There's definitely money to be made in helping companies get their cargo from point "a" to point "b." Even though recent times have been tough on the likes of UPS (NYSE:UPS), nobody really doubts that logistics is a growth market for the future. And one sub-segment that has been strong lately has been intermodal transportation (the use of various forms of transport -- ship, rail, truck, etc.). Time, then, to look at second-quarter results of the biggest handler of intermodal business in the U.S. -- Pacer International (NASDAQ:PACR).
Although revenue growth was nothing special this time around (up less than 1%), profitability continued to improve and the company posted strong growth in operating income. Operating margins are something of a mixed bag -- at 5.5%, they trail those at C.H. RobinsonWorldwide (NASDAQ:CHRW), UTI Worldwide (NASDAQ:UTIW), and J.B. Hunt's (NASDAQ:JBHT) intermodal business -- but that could also suggest there's further room for expansion.
Growth was fueled, ironically perhaps, by doing more wholesale business (which focuses on arranging intermodal cargo service) and less retail business (which involves rail and truck brokerage). Wholesale operating income more than doubled on 12% growth in gross revenue and nearly 52% growth in the number of containers handled. On the retail side, retail revenue dropped once again (down almost 11%), but income was actually 17% higher, thanks in part to getting out from under an unprofitable piece of business with Ford (NYSE:F).
As a non-asset play on intermodal traffic, the state of railroads obviously matters a great deal to Pacer, and it does a fair bit of business with Union Pacific (NYSE:UNP), CSX (NYSE:CSX), Burlington Northern, and Canadian National. And in an odd way, service issues at the rails can be a help for Pacer, since it makes the convenience of having someone else responsible for your shipping needs seem more attractive.
Given that it essentially gets and keeps cargo moving, Pacer is certainly sensitive to economic activity. Even if intermodal traffic continues to gain share, conditions that slow demand from the likes of Whirlpool, General Electric (NYSE:GE), Sony (NYSE:SNE), and other major customers will ultimately be bad for Pacer in the short run. And pricing, margins, and returns are also important -- particularly as the company faces the expiration of a notable contract with Union Pacific in 2011.
Perhaps I'm overly concerned about a near-term slowdown in economic activity, but I wouldn't rush to buy these shares today. It's a fine company, with good returns on capital, in an industry that I like for the long term. But in today's market, I'm more inclined to err on the side of caution and risk missing stocks than stick my neck too far out.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
