Volatile shipping stocks have experienced a resurgence, according to a report.

• Despite challenges in the shipping industry, including lower global trade, disruptions at the Panama Canal, and the Red Sea, the Dow Jones Transportation Average has remained strong.
• According to a report from Alix Partners, ocean carriers may have more money to invest in acquisitions.
• According to AlixPartners' analysis, transports should be viewed as a long-term opportunity for investors who have experienced the sector's sharp ups and downs, including the Covid boom, freight recession, and recent rebound.

The transports industry is facing numerous challenges in 2024, including dwindling freight orders, the entrance of new vessels, drought-related delays at the Panama Canal, Red Sea diversions that could linger into the second half of the year, and the threat of a strike at East Coast ports. Despite a major stock rally fueled by the Covid boom, the industry has experienced a freight recession, overcapacity in ocean shipping and trucking, and now a sector rebound in a strong economy.

Despite being flat this year, transport companies have gained 7.6% in the past 12 months through the end of February, according to a new report from consulting firm AlixPartners. The lesson for investors is to focus on the long game with transport companies.

"According to Marc Iampieri, global co-leader of the shipping and logistics & infrastructure practice at AlixPartners and one of the report's authors, ocean carriers and trucking companies have decreased from "unreasonable highs," but some gems can still be found in the beaten-down sector. Iampieri predicts that weak players will disappear during this time, but companies with cash reserves will be better equipped to weather the storm. Cash provides an option to make strategic moves."

Investors should evaluate the freight industry in terms of its long-term prospects, as it is a cyclical business, according to Iampieri, who works with Fortune 100 companies.

"Investors should focus on the long-term management of companies amidst lower volumes," he advised. "It's important to remember the resilience of these companies over the past few years."

In 2023, the sector faced significant challenges, including widespread layoffs and bankruptcies, as well as issues at heavily funded startups using technology to disrupt the sector, such as Convoy and Flexport.

"Technology helps logistics managers make informed decisions by providing visibility into their supply chain, but the maintenance of technology and its associated costs, even through third-party providers, have become fixed expenses that cannot be scaled down," Iampieri stated.

To enhance their logistics processes and order fulfillment, businesses should partner with third-party logistics providers and freight forwarders, who must collaborate closely with ocean carriers, as recommended in the report.

The report stated that in some cases, relationships may develop into acquisitions, while in others, partnerships and strategic agreements will be the keys to building resiliency and maintaining profitability. Short-term rate volatility will continue to benefit subsectors that thrive on uncertainty, such as brokers.

Ocean carrier cash reserves and outlook

During the pandemic, ocean carriers experienced a significant increase in reserves due to the surge in freight transportation. In 2022-2023, some of these reserves were utilized for the expansion of their operations. Additionally, dividends were increased, and profits were used to enhance their vessel fleets.

"Ocean carriers have enough cash to make deals at a lower valuation due to poor balance sheet management of other companies," Iampieri said. "They can buy these companies for a song."

While major shipping companies have issued cautious outlooks to investors, led by Maersk, the shipping disruptions in the Red Sea are a tailwind for the sector. Iampieri tells CNBC that the sector is being compensated for the additional ocean carrier bunker fuel costs.

"Ocean carriers benefit from the Red Sea diversions. I am more optimistic about them than ever before. Why? The longer route is advantageous. If there was no war, rates would decrease significantly," he stated.

The duration of the diversions and the surcharges that ocean carriers can charge are the big question marks.

"Iampieri stated that this presents an opportunity for them to recover their incremental costs and more. "As long as you can obtain the fees, it is accretive. It's a positive if it lasts a year.""

Since the Red Sea issues, ocean freight rates have been declining, first in Europe and then in North America. According to Freightos, transatlantic rates increased by 54% since mid-December to $1,862/40-foot container last week. However, some carriers are postponing additional planned surcharges. The costlier route is from Asia to the East Coast of North America compared to the West Coast. With new ocean contracts being signed next week, shippers will have to consider the slower travel and the threat of a labor strike at the East Coast ports when making decisions.

To mitigate the impact of higher rates, shippers should reduce their dependence on ocean transport and develop a Plan B, according to the report.

That plan B could be moving freight back to the West Coast.

The West Coast ports have been losing market share to the East Coast and Gulf of Mexico ports due to labor strife and port congestion during the pandemic. However, shippers have been moving more freight to these regions, benefitting from investments in port infrastructure. Despite this, the West Coast will still receive more volume of trade.

ITS Logistics' vice president of drayage and intermodal, Paul Brashier, stated that the company expects at least a 25% increase in containers entering the ports of Los Angeles and Long Beach.

"As the contract season approaches, customers planning on Non-Vessel-Operating Common Carrier (NVO) and carrier side are in search of more storage space for containers."

""Freight rates are lower on the West Coast compared to the East Coast, and the infrastructure of West Coast ports has been strengthened, resulting in lower volumes," Iampieri stated."

Despite the market's cooling since 2021-22, equity investors can still find both short-term rewards and long-term value plays, according to AlixPartners' report.

"Distressed debt opportunities will attract fixed-income investors as earnings multiples return to normal and cash remains abundant. Financial investors and strategic acquirers are actively seeking deals, which is likely to result in a busy deal flow in the next two years. However, the uncertain macroeconomic outlook and global geopolitical tensions pose the most significant risks."