 5 years and 1.2 trillion in 8 years. Among them, US$597 billion, which is highly marketed, is the new expenditure under the 5-year dimension. Under a comparable scale, the remaining nearly US$400 billion is a set plan. Expenditure is the baseline mentioned by the two parties.
Industrial Securities believes that the infrastructure investment plan, with a relatively high average annual investment scale, will help maintain the momentum or expectations of economic recovery, and the fundamentals of the United States have no systemic risks. Assuming that the US$973 billion stated in the agreement is invested in an amortized manner, without considering the multiplier effect, it can be roughly concluded that the investment amount over the years has contributed to the GDP of 0.73%-0.88%. After the multiplier effect is superimposed, infrastructure investment is expected to drive US GDP growth by 1.08%-1.77% in the first two years.
This round of infrastructure investment plans can stimulate US stocks to rise, but considering that the current stock market has fully reflected expectations, the increase will not be too high. The extremely loose liquidity in the past year has led to asset prices that have fully reflected the optimistic expectations of economic recovery. Therefore, under the premise that the infrastructure investment plan cannot bring about unexpected growth, it is difficult for US stocks to see a short-term sharp rise.
Taking into account that 10 years have passed since the last mobile Internet cycle, with the implementation of larger-scale infrastructure investment plans, the cycle will be more dominant in the short term, but it is not realistic to be long-term.
Only when the content of the stimulus bill matches the trend of the contemporary industry to a high degree, the infrastructure investment plan is the catalyst for the long-term trend of the U.S. stock market and related industries, otherwise the stimulus plan will only be "half the effort."
For example, the "tail" of the heavy industrialization trend, superimposed with the stimulus of Roosevelt's New Deal, made 1933-1936 the fastest growing period of steel consumption in the history of the United States, driving stock prices to rise. For another example, the short-term catalytic value of the ARRA Act and cyclical stocks dominate.
Since May, transportation and logistics stocks have been lagging behind the market and industrial sectors, based on concerns about cycle peaks and uncertain links to the use of record freight rates. JPMorgan Chase said that groups like railroad companies have "found their own foothold", not only because the recent performance of transportation and logistics stocks makes the second half of the year more confident, but also because of the catalysts brought by the infrastructure bill-roads and bridges. , Airports, railways and other buildings and facilities.
2. A very successful transportation industry-railway
Before the expected recovery in the second half of the year, the decline in traffic from the first quarter to the second quarter is a key issue, but JPMorgan Chase is not worried, because multimodal transport accounted for 55% of the quarter's decline, due to increased port congestion- The circulation of other commodities has declined month by month. The main content of railway transportation services is cargo transportation, accounting for 65%, followed by multimodal transportation services.
In the latest news, as of the week of August 14, according to data released by the American Association of Railroads (AAR), American rail freight volume has continued to grow, reaching 235,011 vehicles, an annual increase of 5.7%. The volume of multimodal transport performed poorly, with 269,799 multimodal containers and trailers, a year-on-year decrease of 3%.
The U.S. freight rail network has a total length of approximately 140,000 miles. It is currently the world’s largest, safest, and most cost-effective rail freight network. The freight rail network is mainly composed of 7 Class I railways (railways with operating revenues of US$490 million or more). ), 22 regional railways and 584 short-distance railways. Provided more than 167,000 jobs in the United States.
The privatization of railroads is an important feature of the American railroad transportation industry. The U.S. Department of Transportation predicts that by 2040, total rail freight demand will increase by 30%, and the rail industry will invest billions of dollars each year. Unlike roads, American freight railroads are owned by private organizations that are responsible for their own maintenance and improvement projects. Compared with other major modes of transportation, railway owners spend the highest proportion of each year on maintenance and increasing system capacity, and nearly 20% of their revenue is used for this project.
a Private ownership: The railway owners themselves are responsible for the construction, maintenance, operation, and payment of the infrastructure of the vast majority of American freight railways, with almost no government assistance.
