7 Companies to Post Big Profit Gains

BOSTON (TheStreet) -- With the U.S. economy growing for a sixth straight quarter, companies in shipping, railroads, trucking and package delivery are expected by analysts to post big earnings gains this year. Some have already seen spectacular share-price increases.

Traffic volume has risen all along the so-called supply chain, despite rising fuel costs, Middle East and African political turmoil and its potential impact on shipping and oil supplies, and the still evolving nuclear crisis in Japan.

Container freight volume coming into U.S. ports has jumped 8.5% from the beginning of January through March 23, a pace last seen in pre-recession 2007 when inbound freight boxes reached a record 18.9 million, according to Zepol, a firm that tracks shipping data. "The rebound (in shipping activity) has come much faster than we anticipated," said Paul Rasmussen, the firm's president, in an interview Tuesday.

Helping boost investor confidence in the highly cyclical transportation sector is the growth of U.S. exports, a decided shift from the virtual, one-way street of goods from Asia into the U.S. of only a few years ago. That's because of growing U.S. industrial production, the relatively cheap dollar and the continued expansion of middle-class populations in emerging markets, which have an insatiable appetite for American goods.

Freight traffic is on the rise domestically as well. The volume of goods sent by rail rose 6% in the first nine weeks of this year versus the comparable period last year, led by increases in shipments of iron ore, coal, cars, equipment and petroleum products, according to the Association of American Railroads (AAR).

Indicative of the industry's long-term optimism, the nation's freight railroads plan to spend a record $12 billion on capital improvements this year, up 10% from last year, the AAR said.

And package-delivery firms such as United Parcel Service (UPS) and FedEx ( FDX), true bellwethers of the global economy, are reporting steady traffic growth. FedEx CEO Fred Smith said two weeks ago in a conference call that "we are very optimistic about future earnings" because "the dynamics of global trade appear solid." In the U.S., gross domestic product has expanded for six quarters in a row after the deepest recession in 80 years.

But industry players are nibbling at one another's cheese, with higher fuel costs as a catalyst. Standard & Poor's said high fuel prices in 2008 "accelerated the conversion of truck freight to intermodal (containerized freight) as shippers become even more focused on lowering transportation expenses."

And at the other end of the supply chain, package-delivery firms are nipping at larger trucking firms' business, by taking on bigger freight.

Fuel costs, a key factor in any mode of transport and an occasional outsized challenge to the industry in prior years, aren't as big a challenge as in the past. That's because most companies now have fuel-surcharge clauses built into their contracts that allow them to recoup increases, or they're able to pass the higher costs along to customers.

Railroad stocks are up an average 10% this year through March 28, trucking shares 8.4%, and shipping and port companies 6%, as tracked by Morningstar. The S&P 500 Index has gained 4.6%.

Here are reviews of seven highly rated supply-chain stocks:

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Seaspan ( SSW), based in the Marshall Islands, owns and operates a fleet of container ships employed under long-term, fixed-rate charter contracts with some of the largest container-shipping companies in the world.

Its fleet consists of 61 container ships in operation and eight in various stages of completion and scheduled for delivery through March 2012. All of those yet to be delivered are already committed to fixed-rate charters of 12 years from the date of delivery.

Seaspan's CEO said two weeks ago, in conjunction with the company's fourth-quarter earnings release, that its fleet utilization rate is 99.7% and its strong cash flow allows it to raise its annual dividend to 75 cents per share.

The company's forward price-to-earnings ratio of 10.3 is equal to the median of its industry peers.

Per TheStreet, analysts give its shares seven "strong buy" and one "hold" rating. Those same analysts expect 2011 earnings of $1.53 per share, up from $1.12 last year, and that 2012 earnings will be flat to 2011 at $1.53 per share.

Deutsche Bank ( DB) upgraded its rating on Seaspan to "buy" from "hold" on March 25, citing fleet-growth opportunities. It raised its target price to $27 from $16.

Seaspan shares are up 44% this year and 82% over 12 months, giving it a market value of $1.1 billion. Its shares hit a 52-week high March 21.

