Intro

LAST YEAR WAS

one of the worst periods for transportation companies in years. With consumers spooked by credit woes and rising energy prices, freight volume dropped for the first time since 2001. This year promises more of the same, particularly if the U.S. gets hammered by a recession. But don't tell Burlington Northern Santa Fe, which transports enough grain to supply 900 million people with a year's worth of bread and enough coal to power one out of every 10 homes. The nation's second-largest railroad logged its second-busiest year ever last year, hauling in record revenue and cash flow. This year the outlook is for more of the same.

Trains, trucks and ships might not seem like natural places to put your money when the daily headlines shout recession. After all, they are the engines of economic activity, moving everything from corn and coal to iPods and socks. But a handful of transportation companies are poised to ride out the domestic doldrums. After years of hard work to become more efficient, these companies are lean, mean and flexible enough to reduce costs when demand slips. The best-positioned have another weapon: pricing power. Companies like Burlington Northern and United Parcel Service benefit from limited competition and high barriers to entry. No one is going to build a new railroad or re-create a global shipping network overnight. And with railroads still operating near full capacity, it's easier to implement price increases 6 percent last year alone. "If a shipper wants an extra train, it's going to cost them," says Longbow Research transportation analyst Lee Klaskow. No wonder long-term investors like Warren Buffett have been buying stocks such as Burlington Northern.

Even in a slowing economy, moving goods is a big business. Trucks and railroads combined bring in about $700 billion a year in revenue, and increasing world trade means that figure should continue to grow. As a group, transportation stocks typically hit the brakes before other industries, and this slowdown is no exception. Freight shipments started slowing in late 2006. The good news is that the sector often emerges from the doldrums before other companies. Jon Langenfeld, who covers transportation at Robert W. Baird, says these freight recessions typically last about six to eight quarters. If the pattern holds, this one could be nearing an end. Meanwhile, overseas economies are picking up the slack. The rest of the world still needs many of the goods produced here, and someone has to move them. Indeed, research firm Global Insights expects the value of traded goods to rise to $15 trillion this year, from $13 trillion in 2007.

For more SmartMoney Magazine features, turn to the June issue.

That doesn't mean it's smooth sailing for every company that moves things around. High oil prices, for example, help railroads but hurt many trucking companies, which are far less fuel efficient. A deep recession that significantly slows growth abroad or a further spike in oil prices would likely slow the movement of goods globally. Even if a worst-case scenario doesn't play out, economic uncertainty could lead to near-term volatility for this group. "But that's what creates tremendous opportunity for appreciation over the long haul," says John Buckingham, manager of the value-oriented Al Frank fund, which owns names such as DryShips and railroad CSX.

To find transportation companies that can move portfolios as well as goods, we searched for firms that can ride out near-term bumpiness and go full steam ahead at the first signs of recovery. We then looked for those whose profits are expected to remain strong even in a downturn. As an added safety net, we stuck with companies that pay dividends, even if they are on the small side. That left us with five stocks that should keep your portfolio chugging along over the long term.

On the Move
These stocks should at least hold their own in an economic slowdown and be set to roll when the recovery finally arrives.
Company (Ticker)	Price 4/23/2008	Market Value ($mil)	Yield (%)
	97.56	33,971	1.3
	84.41	3,452	1.0
	46.34	9,875	0.6
	31.93	3,982	1.3
	71.67	74,133	2.5

Sources: Baseline; Bloomberg

Burlington Northern, UPS

In the battle of trucks versus trains, the rails increasingly have the advantage. With trains three times as fuel efficient as trucks, more shippers have turned to railroads to move their goods. Seemingly insatiable demand for commodities is also keeping train cars brimming with grain and coal, offsetting the slump in autos and home building.

Burlington Northern sits right in the center of this rail boom, with 70 percent of its revenue coming from what Klaskow calls the "holy trinity of freight" agriculture, coal and intermodal transport (moving containers of goods via a mix of trucks, trains and ships). But the Fort Worth, Tex.-based company is also an operating superstar, with return on equity a key measure of how well a business is run steadily rising to 17 percent, from single digits in 2003. During the last downturn Burlington Northern was one of the few railroads diligently investing in its systems. That allowed it to quickly benefit when the American economy rebounded and global trade exploded. The others eventually caught up, ushering in a period of impressive profit growth for an industry left for dead a decade earlier.

When the latest downturn hit, some investors feared the good times were over. But the major U.S. railroads beat Wall Street's profit estimates in last year's fourth quarter, even as volumes eased. That proved "the rail renaissance was real, and the fundamental turnaround story is bigger than the economic cycle," says veteran railroad analyst Tony Hatch. Even against a weak economic backdrop, analysts expect Burlington Northern to increase profit by 13 percent this year, to $2.04 billion, or $5.91 a share. One big reason: railroads' ability to impose fuel surcharges and increase prices.

Burlington Northern shares are up nearly fourfold since 2003, but Craig Hodges, comanager of the Hodges Fund, says the rail-revival story is still in its early stages. He thinks that at 17 times 2008 expected earnings, the stock is still attractive, given prospects for 13 to 15 percent profit growth for the foreseeable future.

