Sector Scan: Why Even Santa Depends on Global Transportation

November 24, 2017 Mark Fairbairn

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Great news if you pre-ordered an iPhone X for your holiday gift list: Apple shortened shipping estimates to two to three weeks in Canada and the United States—just in time to land it under the Christmas tree.

Eager customers have been following UPS tracking as their coveted phones travel hectic itineraries, comparing notes online: To reach Vancouver, one order was reported to be shipped by air from China with stops in Korea, Anchorage, Kentucky and Seattle.

It’s easy to take the business of transportation for granted in this era of global supply chains, yet this behind-the-scenes sector quite literally puts the world in your pocket.

Take that iPhone, for instance: all the bits and pieces inside each one–from raw materials to components to end product–collectively travel an estimated 500,000 miles via container ship, truck, train and plane, according to author Edward Humes in From Door to Door: The Magnificent, Maddening, Mysterious World of Transportation.

That’s a trip to the moon–and nearly all the way back–before you even make that first call or text, he says.

Investing in planes, trains and shipping containers

Moon analogies aside, the transportation sector is critical to our global economy.

It’s a cluster of five inter-related industries within the industrials sector: Air freight and logistics; airlines; marine; roads and railways; and transportation infrastructure, such as airports and seaports.

Historically, this sector has been driven by globalization, outsourcing and offshoring–the trade and logistics market once grew at multiples of gross domestic product (GDP), but now keeps pace more closely.

Hunting for profitability in a low-margin business

Despite a world-spanning footprint, the global transportation sector only represents about 2% of global equity markets. Businesses in this sector are often very capital intensive, low margin and cyclical–some of the reasons we don’t have a lot of exposure to the sector within our MD portfolios.

In Canadian equity markets, railways dominate the transportation sector–not surprising given the country’s vast distances, natural resources and the fact that trains excel at moving big, bulky items over land. Specifically, Canadian National Railway and Canadian Pacific Railway are held within our Canadian Equity Funds, as we’ve previously highlighted, including the MD Equity Fund, MD Select Fund, MD Balanced Fund and MDPIM Canadian Equity Pool.

We can seek out more varied opportunities in the U.S. and international markets, focusing on companies that have been able to deliver above-average profitability, have a strong competitive position or are well poised to contend with industry disruptors–from e-commerce to automation.

Why we like the logistics of Kuehne + Nagel

One holding in MD International Growth Fund and MDPIM International Equity Pool is Swiss shipping conglomerate Kuehne + Nagel International AG (KN), a world leader in providing transportation logistics.

Rather than transport goods or own carriers, the company acts as a broker, organizing logistics from point A to B, aggregating shipments via transport partners, and helping customers design and administer supply chains.

Edinburgh-based sub-advisor Walter Scott & Partners Limited sees KN as well-positioned for growth from several strategies.

It is ahead of the pack digitizing what is still a highly manual industry. An automated quoting and booking system allows customers to book online rather than make calls by phone.

The company is also integrating itself into customers’ supply chains to provide higher value, industry-focused solutions, whether it’s to deliver the freshest produce for health-conscious consumers or provide the precise conditions for shipping pharmaceuticals. One great example is KN’s global logistics partnership with GlaxoSmithKline, taking on a key role in logistics and inventory management for the pharmaceutical giant.

And while Kuehne is already the number one global sea freight forwarder, and among the largest in air cargo, there’s lots of room for it to gain market share by acquisition, say Walter Scott’s analysts.

Expeditors International: Another supply-chain go-between

In the same vein, MD holds a competing logistics leader in MD Equity Fund, MD American Value Fund and MDPIM U.S. Equity Pool, with an investment in Expeditors International, another strong global logistics franchise that has expanded along with global trade. As with KN, Expeditors offers expertise and technology to help customers and their global supply chains move components and end products around the globe.

MD sub-advisor Fiduciary Management, Inc. sees Expeditors as a long-term holding, having built a superior business, with better-than-average growth and very high returns-on-capital and free cash flow. The company continues to invest in technology and people to grow its network and the shares trade at a discount to historical averages and to the overall market.

Delivering the goods that last mile: UPS

A name you may be more familiar with is UPS, a transportation sector holding in MD American Growth Fund and MDPIM U.S. Equity Pool. The company ships over 19 million packages per day in over 220 countries. Its U.S. and international delivery businesses almost account for 80% of its $61 billion annual revenues. UPS also has a supply chain and freight business to provide logistics services, freight forwarding, customs and insurance.

Adam Calamar, CFA, Portfolio Manager with MD sub-advisor Jensen Investment Management says the company remains well-positioned with strong competitive advantages and solid growth drivers, particularly related to e-commerce. It also has a solid strategy to build-out the UPS brand globally.

Still, as Calamar notes, this remains a highly competitive industry with many sophisticated players and recent entry by Amazon.

It’s about global economics, not just a means of transportation

Back to that iPhone’s journey. According to logistics industry experts, you could pack about 450,000 iPhones aboard a Boeing 777 jet, and that plane can fly non-stop from China to North American transport hubs in about 15 hours.

Many more devices could fill a cargo ship, but it would take up to 30 days for that product to hit store shelves.

But the economics of transportation are more intricate than just the sum of distances travelled.   

The pressing demands of customers like Apple, industry disruptors in e-commerce, the emergence of automation, and shifts in global supply chains are all factors keeping the business of transportation in constant motion.  

As for delivery of that iPhone X down the chimney next month, I’d say it’s a safe bet Santa won’t be trading in his reindeer for a fleet of drones–just yet, at least.


Mark Fairbairn

Mark Fairbairn, CFA, B.Eng., is a Senior Investment Analyst with the Investment Management team at MD Financial Management. He is responsible for the non-North American equity funds and pools as well as the currency overlay program within the equity funds.

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