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The CSX ( csx) railroad system serves the eastern U.S with 21,000 miles of track and has big intermodal service centers at several ports. Its biggest revenue source is hauling coal, at 30%; then intermodal traffic (containerized freight), 13%; chemicals, 14%; and a diverse mix of other goods.

Its shares are up 23% this year and 56% over the past year, giving it a market value of $29 billion. Its shares hit a 52-week high March 25.

Standard & Poor's analysts give its shares a "buy" rating and the company four out of a possible five stars. But the rating's firm's price target of $79 has since been exceeded since the report was issued.

Overall, S&P says CSX should benefit from the nation's economic recovery, "given its role in transporting many of the basic materials required in manufacturing and construction, including coal and scrap used by steel mills."

S&P expects revenue growth of about 7% in 2011, with traffic volume rising about 5%. It also predicts wider margins due to increased operating efficiencies.

For fiscal 2011, analysts tracked by S&P estimate the company will earn $5.02 per share and that will grow 16% in 2012 to $5.80 per share. Analysts' ratings are: 12 "buys," 12 "buy/holds" and eight "holds."

Capital Global Investors owns 12.4% of its shares, more than double that of the next largest investor, Fidelity.

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Norfolk Southern ( NSC) also owns 21,000 miles of track throughout the eastern U.S. and serves major intermodal ports. Its mix of products hauled is: coal, 28%; intermodal traffic, 19%; and a mix of car, agriculture, metal, chemical and forest products.

Its shares are up 10% this year and 28% over the past year, giving it a market value of $24 billion.

Morningstar analysts say Norfolk Southern is "one of the best-run railroads in North America. The firm normally generates one of the top operating ratios in the industry, and produced around $1 billion of free cash during four of the past five years. We like Norfolk's strong operations, defensive freight mix and expansion plans."

S&P gives it a "buy" rating and four out of a possible five stars and has a 12-month price target of $75 on its shares. Shares are currently trading at $68.68.

S&P analysts expect its revenue to rise 7% this year after a 19% increase in 2010. "With auto and steel production forecast to rise globally, we think NSC's metallurgical coal volumes will stay elevated during 2011," they said in a research note. "We also see it benefiting from production coming on line at two auto plants, as well as increases in ethanol production along its network."

For fiscal 2011, analysts estimate that Norfolk Southern will earn $4.65 per share in 2011 and that will rise 15% to $5.34 per share in 2012.

Analysts tracked by TheStreet give the company 18 "strong buy" ratings, three "moderate buys" and seven "holds."

Sweetening the pot, Norfolk Southern pays a higher dividend than other railroads as it currently has a 2.36% yield.

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Landstar System ( LSTR) is a provider of logistics for others in the shipping industry. Its customers include thousands of less-than-truckload small and midsize carriers. It connects them with rail intermodal, air-cargo and ocean-cargo networks.

About 92% of its revenue comes from its third-party logistics services, and about 3% each from intermodal services and ocean-freight forwarding.

"Landstar provides a compelling value proposition to both shippers and carriers," said Morningstar analyst Matthew Young in a March 3 research note. "The company leverages buying power, technological capabilities and relationships with asset-based capacity providers to enhance shippers' supply-chain-related execution."

The company's shares get a "buy" recommendation and the company a rating of four out of a possible five stars from Standard & Poor's.

S&P says it expects Landstar "to benefit from market-share gains and incremental revenues from new agents added to its commissioned agent base. We expect improving volumes and pricing, and a slight moderation in purchased transportation rates as a percentage of gross revenues."

S&P gives Landstar's shares a 12-month price target of $56. They're currently trading at $44.23.

For fiscal 2011, analysts estimate the company will earn $2.16 per share and that will grow 17% to $2.52 per share in 2012, per S&P. Analysts' ratings include 10 "buy" ratings, seven "buy/holds," six "holds" and one "sell."

Its shares are up 9.8% this year and 9.5% over the past year, giving it a market value of $2 billion.

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J.B. Hunt Transport Services ( JBHT) is one of the nation's largest long-haul trucking firms. It operates four segments: intermodal delivery, which transports products between customers and railroad loading stations, which makes up 55% of revenue; contract services, which provides contract customer's fleet needs, at 24%; truck-load hauling, at 14%; and brokerage and logistics, at 7%.

