Citi begins coverage on Transportation stocks, names its top picks

Investing.com -- Citi said Tuesday it has begun research coverage on 19 companies within the Transportation and Logistics industry, highlighting the sector's recent struggles but also identifying a potential upside for investors.

The industry has experienced a significant downturn, with a supply-demand imbalance placing downward pressure on freight rates, thus negatively impacting margins and earnings for transportation companies.

This has led to the Transports Index underperforming compared to the S&P 500, with a year-to-date decrease of 0.5% against the S&P's 20.6% gain.

“In our view, this weakness presents an opportunity to buy quality companies at reasonable prices with significant earnings upside potential as the cycle turns,” analysts wrote.

“Against this backdrop of underperformance, we believe select Transportation and Logistics stocks are well-positioned to deliver strong relative outperformance in the year ahead,” they added.

Citi's analysis suggests that the cyclical downturn in transports is nearing its end, with the current low rates and margins setting the stage for strong earnings growth forecast for 2025 and 2026 as the market recovers.

The firm's positive outlook is further reinforced by the belief that many companies in their coverage have experienced management teams known for disciplined capital allocation, and the essential nature of transportation services to the North American economy, which reduces the risk of disruption or replacement.

“In our view, investors should be positioned for a cyclical recovery, with attractive opportunities in companies that are leveraged to realize outsized benefits as freight conditions tighten,” Citi analysts noted.

They have identified JB Hunt Transport Services Inc (NASDAQ:JBHT), Saia (NASDAQ:SAIA), CSX Corporation (NASDAQ:CSX), and United Parcel Service (NYSE:UPS) as their top picks in the sector.

Norfolk Southern Corporation (NYSE:NSC), Canadian Pacific (NYSE:CP) Kansas City, FedEx Corp (NYSE:FDX)., XPO Inc (NYSE:XPO), TFI International (NYSE:TFII), and Werner Enterprises (NASDAQ:WERN), among others, are also included in Citi’s new coverage.

Werner Enterprises is the only Sell-rated stock.