Air Freight & Surface Transportation Industry and Valuation Overview James J. Valentine, CFA September 2003 (312) 706.4600 james.valentine@morganstanley.com MORGAN STANLEY NORTH AMERICAN FREIGHT TRANSPORTATION EQUITY RESEARCH TEAM Research Associate Sector Name Telephone E-mail address Chad Bruso, CFA Air Freight 312-706-4603 chad.bruso@morganstanley.com Christopher Leshock Railroads 312-706-4602 chris.leshock@morganstanley.com Mike Manelli Trucking 312-706-4604 mike.manelli@morganstanley.com
Current Morgan Stanley Stock Ratings Freight Transportation Industry View: In Line Stock Ratings Overweight Canadian National (CNI) CSX (CSX) CP Ships (TEU Union Pacific (UNP) Underweight Arkansas Best (ABFS) United Parcel Service (UPS) Equal-weight Burlington Northern (BNI) C.H. Robinson Worldwide (CHRW) Canadian Pacific (CP) CNF Inc. (CNF) Expeditors International (EXPD) FedEx (FDX) Heartland Express (HTLD) J.B. Hunt Transport (JBHT) Kansas City Southern (KSU) Norfolk Southern (NSC) Ryder System (R) Swift Transportation (SWFT) USF Corp (USFC) Werner Enterprises (WERN)
Return on Capital Employed (ROCE) 30 25 25.4 22.9 20 16.9 16.6 Percent 15 11.6 11.2 10.1 9.9 9.5 9.3 9.1 8.8 10 8.3 7.4 5 5.1 4.8 3.6 0 UPS Expeditors CH Robinson Swift JB Hunt Ryder CP Ships Canadian Pacific Canadian National Fedex Werner Heartland Express CNF Norfolk Southern CSX Corporation Union Pacific Burlington Northern
Return on Equity (ROE) 30 25 25.0 23.1 22.8 20 17.0 Percent 15 12.9 12.5 11.6 11.3 10.8 10.6 10.4 10.3 10 9.0 7.5 7.1 5 5.1 4.6 0 UPS CH Robinson Swift Werner CP Ships Union Pacific Burlington Northern JB Hunt Canadian Pacific Fedex Canadian National Heartland Express Expeditors Ryder CNF Norfolk Southern CSX Corporation
Returns on Equity (Du Pont Model) Rail Avg. TL Avg. LTL Avg. Profit Margin (Net Income/Revenues) 7.6% 3.6% 1.8% Asset Utilization (Revenues/Assets) 0.37 1.37 1.80 Leverage (Assets/Equity) 3.22 1.93 2.64 Return on Equity 9.1% 9.5% 8.4% Source: Company reports, Morgan Stanley research
Infrastructure Costs: Railroads vs. Truckload 40.0% 35.0% 30.0% 25.0% % of Revenue 20.0% 15.0% 10.0% 5.0% 0.0% Railroads Werner Note: 2001 Data, railroad figures include capitalized and expensed railway and structure expenditures. Source: Association of American Railroads, company reports
Modal Pricing 170 160 150 140 130 Less-than-Truckload (ex FS) Truckload Railroad 120 110 100 90 80 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Source: Association of American Railroads, Bureau of Labor Statistics
Labor Costs by Mode Average Wage & Benefit Cost per Employee Wage & Benefit Expense as a % of Revenues Average Wage & Benefits per Employee $90,000 $80,000 $70,000 $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 $0 Railroad ` Unionized LTL Truckload Wage & Benefits as a % of Revenue 70% 60% 50% 40% 30% 20% 10% 0% Unionized LTL Truckload Railroad Source: Association of American Railroads, company data
Shipper Service Rankings of Railroads and Trucks Shipper Rankings of Value for the Dollar Shipper Rankings of Delivery Reliability 9.0 Jan '02 May '02 Jan '03 June '03 9.0 Jan '02 May '02 Jan '03 June '03 8.0 7.0 6.0 7.0 7.37.1 6.8 6.8 6.6 6.2 5.9 5.7 6.0 8.0 7.0 6.0 7.4 7.7 7.6 7.1 7.2 7.1 6.4 6.2 6.3 6.0 5.0 5.0 4.0 4.0 3.0 3.0 2.0 2.0 1.0 1.0 0.0 LTL Truckload Rail 0.0 LTL Truckload Rail Source: Morgan Stanley Freight Pulse Surveys
Trucking and Railroad P/E Ratios 25.0 Truckload Sector P/E Based on 12-Month Forward Consensus EPS Estimates (left axis) Regional LTL Sector P/E Based on 12-Month Forward Consensus EPS Estimates (left axis) Rail Sector P/E Based on 12 Month Forward Consensus Estimates 20.0 P/E Ratio 15.0 10.0 5.0 Jan-87 Jan-88 Jan-89 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04
Stock Index Performance 1994-2003 350 300 250 200 TL Index S&P 500 Regional LTL Index Rail Index National LTL Index 150 100 50 - Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Source: FactSet
Morgan Stanley Truckload Freight Index Dry-Van Only 3.5 3.0 97-99 Average 2000 2001 2002 2003 2.5 2.0 1.5 1.0 0.5 0.0 1-Jan Source: Morgan Stanley Research Incremental Truckload Demand 16-Jan 31-Jan 15-Feb 2-Mar 17-Mar 1-Apr 16-Apr 1-May 16-May 31-May 15-Jun Incremental Truckload Supply 30-Jun 15-Jul 30-Jul 14-Aug 29-Aug 13-Sep 28-Sep 13-Oct 28-Oct 12-Nov 27-Nov 12-Dec 27-Dec
