Deutsche Bank eyes industrial rebound, endorses these transportation stocks

Harnain shied away from the highly fragmented and oversupplied truckload market and its closest competitor – intermodal – placing eight “hold” ratings on TL, intermodal and other logistics providers.

LTL stocks are down 16.7% year to date while the railroads are up 2.4%. The TL-intermodal group is down 9.6%. The S&P 500 is off 1.6%.

Harnain noted past rate-cutting cycles have historically been precursors to positive inflections in the Institute for Supply Management’s (ISM) manufacturing data, a bellwether for freight ton-miles. She said ISM data typically “bottoms eight months from the beginning of a rate cutting cycle” and that transport stocks outperform the S&P 500 by 11 percentage points a year into rate cuts.

Transportation’s role in both moving the inputs needed to create finished goods, and delivering those goods to end users, means “a reinvigorated industrial economy” could create “a fertile backdrop for volume advancement,” Harnain said. “To put it more simply, we would cast Transportation as the glue upholding the Industrial economy, and that Industrial economy is ripe for a comeback.”

However, some industry analysts have argued that the administration’s domestic manufacturing push, predicated on widespread tariffs, may create a scenario in which gains from reshored industrial production are lost to demand destruction in certain verticals. Also, there is concern that tariffs will drive inflation higher, leading to a weakened macro economy.

Data released Monday showed the ISM Purchasing Managers’ Index (PMI) was down 60 basis points in February at 50.3. While that was a second straight month of expansion (a reading above 50 signals growth) after 26 months of contraction (a sub-50 reading), the new orders subindex fell 650 bps to 48.6 with the prices index jumping 750 bps to 62.4. The report noted broader concern over trade policy is weighing on demand while new tariffs (implemented or pending) have suppliers already hedging against price hikes.

Changes in ISM data usually precede LTL volume inflections by three to four months. Industrial-related shipments account for roughly two-thirds of freight mix for some carriers.

Transportation-centric mutual funds have seen investment outflows totaling 25% of assets under management over the past year while equity funds tied to other sectors have seen a 2% increase, the report said. The thought is that as valuation multiples for transports continue to reset lower, shedding some of the froth garnered during the pandemic, investors are likely to become more constructive on the space.

Harnain acknowledged that further rate cuts aren’t a given and that tariffs could thwart growth, thus the selective approach in her stock picking.

“Tariffs represent a grave risk for an industry heavily reliant on trade-flows, particularly between Canada and Mexico,” Harnain said. “Given that these factors create a likely still choppy environment, our recommendation would be to maintain a quality bias when selecting equities for investment across the Transportation landscape.”

Harnain was most recently a director in institutional equity sales at Deutsche. She has held analyst roles at Deutsche and other Wall Street firms in the past.

Deutsche Bank’s transportation coverage was previously led by Amit Mehrotra, who is now the industrial sector head at UBS (NYSE: UBS).

LTL stocks were mixed on Friday with ODFL up 1.8%, SAIA up 0.2% and XPO down 2.3% at 2:43 p.m. EST. Shares of NSC and UNP were up 2.4% and 1.7%, respectively. The S&P 500 was up 0.5% at the time.

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