United Parcel Service (

To keep tabs on the country's economic health, the Federal Reserve checks in with United Parcel Service. After all, the Atlanta-based company figures that it moves about 6 percent of U.S. gross domestic product. Lately, the feedback hasn't been all that rosy. The company says U.S. package volumes slipped 0.3 percent in the first quarter the steepest decline since 2003. That and higher fuel prices led the company to miss its initial profit forecast. Although analysts still expected a small increase in profit for the full year, Chief Financial Officer Kurt Kuehn says the company is on "high alert," ready to cut costs at a moment's notice to deal with declining volume.

Of course, if a protracted recession hits, customers could forgo shippers like UPS and choose smaller, lower-cost options or fight fuel surcharges more aggressively. But UPS has faced tough economies before and still has managed to increase its revenue every year for the past 100 years. "In hard times they are very good at managing expenses," says Daniel Ortwerth, transportation analyst at Edward Jones.

While the domestic-parcel business made up 61 percent of 2007 sales, longer-term growth should come from its two other divisions. International operations saw profit increase 11 percent last year as UPS continued to expand abroad (latest market: Romania). And after some early missteps, the company's logistics and freight businesses are showing signs of a turnaround. For example, its trucking business, which hauls heavy cargo, is gaining market share and seeing higher volumes, even though the overall trucking industry is in a slump. With UPS shares trading at about 17 times 2008 earnings near five-year lows bargain hunters might consider hopping aboard. The stock's 2.5 percent dividend yield should help allay any motion sickness along the way.

J.B. Hunt, Expeditors Intl., DryShips

The U.S. trucking business is under siege; total freight shipped is down, and fuel costs are up way up. The stocks of most trucking firms have jackknifed over the past year as investors have shied away from the industry. But J.B. Hunt Transport Services keeps rolling along, with its shares recently trading just barely below their all-time high.

The Lowell, Ark.-based firm has kept on truckin' by becoming the middleman between railroads and retailers. Companies like Wal-Mart hire J.B. Hunt to haul goods over to the rail yard, where the stuff gets loaded onto a train for shipment. That way customers save on hefty fuel surcharges that long-haul truckers impose when gas prices are high. At the same time, J.B. Hunt's efficient business model has allowed it to increase its return on capital to more than 30 percent, more than triple the trucking industry's average of 9 percent. Feeding the railroads accounts for about 45 percent of J.B. Hunt's revenue of $3.5 billion and nearly two-thirds of its $369 million in operating profit.

Of course, J.B. Hunt is hurt along with other truckers by the downturn in the traditional hauling of goods around the country. That part of its business fell 13 percent last year and doesn't look like it will rebound for at least several months. And J.B. Hunt trades at 20 times 2008's expected profits of $199 million, or $1.57 a share, a pricey valuation for any transportation stock. Still, UBS transportation analyst Rick Paterson says J.B. Hunt is one of the best-run truckers, and its truck-to-rail business will keep profit from sinking too low. And if recent history is any guide, trucking stocks could jump at the first hint of an economic recovery.

Expeditors Int'l (

Seattle-based Expeditors International of Washington is one of the leaders in global logistics, managing cargo in 61 countries. But the best part of Expeditors' business model, analysts say, is that the firm owns very few assets. So in dicey economic times, it doesn't have planes, trains or trucks standing idly by.

Owning Expeditors stock is a wager on the long-term growth of global trade. That should be a reasonably safe bet thanks to the rising incomes in developing countries. Global exports have increased, on average, 5.5 percent a year since 2000, according to the World Trade Organization. Expeditors shares trade at a robust 32 times expected 2008 profits of $1.43 a share but that's below its five-year average price/earnings ratio of more than 40. And if there's a recession on the way, CEO Peter Rose doesn't want to hear about it. "We see opportunity in the long term," he says.

One downside is that European and American governments are examining the surcharges that Expeditors and other freight forwarders impose on their customers. Skittish investors might want to wait to see if the investigations amount to anything. But T. Rowe Price logistics analyst Joe Fath says Expeditors has a strong business model and will do well as long as global trade continues to increase.

DryShips (

DryShips Chief Executive George Economou says his company is like a taxi service, shuttling commodities such as iron ore and fertilizer around the world. Lately, DryShips has been as busy as a yellow cab on a rainy day. A U.S. recession or even a drop in commodity prices isn't going to hurt DryShips' business much, Economou tells SmartMoney. After all, China's industrialization will continue, requiring steel for roads, bridges and railroads and thus requiring iron ore. "If you look at economies that have gone through the same type of shift, from agrarian to industrialized economies, like Korea and Taiwan, it's about a 30-year cycle," he says. "And China is only halfway there."

With the strong demand for commodities, DryShips has decided against locking in long-term contracts with customers. That has contributed to phenomenal growth, with earnings expected to rise about 90 percent this year, to $681 million, or more than $18 a share. It also gives DryShips a forward price/earnings ratio of just 5, and when earnings multiples are that low, investors often have questions. Indeed, the Greek company has raised eyebrows over its business dealings with a private firm owned by Economou and his family. (Economou says that the relationship helps keep DryShips' operating expenses lower than some rivals'.) The lack of long-term contracts also makes the earnings highly volatile, and investors have to trust the company to play it just right. "If you are investing in DryShips, you are a gambler betting on jockey Mr. Economou," says Buckingham, of the Al Frank fund.