When Wall Street takes to the open road
Getting from ``here'' to ``there'' in the United States is not always as easily done as said, as anyone who has stood in a crowded airport terminal this summer can attest. Hollywood filmmaker John Hughes touched on the humor of the US transportation system in his recent movie, ``Planes, Trains, and Automobiles.'' For corporate America, there is often more consternation than humor in the transportation process. Summer means added strains on transport schedules, because of vacations. Yet, even its most severe critics would probably concede that the US transportation system, for all its flaws, is still one of the best in the world.
Wall Street, not surprisingly, has as many opinions about the transportation system as the public at large. Yet, if there seems to be any consensus about planes, trains, and trucking during these summer months, if would be one of caution more than unbridled enthusiasm.
``I remain cautious,'' says T. Richard Holt, a trucking analyst with Prudential-Bache Securities Inc. Looked at year-to-date, through mid-June, trucking as a group has outperformed the market by about 3 percent, says Mr. Holt. PruBache's unweighted trucking index, in fact, has gained 12.5 percent versus a 9.4 percent increase in the Standard & Poors industrial index. This is quite an improvement in the group's performance compared to early last year, when PruBache's trucking index declined 11 percent, while the S&P index jumped almost 25 percent.
Still, the ``fundamentals'' for trucking ``remain uncertain,'' says Holt, who argues that the recent strength of the group has been based on takeover-related activity in some smaller-capitalization stocks.
One potentially adverse factor, Holt says, is the impact of a new three-year labor contract with the Teamsters Union that was tentatively ratified in March. The pact is expected to push wages, including fringe benefits, up by 7 percent this year, and 3 percent each in both 1989 and 1990. Higher labor costs, says Holt, have already had a negative impact on at least one carrier. ``Is this,'' asks Holt, ``a harbinger of things to come within the industry?''
Holt doubts the drought now affecting large parts of the US Midwest will have any positive impact on trucking - although, presumably, some barge traffic might have to be diverted from rivers with low water levels to alternative transport. Such diversions, he believes, ``would probably go to railroads instead of trucks.''
Another transportation sector about which Wall Street seems cautious is railroads. Craig Kloner, an analyst with Goldman Sachs & Co., refers to rail carriers as ``chicken cyclicals.''
``Cyclical stocks,'' says Mr. Kloner, ``tend to be very volatile during the latter end of an economic cycle.'' Yet, he says, ``in terms of performance, rail issues have tended to do better than most cyclicals in recent years.''
Goldman Sachs notes that rail issues have done slightly better than the market as a whole since the market plunge last October. But Kloner believes that gains in earnings for the group will probably peak during the middle period of the year, given heavy traffic and higher freight rates. But that implies that the market strength of the stocks may also peak somewhat with the strong earnings performance during this period.
Goldman Sachs, for its part, particularly likes Western rail stocks, including Burlington Northern and Union Pacific, although one Eastern carrier, Conrail, is on its recommended list.
Last week, the overall market seemed to take the Gulf turmoil fairly calmly. In fact, it seemed more preoccupied with a number of internal financial developments than with the Gulf.
One point of discussion was a reported plan by the New York Stock Exchange and the Chicago Mercantile Exchange to jointly halt trading if necessary to prevent another stock market crash.
``Circuit breakers,'' for example, would be used to halt trading if the Dow Jones industrial average fell 250 points. Trading would be stopped for an hour. And if the Dow dropped another 150 points during the same day, trading would be halted for two hours.
This type of coordination, which must be approved by federal regulatory agencies, has been urged by market experts as a way of luring back small investors.
For the week, the Dow Jones industrials closed down 25.43 points at 2,106.15
Still, not all financial houses are as cautious about airline stocks - for the moment, at least. Michael Derchin, an analyst with Drexel Burnham Lambert Group Inc., suggests maintaining ``an overweighted posture in the [airline] group, based on improving industry fundamentals.''
``Everything continues to look good for the industry,'' says Mr. Derchin. He particularly likes United, American, Northwest, and US Air.
Derchin projects traffic growth during the year in the 4 to 5 percent range, and revenue growth of 10 to 12 percent, two sets of statistics that still suggest Americans love to take to the open road - or runway.