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Transport Stocks: Value Play Or Value Trap?

Posted: Oct 22, 2008 10:39 AM by Chris Seabury

Tickers in this Article: BNI, FDX, UPS

The steep market selloff over recent weeks has hit the transportation sector hard. Fears about a slowing economy have caused many investors to sell their transport stocks first and ask questions later. Fears aside, bear markets provide outstanding buying opportunities for patient, long-term investors. This seems to be the case with many transportation stocks.

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Three potentially long-term valuation plays include: Burlington Northern Santa Fe (NYSE:BNI), FedEx (NYSE:FDX) and United Parcel Service (NYSE:UPS).

Burlington Northern Steaming Ahead
While shares of Burlington Northern have been hit hard by the recent sell-off, an opportunity has been created for investors to pick up shares at an attractive level. The company is currently trading at a forward price earnings ratio of 12. Over the past four quarters, Burlington Northern consistently beat earnings per share expectations.

Quarter	Sept. 2007	Dec. 2007	March 2008	June 2008	Sept. 2008
Estimated EPS	$1.37	$1.39	$1.22	$1.30	$1.69
Actual EPS	$1.48	$1.46	$1.30	$1.34	Due: Oct. 23

Burlington Northern has paid and increased its dividend consistently since 1980 and its current dividend pays $1.60, which is a 2% yield. All things considered, the stock may be at a tempting entry point for long-term investors. Although Burlington Northern could continue an up and down movement over the short-term, it could reveal attractive valuations, steady earnings and a consistent dividend in the long-term, which would contribute to Wall Street seeing a higher value than where shares trade currently. (For more information about what it means to be a value investor, check out our handy Stock-Picking Strategies: Value Investing.)

FedEx and UPS: Big-Name Value Traps?
FedEx and UPS look like great valuation opportunities as a result of the current weakness in stocks. A side-by-side comparison demonstrates the attractiveness of these stocks. FedEx is trading at a forward P/E of 11, while UPS is trading at a forward P/E of 13. FedEx and UPS both have a history of paying and raising dividends, going back to 2002 and 1999, respectively. Recently, however, FedEx has hovered around the 52-week low of $60.90 that it hit on October 16, 2008. In addition, UPS touched a long-term low level of $43.32 on October 10, 2008; it previously had traded around the $50 mark. While FedEx and UPS may be beaten down, they are not out. Both are valuation plays that have paid consistent dividends over the past several years and I wouldn't be surprised to see shares of both move up. (Relying too much on P/E can cost you; to learn why, read Relative Valuation: Don't Get Trapped and Value Traps: Bargain Hunters Beware!.)

Bottom Line
There are many great long-term valuations in the transportation sector. By examining factors such as consistency in distributions and whether a company has beat its EPS expectations, several companies can be deemed strong performers of tomorrow - at a discount today. Value investors who can look beyond the short-term market volatility now will find strong companies trading at a fraction of their previous levels. Thus, these companies could be solid performers for your portfolio over the long haul.

By Chris Seabury

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