Morgan Stanley Dry-Van Supply/Demand Indexes Dry-Van Demand Index Dry-Van Supply Index 275 250 1998 1999 2000 2001 2002 2003 225 1998 1999 2000 2001 2002 2003 225 200 200 175 175 150 125 100 75 50 25 1/1 1/15 1/29 2/12 2/26 3/12 3/26 4/9 4/23 5/7 5/21 Source: Morgan Stanley Research 6/4 6/18 7/2 7/16 Days 7/30 8/13 8/27 9/10 9/24 10/8 10/22 11/5 11/19 12/3 12/17 12/31 150 125 100 75 1-Jan 15-Jan 29-Jan 12-Feb 26-Feb 12-Mar 26-Mar 9-Apr 23-Apr 7-May 21-May 4-Jun 18-Jun 2-Jul 16-Jul 30-Jul 13-Aug 27-Aug 10-Sep 24-Sep 8-Oct 22-Oct 5-Nov 19-Nov 3-Dec 17-Dec 31-Dec
Railroads YOY Change in Key Rail Traffic Commodities 15% 10% 5% % YOY CHANGE 0% -5% -10% -15% -20% -25% Week 1 Week 5 Week 9 Week 13 Week 17 Week 21 Week 25 Note: Trailing 4-week averages Week 29 Week 33 Week 37 Week 41 Week 45 Week 49 Week 1 Week 5 Week 9 Week 13 Week 17 Week 21 Source: Association of American Railroads Economically-sensitive Traffic Motor Vehicle Traffic Coal Traffic 2001 2002 2003 Intermodal Traffic Week 25 Week 29 Week 33 Week 37 Week 41 Week 45 Week 49 Week 1 Week 5 Week 9 Week 13 Week 17 Week 21 Week 25 Week 29 Week 33
Air Freight & Surface Transportation Industry and Valuation Overview September 2003 James J. Valentine, CFA (312) 706.4600 james.valentine@morganstanley.com MORGAN STANLEY NORTH AMERICAN FREIGHT TRANSPORTATION EQUITY RESEARCH TEAM Research Associate Sector Name Telephone E-mail address Chad Bruso, CFA Air Freight 312-706-4603 chad.bruso@morganstanley.com Christopher Leshock Railroads 312-706-4602 chris.leshock@morganstanley.com Mike Manelli Trucking 312-706-4604 mike.manelli@morganstanley.com
Air Freight & Surface Transportation Clauses ANALYST STOCK RATINGS Overweight (O or Over). The stock s total return is expected to exceed the average total return of the analyst s industry (or industry team s) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Equal-weight (E or Equal). The stock s total return is expected to be in line with the average total return of the analyst s industry (or industry team s) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Underweight (U or Under). The stock s total return is expected to be below the average total return of the analyst s industry (or industry team s) coverage universe, on a risk-adjusted basis, over the next 12-18 months. More volatile (V). We estimate that this stock has more than a 25% chance of a price move (up or down) of more than 25% in a month, based on a quantitative assessment of historical data, or in the analyst s view, it is likely to become materially more volatile over the next 1-12 months compared with the past three years. Stocks with less than one year of trading history are automatically rated as more volatile (unless otherwise noted). We note that securities that we do not currently consider "more volatile" can still perform in that manner. ANALYST INDUSTRY VIEWS Attractive (A). The analyst expects the performance of his or her industry coverage universe to be attractive vs. the relevant broad market benchmark over the next 12 18 months. In-Line (I). The analyst expects the performance of his or her industry coverage universe to be in line with the relevant broad market benchmark over the next 12 18 months. Cautious (C). The analyst views the performance of his or her industry coverage universe with caution vs. the relevant broad market benchmark over the next 12 18 months. The information and opinions in this report were prepared by Morgan Stanley & Co. Incorporated ( Morgan Stanley ). This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The securities discussed in this report may not be suitable for all investors. Morgan Stanley recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives. This report is not an offer to buy or sell any security or to participate in any trading strategy. Morgan Stanley, Morgan Stanley DW Inc., affiliate companies and/or their employees may have investments in securities or derivatives of securities of companies mentioned in this report, and may trade them in ways different from those discussed in this report. Derivatives may be issued by Morgan Stanley or associated persons. Within the last 12 months, Morgan Stanley, Morgan Stanley DW Inc. or an affiliate managed or co-managed a public offering of securities of CP Ships LTD, Ryder System, Union Pacific and United Parcel Service. Within the last 12 months, Morgan Stanley, Morgan Stanley DW Inc. or an affiliate has received compensation for investment banking services from Burlington Northern SF, CNF Inc., CP Ships LTD, CSX Corporation, Canadian Pacific Railway, Kansas City Southern, Norfolk Southern, Ryder System, US Freightways, Union Pacific, United Parcel Service and Werner