Standard & Poor's analyst Kevin Kirkeby wrote in a recent research note that the company has wisely formed partnerships with railroads rather than competing with them, and its role is to prove "first mile" and "last mile" deliveries, while leaving the long-haul portion of shipping-container traffic to railroad companies.

S&P has a "buy" recommendation on its shares and gives the company a rating of four stars out of a possible five. It gives its shares a price target of $48. They are currently trading at $43.49.

S&P projects revenue growth of 13% this year, after an 18% rise in 2010.

"We think intermodal will continue to be (the company's) fastest-growing segment as it targets market share in key East Coast freight lanes," said S&P. "We believe the company will continue adding capacity, both tractors and containers, to its intermodal and dedicated operations during 2011."

For fiscal 2011, analysts estimate the company will earn $2.02. For fiscal 2012, analysts estimate earnings per share will grow 20% to $2.43.

The company's shares get 11 "buy" ratings, 11 "buy/holds," seven "holds" and one "weak/hold," according to an S&P synopsis of analysts' views.

J.B. Hunt's shares are up 7% this year and 23% over the past year, giving it a $5.2 billion market value.

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United Parcel Service ( UPS) is the world's largest express-delivery company. Its fleet of shiny brown delivery trucks is ubiquitous in over 120 countries. It provides logistics and freight forwarding via air, sea, rail and ground links as well as international trade management and customs brokerage.

More than 70% of its volume is business-to-business, and the company claims it delivers over half of the goods purchased on the Internet.

Standard & Poor's said in a recent research report that it expects 2011 revenue will rise 11% over last year, accelerating from 9%. "We see gains in U.S. domestic as well as international shipping, driven by strengthening in the U.S. and global economies.

"We see a 14% rise in supply-chain and freight revenues after a 16% increase in 2010," added S&P analysts, and fuel surcharges are likely to boost revenue. "We expect UPS to be successful in getting customers to absorb rate increases, given our view that shipping demand is likely to improve."

S&P estimates that UPS will post earnings of $4.36 per share in 2011, a 22% rise from 2010. Its survey of analysts' ratings found 12 "buys," 11 "buy/holds" and seven "holds."

UBS ( UBS) has a "buy" rating on UPS shares and an $86 price target.

Bank of America ( BAC) reiterated its "buy" rating on UPS on March 11 with an $82 price target based on a 19.5 times projected 2011 earnings estimate of $4.22 per share. It's forecasting earnings of $4.95 per share in 2012 for the company.

UPS's shares are up 2% this year and 18.5% over the past 12 months, giving the company a market value of $71 billion.

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FedEx ( FDX), the second-largest package-delivery company, is the world's biggest express-delivery firm, and derives two-thirds of its revenue from its express division.

The company said two weeks ago that it carried record domestic and international volume in the fiscal third quarter ended Feb. 28, and that its loss-making domestic truck unit would return to profit by June. For its fiscal fourth quarter, traditionally the company's strongest, FedEx predicted earnings of $1.66 to $1.83 per share, topping analysts' consensus forecasts of $1.65 per share.

Improving volumes are allowing FedEx to charge higher rates to new customers and raise rates as contracts with current customers come up for renewal, FedEx said.

According to TheStreet's survey of analysts, they give FedEx 17 "strong buy" ratings, three "moderate buys" and four "holds."

Standard & Poor's gives the shares a "buy" recommendation and the company a top five-star rating. It put a 12-month $113 price target on its shares now trading at $90.28.

S&P said in its review of the company that "we think that an improving U.S. and global economy is likely to lead to increased volumes across FedEx's entire network, and improved capacity utilization should drive margin expansion in fiscal 2011 and fiscal 2012. We believe the shares will benefit from increased investor interest in logistics stocks on concrete signs of economic improvement."

Its shares are up only 0.1% this year and 2.4% over the past year, giving the company a market value of $28 billion.

>>To see these stocks in action, visit the 7 Companies to Post Big Profit Gains portfolio on Stockpickr.

Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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