b Capital-intensive: The railway industry has a large capital investment, and the capital expenditure of freight railways as a percentage of income is six times the average of the US manufacturing industry.
c Continuous investment: From 1980 to 2020, freight railroads in the United States spent nearly $740 billion on capital expenditures and maintenance costs—an average of about $25 billion per year. These include locomotives, trucks, tracks, bridges, tunnels and other infrastructure and equipment.
d Self-financing: The U.S. public policy and operating environment enable the rail freight industry to bear the costs of maintaining and modernizing the nearly 140,000-mile freight rail network by itself, realizing a positive economic cycle that sustains the industry’s sustainable development.
e Economic driving force: The net economic effects of freight rail operation and investment are far-reaching. In 2019, the US freight railroad drove $265 billion in economic activity and supported approximately 1.2 million jobs nationwide.
In 2019, U.S. rail transportation realized revenue of nearly 80 billion U.S. dollars, of which the first-level rail operation revenue accounted for more than 90%. The main content of railway transportation services is cargo transportation, accounting for 65%, followed by multimodal transportation services, accounting for 28.3%, and passenger transportation only accounting for 5%. The goods transported by cargo mainly include raw materials, consumer goods, etc., of which coal accounts for the largest proportion, 45%; and the number of containers transported by multimodal transport has increased the fastest, especially along the line from California to Illinois. The number of miles per gallon of freight rail transportation in the United States is four times that of truck transportation, and it also reduces greenhouse gas emissions by 75% compared to truck transportation.
3. Risk warning: logistics competition,
Railroad fragmentation and continued labor shortages
In the larger industry theme, JPMorgan Chase said that high-frequency data does not show that future logistics and transportation consumption will slow down; labor shortages will hit each company differently. Among them, freight trucks are the biggest hit, and freight trucks are the biggest hit. The rate cycle shows obvious signs of deceleration; and most companies are unlikely to quickly reduce the profitability cycle; as for the new infrastructure construction bill, the bank believes that it may become a powerful catalyst for the logistics and transportation industry. However, it will take several years or even longer for the decentralized implementation of the plan, and the specific benefits remain to be seen.
The specific logistics industry and railway transportation are also facing external competition and internal problems, respectively. At the same time, the continuous shortage of labor force is also a blow.
1. The ghost of logistics competition-Amazon's last mile
Consumers trapped at home due to the epidemic choose to embrace e-commerce, but this has increased the pressure on shippers: while meeting consumer expectations, they must control costs and ensure consistent delivery quality. The last mile delivery model has been developed to include a regional agency model, a crowdsourcing model and a self-operated delivery model. Successful shippers are developing strategies that combine delivery execution capabilities with consumer commitments, and are trying to regain their influence on carriers.
Amazon launched a complete third-party delivery service in the United States and competed with "package incumbents" UPS (UPS) and FedEx (FDX) for share. As Amazon considers entering the non-Prime transportation sector, FedEx seems to be the one most affected. Amazon has taken over the transportation of its main products, and as more and more shopping moves online, companies such as FedEx have lost a lot of business.
2. Railway transportation: the differentiation of vehicle and multimodal transportation
Despite the slight improvement in the operating ratio, the reduction in freight volume in 2020 will still result in a shrinking profit. The railway vehicle business has been the most affected and will face a long-term decline. In contrast, compared with truck transportation, cost and sustainability advantages have led to a strong rebound in the multimodal transport business; the railway sector has made multimodal operation the main investment target. The recent corporate mergers and acquisitions also signify that railway companies are trying to think creatively about how to grow.
3. Insufficient resumption of work and shortage of professionals—increasing labor costs
The nation's rail transportation industry is facing recruitment difficulties. Affected by this, the efficiency of rail transportation is currently unable to return to the level before the epidemic, and economic recovery is suppressed. The Wall Street Journal (blog, Weibo) reported that insufficient resumption of work in the railway transportation industry continues to cause delays in the transportation of chemicals, fertilizers and other products, threatening the operations of factories in the United States and hindering the economic recovery process. This issue has attracted the attention of federal regulators. Previously, regulators had expressed concern about the railway transportation industry's attempts to cut costs and adjust operating plans.