Enterprises. In the next 3 months, Morgan Stanley, Morgan Stanley DW Inc. or an affiliate expects to receive or intends to seek compensation for investment banking services from Arkansas Best, Burlington Northern SF, C.H. Robinson Worldwide, CNF Inc., CP Ships LTD, CSX Corporation, Canadian National, Canadian Pacific Railway, FedEx Corp., J.B. Hunt Transport, Kansas City Southern, Norfolk Southern, Ryder System, Swift Transportation, US Freightways, Union Pacific, United Parcel Service and Werner Enterprises. As of November 29, 2002, Morgan Stanley, Morgan Stanley DW Inc. and/or their affiliate companies beneficially owned 1% or more of a class of common equity securities of the following companies covered in this report: Arkansas Best, Burlington Northern SF, CNF Inc., CSX Corporation, Norfolk Southern, Swift Transportation, US Freightways and Union Pacific. Morgan Stanley, Morgan Stanley DW Inc. and/or their affiliate companies make a market in the securities of Arkansas Best, Swift Transportation, Union Pacific and Werner Enterprises. The research analysts, strategists, or research associates princ ipally responsible for the preparation of this research report have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and investment banking revenues. Morgan Stanley has no obligation to tell you when opinions or information in this report change. Morgan Stanley and its affiliate companies are involved in many businesses that may relate to companies mentioned in this report. These businesses include market making and specialized trading, risk arbitrage and other proprietary trading, fund management, investment services and investment banking. This report is based on public information. Morgan Stanley makes every effort to use reliable, comprehensive information, but we make no representation that it is accurate or complete. This report has been prepared by Morgan Stanley research personnel. Facts and views presented in this report have not been reviewed by, and may not reflect information known to, professionals in other Morgan Stanley business areas, including investment banking personnel. The value of and income from your investments may vary because of changes in interest rates or foreign exchange rates, securities prices or market indexes, operational or financial conditions of companies or other factors. There may be time limitations on the exercise of options or other rights in your securities transactions. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realized. This publication is disseminated in Japan by Morgan Stanley Japan Limited; in Hong Kong by Morgan Stanley Dean Witter Asia Limited; in Singapore by Morgan Stanley Dean Witter Asia (Singapore) Pte., regulated by the Monetary Authority of Singapore; in Australia by Morgan Stanley Dean Witter Australia Limited A.B.N. 67 003 734 576, a licensed dealer, which accepts responsibility for its contents; in certain provinces of Canada by Morgan Stanley Canada Limited, which has approved of, and has agreed to take responsibility for, the contents of this publication in Canada; in Spain by Morgan Stanley, S.V., S.A., a Morgan Stanley group company, which is supervised by the Spanish Securities Markets Commission (CNMV) and states that this document has been written and distributed in accordance with the rules of conduct applicable to financial research as established under Spanish regulations; in the United States by Morgan Stanley & Co. Incorporated and Morgan Stanley DW Inc., which accept responsibility for its contents; and in the United Kingdom, this publication is approved by Morgan Stanley & Co. International Limited, solely for the purposes of section 21 of the Financial Services and Markets Act 2000 and is distributed in the European Union by Morgan Stanley & Co. International Limited, except as provided above. Private U.K. investors should obtain the advice of their Morgan Stanley & Co. International Limited representative about the investments concerned. In Australia, this report, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The trademarks and service marks contained herein are the property of their respective owners. Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages of any kind relating to such data. The Global Industry Classification Standard ("GICS") was developed by and is the exclusive property of MSCI and S&P. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Morgan Stanley. Additional information on recommended securities is available on request.