Gene Marcial's Inside Wall StreetDespite the ongoing nasty sell-off in equities, some analyst think investors are in for several positive surprises for the remainder of this year and for 2011, and most could provide a boost for the dragging transportation industry.

Among those surprises, says Gerald E. Thunelius, managing partner and head of Core Fixed Income Strategies at TCP Global Investment Management, are: The economy will grow faster than people expect; employment will continue on a slow but positive growth trend; and inflation will definitely grow -- as the government will keep reflating to avoid a depression.

Within transportation, Thunelius sees Ryder System (R), a global provider of transportation services to various industries, as the big beneficiary of the economy's resurgence. With inventory levels "too low" amid growing demand for more goods and services, Ryder should harvest a lot of the bounty, says Thunelius.

"Simply put, the government will reflate as inventories are down to seriously low levels while companies are flush with cash," he says. "We are moving closer to the point where CEOs are feeling more optimistic." His best guess is that companies will start reinvesting and spending in a big way on technology, which will ultimately fuel hiring.

As a result, he's confident that companies like Ryder will start experiencing sales growth again and becoming increasingly profitable.

A Good Bet in Transportation

Given these looming positives, "Ryder is definitely cheap," he says, and the stock is a steal at this point, with sales and improved earnings in sight. Ryder's stock, which dropped to a 52-week low of $32 a share on Feb. 4, 2010, has rebounded. It closed on May 20 down $2.72, to $42.28, on a day that equities got pummeled everywhere because of ongoing worries about Europe. Some analysts believe the stock is worth much more. BB&T Capital, for one, rates it a buy with a 12-month price target of $60.

The problem now, says Thunelius, is that investors are underinvested and don't own enough stocks. They need to build up their portfolios to take advantage of coming economic snap-back, he advises. The place to start is in transportation, and Ryder is a good bet, he says.

He says that with inventories of all kinds of goods running almost empty, demand is springing up and will grow much sooner than many people expect. Traffic volume for companies like Ryder will jump, he says. Thunelius thinks Ryder is a leading economic indicator because it serves customers in an array of industries, including automotive, electronics, paper products, food and beverage, and retailing.

What the Ryder indicator is saying now is that markets are ripe for cash to be redeployed because the overall health of corporate profits is becoming more vibrant, says Thunelius. And it can't be overemphasized, he argues, that one area investors should pay more attention to is the lagging transportation sector.

Sequential Gains Starting This Year

The economic downturn had weighed heavily on Ryder's operations. Standard & Poor's analyst Kevin Kirkeby says since its operations are mainly contract-based, they're generally slower to respond to changes in the economy. However, with manufacturing plants increasing production, notably the automakers, "we see Ryder's rental operations as a key near-term capacity supplier to companies that are still reluctant to commit to new trucks," says the analyst.

With the economy revving up, Ryder's other segments will begin to show sequential gains this year, says Kirkeby, who rates the stock a buy, with a 12-month price target of $54. He sees margins widening slightly in 2010 as cost-cutting measures take hold and customers' shipping schedules stabilize. That should result in more effective fleet positioning by its customers. Kirkeby forecasts Ryder will earn $1.93 a share in 2010, up from $1.82 in 2009.

It's possible that Ryder's earnings could do even better. Art W. Hatfield, analyst at investment firm Morgan Keegan, says earnings could approach $2 a share in 2010 if the contractual portion of Ryder's business improves as the year progresses. For 2011, Hatfield says he could see the company earning closer to $3 a share.

"We continue to like this stock," says Hatfield, given the health of the company's balance sheet, ample cash to make acquisitions and its ability to generate free cash flow. Ryder's cash flow jumped from $83.7 million a year ago to $135.9 million in the first quarter of 2010, notes Hatfield.

Investors Haven't Loaded Up


Although only two of the 10 analysts who follow Ryder recommend buying the stock, none rates it a sell. The other eight analysts tag it a hold. Some big institutional shareholders own large stakes, including Bank of America, which recently bought 1.7 million shares, boosting its holdings to 7.85%. The largest stakeholder is UBS Global Asset Management, which owns 10%.

It's no surprise that Individual investors haven't loaded up on Ryder shares. But for those who believe the economy is headed toward a healthy rebound, Ryder is one to ride with as the transportation industry responds to that rebound.

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