Pricing power and valuation discount drive logistics returns in the future
Head of Equity Strategy
Summary: The global logistics industry is an interesting theme for long-term investors as it plays into more global trade, much bigger e-commerce market, and pricing power of logistics services due to network effects and complexity. We are long-term positive on the industry, and believe consolidation and price power combined with attractive equity valuations will drive outperformance compared to global equities.
Last year we wrote about the global logistics industry and how it has generated outperformance relative to the broader equity market. It has done so by more efficient logistics networks, pricing power, rapid growth of e-commerce, and increased complexity. The logistics industry is a window into the current inflationary period driven by massive fiscal stimulus and household income growth driving inflationary pressures in commodities.
Today we are launching our 15th equity theme basket providing a diversified exposure to the global logistics industry - you can find the basket on the SaxoTrader here. It is the biggest basket we have done to date, as the industry is very large and complex, consisting of 50 stocks across a wide range of logistics services from sea, land, integrated, application systems and storage/warehouses. The basket represents $1.35trn in market value and an industry that grew earnings 16% over the past year, and the stocks have been selected based on highest market value within the different sub-categories. We have excluded passenger transportation and focused instead of logistics of consumer goods and industrial products such as crude oil and liquified natural gas (LNG).
|Name||Category||Mkt Cap (USD mn.)||Sales growth (%)||EBITDA growth (%)||Diff to PT (%)||5yr return|
|United Parcel Service Inc||Integrated||186,816||19.4||22.8||-1.3||143.1|
|Union Pacific Corp||Land||149,289||-10.4||-9.7||6.9||195.8|
|Deutsche Post AG||Integrated||84,456||10.6||38.2||4.4||148.0|
|Norfolk Southern Corp||Land||70,293||-11.5||-4.6||4.4||272.8|
|DSV PANALPINA A/S||Integrated||54,277||19.8||40.8||-0.7||397.2|
|Canadian Pacific Railway Ltd||Land||54,188||-5.5||-4.2||1.3||199.2|
|AP Moller - Maersk A/S||Sea||52,393||9.5||81.6||0.1||146.3|
|SF Holding Co Ltd||Integrated||49,713||34.0||NA||22.6||290.6|
|Kuehne + Nagel International AG||Integrated||40,564||3.5||14.5||-23.7||154.7|
|COSCO SHIPPING Holdings Co Ltd||Sea||37,909||31.5||NA||10.1||503.7|
|JD Logistics Inc||Integrated||32,613||47.2||184.5||NA||NA|
|Expeditors International of Washington Inc||Integrated||21,227||43.6||51.4||-12.0||176.7|
|JB Hunt Transport Services Inc||Land||18,127||6.6||-20.5||2.9||119.3|
|XPO Logistics Inc||Land||16,414||4.7||-36.7||6.1||419.7|
|CH Robinson Worldwide Inc||Integrated||12,903||12.0||12.0||4.8||47.0|
|SITC International Holdings Co Ltd||Sea||9,590||8.5||40.0||36.8||782.9|
|TFI International Inc||Land||8,947||1.2||-25.6||0.8||437.3|
|Orient Overseas International Ltd||Sea||8,884||19.1||94.9||65.1||482.0|
|Manhattan Associates Inc||Services||8,651||-5.5||1.1||7.9||102.3|
|Nippon Express Co Ltd||Integrated||7,677||-0.1||18.0||1.3||115.2|
|Nippon Yusen KK||Sea||7,001||-3.6||19.3||8.5||151.8|
|Mapletree Logistics Trust||Storage||6,447||14.3||13.3||6.2||169.6|
|Qingdao Port International Co Ltd||Services||5,974||19.0||NA||57.0||44.4|
|Koninklijke Vopak NV||Storage||5,972||-5.0||-28.3||19.1||-6.4|
|Kerry Logistics Network Ltd||Integrated||5,390||29.7||-7.5||-0.6||142.7|
|Liaoning Port Co Ltd||Services||5,282||3.0||NA||NA||-35.8|
|Aurizon Holdings Ltd||Land||5,153||1.5||-4.0||28.1||11.7|
|Descartes Systems Group Inc/The||Services||4,947||7.0||16.0||17.1||160.1|
|Qube Holdings Ltd||Integrated||4,439||0.8||-10.7||11.3||59.7|
|Ryder System Inc||Services||4,406||-4.8||4.7||8.6||42.0|
