Weakness In Air Freight Markets Make Forward Air Questionable

After optimism began to percolate late last year regarding prospects for economic growth in 2014, Forward Air (FWRD) shares took off rising from below $38 to nearly $45 per share recently. I believe this optimism may be premature as the air freight market is still lackluster, and FWRD faces company specific challenges. In particular, the company is likely to see lackluster revenue and EPS growth due in part to its exposure to the retail segment. With the stock trading at more than 20X CY 2014 EPS, FWRD is hardly cheap enough to overcome these concerns currently. Especially in light of recent concerns over the retail environment and Chinese manufacturing performance, investors don't need to rush into FWRD at this stage.

Forward Air is a provider of transportation and related logistics services. I first stumbled onto the company while doing research on aircraft leasing companies and was intrigued by the cyclical nature of the business given the likely gradual improvement of the US economy over time. FWRD is particularly exposed to the US recovery because its operations are primarily serving the US market. Forward Air provides customers (primarily air freight forwarders, airlines, and cargo airlines) local pick-up and delivery services via surface transportation through its network of terminals near airports all across the US and Canada. The company also offers related services from freight brokerage, warehousing, shipment consolidation and sorting, and customs brokerage. In addition, the company has a separate business segment (Forward Air Solutions) which offers pool distribution services through a network of terminals to distributors and retails both regionally and nationally.

The wide variety of the companies services mean that it is competing with a diverse body of other companies ranging from FedEx (FDX) and United Parcel Service (UPS) to Atlas Air Worldwide (AAWW), CH Robinson (CHRW), and Expeditor's International (EXPD). The last decade has been a good one for the group as a whole by and large, thanks in part to the increasing prosperity of China and the exploding volume of trade (which in turn has triggered huge increases in national and international freight tonnage). FWRD is no exception here with the firms revenues increasing at a compounded annual growth rate (or CAGR) of roughly 9% from 2003-2013. Profitability and margins have been a more mixed bag. While profits pre-Crisis were very strong with margins hovering in the mid-teens, since the Crisis they have generally been in the high-single digits (which is still a marked improvement from the sub 3% level seen in 2009).

On the whole then, the industry has done very well in recovering from the Financial Crisis, yet shipping volumes, weights, and pricing all remain under pressure as many competitors from EXPD to AAWW have reported over the last couple of quarters. Despite this, efficiency gains, cost cuts, share buybacks, and a slowly healing global economy have all helped to push up firm and industry profits over the last three years. In fact, FWRD did reasonably well growing revenues lately; the company saw 9% growth in 2012, and it looks likely to report calendar year 2013 growth of around 11-12% when it reports for the fourth quarter in a few weeks. 2014 will probably see slower revenue growth in my opinion, especially given the challenging conditions that retailers have been reporting lately. I would look for 2014 top-line growth of perhaps 9-10% largely powered by gains in the airport-to-airport segment with notable weakness in the Forward Air Solutions segment. FWRD management has hinted at adding new customers to shift focus away from retail given the weakness there, but this will be an initiative that takes time to bear fruit.

The other factor that has been lurking in the shadows and holding back Forward Air and the rest of the segment as a whole is the newer cost-cutting mindset present in most post-Crisis management teams. This mindset has led many firms to eschew faster transportation choices for slower less costly transportation options. Firms like FWRD thrive on charging a premium to get goods moved quickly, so this trend has been the bane of their existence for several quarters now. The new found frugality among corporate customers is a key reason that 2013 EPS is only likely to grow 2-3% YOY vs. CY 2012 despite much faster top-line growth. In fact, 4Q2013 results are likely to be down year over year vs. 2013, emphasizing the challenging industry outlook.

While the eventual improvement in the overall economy will surely help drive FWRD's stock price higher within the next few years, until the macroeconomic clouds begin to lift more visibly, especially in the retail segment, investors do not need to rush to establish a long position. Patience is a virtue with cyclical companies, and this is certainly true in the case of Forward Air.

Source: Weakness In Air Freight Markets Make Forward Air Questionable

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

This entry passed through the Full-Text RSS service — if this is your content and you're reading it on someone else's site, please read the FAQ at http://ift.tt/jcXqJW.