Con-Way Inc. (NYSE:CNW) -- How GDP Growth Impacts Con-Way Stock

Con-way Inc. (NYSE:CNW) is a California-based provider of transportation, logistics, and supply-chain management services, a sector where Baird has noted fluctuations in strength that relate to GDP growth. Dan Amoss, editor of Agora Financial’s Strategic Short Report, explains how the Baird finding applies to Con-way’s business prospects.

From Amoss’ latest reader update:

“On June 30, the transportation analysts at Baird published a note on the macro situation facing trucking companies, writing:

During previous cycles, it is common for early-cycle freight strength to ease during the initial stages of an economic recovery. This initial freight acceleration, as measured by year-over-year freight growth, is a factor of inventory trends amid improving economic activity and easier prior-year comparisons. As can be seen in the chart below, during previous economic cycles, freight growth experiences an initial surge above GDP growth as the economy rebounds, but eventually retrenches before reaccelerating growth to a new cycle high [emphasis added].

Here is a chart of the Baird Freight Index versus GDP growth:

“For the reasons mentioned above, I expect U.S. GDP growth to fall back towards zero in the coming quarters. If so, this would drive the Baird Freight Index — and the profit outlook for Con-Way — much lower. I doubt we’ll see a reacceleration ‘to a new cycle high’ in Baird’s Freight Index because this is not a typical GDP cycle. There simply won’t be as much demand for trucking services now that the post-crash inventory replenishment cycle is mostly behind us.

“The glut in the ‘less than truckload’ sector isn’t helping Con-Way. Con-Way aggressively priced business in 2009 to cover its fixed costs, and is seeking to raise prices in 2010. But when it asks customers for higher pricing, many will divert freight to lower-priced competitors. So whatever benefit Con-Way gets in 2010 from higher pricing should be offset by the loss of customers.”

Dan Amoss is anticipating that Con-way’s next earnings report on August 4th will shed additional light on these concerns. He also expects CNW stock to remain weak to the extent that investor flight from risk continues in the broader stock market. To find out more about Amoss’ specific recommendations for Con-way investors, you should subscribe to the Strategic Short Report. It’s available through the Agora Financial reports page, which can be found here.


Rocky Vega,
The Daily Reckoning

[Nothing in this post should be considered personalized investment advice. Agora Financial employees do not receive any type of compensation from companies covered. Investment decisions should be made in consultation with a financial advisor and only after reviewing relevant financial statements.]