|COSCO SHIPPING Energy Transportation Co Ltd||Sea||3,929||9.2||NA||31.7||-16.9|
|Hitachi Transport System Ltd||Land||3,557||-3.0||6.9||7.7||106.9|
|SPS Commerce Inc||Services||3,366||14.7||20.2||33.5||228.2|
|Mitsubishi Logistics Corp||Services||2,647||-6.7||0.6||1.5||21.3|
|Golden Ocean Group Ltd (*)||Sea||2,019||-12.4||151.4||18.9||198.9|
|Star Bulk Carriers Corp||Sea||1,988||-10.2||21.0||47.2||419.2|
|Kintetsu World Express Inc||Integrated||1,628||11.9||36.4||38.8||96.1|
|Golar LNG Ltd||Storage||1,396||-3.3||65.6||40.3||-19.2|
|Teekay LNG Partners LP||Sea||1,354||2.1||4.4||11.1||49.5|
|Echo Global Logistics Inc||Services||910||25.6||17.1||7.4||48.8|
|Aggregate / median||1,353,113||6.8||16.0||7.2||149.9|
Source: Bloomberg and Saxo Group
* Peter Garnry has holdings in these companies
Complexity and pricing power drive shareholder returns
According to industry surveys the global market for logistics services will hit €500bn in 2024 driven by rapid expansion in e-commerce, which has seen outrageous growth during the global pandemic. Logistics costs are estimated to be around 15% of revenue and thus the accelerating in container freight rates and last-mile delivery is adding cost pressures on retailers and forcing them to increase prices and thereby adding to inflationary pressures. The share of logistics costs has remained quite stable around 15% of revenue despite large investments in automation, improved networks, and computer systems, indicating that the industry is solving a very complex problem. However, it is the complexity of logistics that is providing these logistics firm with a pricing power that ultimately drives good profitability and returns for shareholders.
Our logistics basket has rallied 122% from the end of March 2020 easily outpacing the MSCI World and this year the basket is up 28% making it the best regular equity theme outside of high volatility crypto & blockchain basket. With personal income up more than 16% over the past year in the US there is enough momentum among US households to keep the consumption spree going and we expect the underlying demand for logistics services to be strong. In terms of equity valuations, the basket is not expensive relative to the MSCI World with the basket valued at 12-month forward P/E of 14x vs 20.2 for the MSCI World.
We expect e-commerce to remain strong and cross-border logistics of e-commerce packages will continue to be the most important area of growth for these companies. While the smaller logistics firms have some niche positions in the market, we believe the biggest value creation will take place among the largest logistics companies because the value of an efficient global logistics network will go up dramatically. Companies are willing to pay a premium for that service. We also believe mergers and acquisitions will continue in this industry as it is still quite fragmented and that those mergers will drive more efficiencies and more pricing power, which eventually is bad for companies and overall inflation.
Key risks: higher fuel costs and e-commerce slowdown
The key risks to this portfolio are fuel costs and a slowdown in e-commerce spending. Brent Crude futures for August 2021 just hit $71/brl today indicating a lot of pressure on energy prices and fuel costs. This is risk to logistics firms and the degree of risk depends on how much they can pass on to their customers. E-commerce hangover has been a topic ever since 8 November 2020 when the world got the vaccine news, but so far, the revenue growth is still high, but an eventual full opening of physical stores and restoring of old habits could dent growth in e-commerce. Higher interest rates could also put pressure on profits at logistics companies and their equity valuations because these companies invest a lot of capital in physical assets.