Transportation Outpaces the Dow on Low-Cost Services

The Dow Jones Transportation Average beat the Dow Jones Industrial Average Wednesday, gaining 0.13% while the DJIA fell 0.95% Transportation companies have been hit in recent years not only by lower freight and passenger volume, but also by cash-strapped customers downgrading to less-expensive services, which puts pressure on profit margins. Transporters are beginning to adjust to a prolonged period of higher demand for low-cost services, however, with streamlined operations and an emphasis on serving non-premium customers.

The outperformance of the DJTA on Wednesday was largely due to logistics and parcel delivery provider FedEx (NYSE: FDX  ) , which jumped a whopping 5.15%. FedEx has seen erosion in its high-margin Express delivery segment since the onset of the recession, hurting revenue and margins. On Wednesday, it announced a companywide initiative to take $1.7 billion in costs out of the business by the end of 2016, largely through focusing on making its slower, lower-margin yet more affordable ground delivery operations more efficient.

FedEx's Express business, anticipating no great rebound in premium delivery volumes, will see a headcount reduction through voluntary buyouts of employees. FedEx also plans to reduce its aircraft fleet and number of flights, instead focusing on ground and ocean delivery as customers embrace slower, cheaper shipping options. FedEx also plans to cut selling, general, and administrative expenses. The company has promised further details on Thursday.

Parcel delivery competitor UPS (NYSE: UPS  ) has also announced aggressive cost-cutting measures, and the two companies' share prices usually move in sync with each other. Today, however, shares of UPS were down 1% after European Union regulators announced they would challenge the company's bid to acquire Dutch delivery service TNT Express. The $6.5 billion deal would leave Europe with only three major logistics operators: UPS, FedEx, and DHL. Representatives from both UPS and TNT expressed confidence that EU objections could be answered and the merger would go through as planned.

Customers are also moving to more economical offerings in the airline industry. Low-cost domestic carrier JetBlue (Nasdaq: JBLU  ) gained 1.9% after announcing that its September 2012 traffic was 6.1% higher year-on-year. With many airports reporting flat or declining traffic volumes, that figure probably indicates that JetBlue is taking share from other airlines. Legacy carrier United Continental (NYSE: UAL  ) , for example, was among the DJTA's worst performers Wednesday, posting a loss of 1.5%.

Outside the DJTA, Guangshen Railways (NYSE: GSH  ) led the transportation field, posting gains of 4.4% for the day and 9% for the week. Guangshen is a Chinese passenger and freight rail line operating in the dense, wealthy Guangdong province. Shares on the New York Stock Exchange have gapped up to match the valuation of shares trading on the Hong Kong Stock Exchange, as analysts become confident that new Chinese leadership, to be announced in November, will provide additional government stimulus to support infrastructure like rail.

Railroads generally benefit when consumers choose slower, low-cost options since rail transit is much more fuel-efficient than air travel. American railroads, which ship more freight than any other transportation mode in North America, are therefore set to benefit from more economical consumer preferences. Despite long-term trends favoring the railroads, however, many Class I operators are selling for steep discounts to their historical prices, presenting a great opportunity for value investors to buy in. I've identified one railroad stock poised to deliver, boasting the highest margins and the most reliable traffic volumes in the industry. To learn more about the company, just click here.

Fool contributor Daniel Ferry has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend FedEx, Guangshen Railway, and United Parcel Service. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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