FedEx (FDX.US) Chief Financial Officer Mike Lenz also stated on the performance conference call: "Although we have ushered in significant growth opportunities, the general labor shortage affecting many companies and industries in the United States has also passed higher wage rates. And lower productivity has an impact on us".
4. Institutional view: Motorola prefers rail transportation.
The market is still on the sidelines
JPMorgan Chase believes that freight companies with multiple transportation channels such as railways, roads and aviation are still beneficiaries of the popular "inflation + pricing", especially rail transportation. It has upgraded the ratings of several stocks in mid-May. For example, the reason for the upgrade of UPS (UPS.US) rating is mainly because UPS has strong pricing power and multiple transportation channels, and has carried out a new round of value. $5 billion in stock repurchases.
As for confidence in this type of industry, the bank expects that as the market expects the industry to continue to use near-record freight rates to make profits, the market’s sentiment for the industry will remain mixed: “Some investors are still on the sidelines in the second half of 2021. , And tend to avoid valuation adjustments that may occur when the stock price rises to its peak."
1. Railway companies (such as Norfolk South) are attractive because inflation pricing has become a more valuable attribute.
Evercore ISI analyst Jonathan Chapel raised Norfolk Southern to outperform the market, with a target price of US$303, higher than US$301. Chappell believes that the transportation cycle has a long way to go in terms of pricing, revenue and cash flow expansion, and supply chain constraints have greatly delayed the usual response to demand and pricing of freight intensity. The analyst said that regulatory concerns have reappeared in the railway industry, but he believes that these "worries are smoke rather than flames." Chappell added that Norfolk's relative underperformance missed the company's "great opportunity for earnings per share growth and its current favorable relative valuation."
In addition, so far this year, Norfolk South is the best performing company in its peers (excluding CSX Corp. (CSX)).
Year-to-date, NSC has risen 10.35 percent. This is lower than the performance of the Industrial Index (XLI) and the Standard & Poor's 500 Index, but higher than its peers and has undergone a 10% correction.
At the same time, railway fundamentals are improving. Norfolk Southern reports that all market segments except agricultural products (000061, shares) (except grains) have achieved year-to-date growth. Since there is only one week left in the second quarter, the following figures will be very close to the actual quarterly figures that will be reported this month. What we see below is a surge of nearly 350,000 total cargo, which is equivalent to a surge of 26%. The total load of coal and coke has increased by more than 50%.
Although the growth rate will slow significantly by the end of the year, the company expects the growth rate of commodities, multimodal transport and coal to continue. The market is affected by worker shortages and rising input prices, but railways can more easily solve the problem of worker shortages.
Compared with the third quarter of 2019, the company's labor force and the number of locomotives in service have decreased by 22%. At the same time, the total weight of the train (basically the volume of transportation) has increased by 15%. The average train length has increased by 14%.
In general, JP Morgan Chase stated that since adding the railroad to its "buy-down" list in mid-May, it has become keen on railroads and increased its holdings in Norfolk South (NYSE:NSC). In this industry, the top choices are FedEx (FDX), Norfolk South (NSC) and TFI International (NYSE:TFII).
2. XPO and its spin-off GXO, "to a large extent have the highest incremental benefits"
Morgan Stanley analyst Ravi Shanker began reporting on XPO Logistics, giving it a wait-and-see rating with a target price of $75. Shanker told investors in a research report that the "new" XPO is a relatively rare combination, that is, the combination of asset-heavy LTL transportation and asset-light brokerage business and European business, adding that the range of peer quality and multiples It is very broad, and it may take a while for the market to determine the true position of XPO in its new block.
Barclays analyst Brandon Oglenski launched a report on GXO Logistics with a wait-and-see rating and a target price of $77. Oglenski told Investor in a research report