As the economy continues to grow, the Zacks industry is benefiting from healthy equipment and rental demand as companies increasingly make capital investments to expand their operations. Interest rates, which are currently near zero, are fueling rental demand. Despite supply chain disruptions, the near-term outlook for the transportation equipment and leasing industry looks promising due to strong consumer demand.

In this active context, companies like Ryder System (R Quick Quote – ), GATX Corporation (GATX Quick Quote – ) and Trinity Industries (TRN Quick Quote – ) will benefit.

About the industry

The Zacks Transportation-Equipment and Leasing industry consists of companies that provide equipment financing as well as leasing and supply chain management services. The industry includes lessors of aircraft, railcars and intermodal containers. Some of these companies even offer logistics and transportation solutions, such as vehicles, drivers, management and administrative services. Most industry participants offer fleet management solutions and serve clients ranging from small businesses to large international corporations. Customers come from a wide range of industries, the most important of which include automotive, electronics, transportation, grocery, lumber and wood products, food service and home improvement. Some of these companies provide locomotives, value-added, technology-based equipment, systems and services to the freight rail and passenger transportation industries.

Three Trends Shaping the Future of the Transportation Equipment and Rental Industry

Supply Chain Woes: Continued supply chain disruptions are a major detriment to the transportation equipment and rental industry due to the epidemic. Parts shortages, labor shortages and delays in the delivery of new equipment are eroding revenues for industry participants. With the emergence of new coronavirus variants, this situation is unlikely to improve in the near term, potentially exacerbating supply chain disruptions.

Healthy Equipment and Leasing Demand: Demand for equipment financing and leasing remains strong as companies continue to show interest in capital expansion to scale their operations and recover from the pandemic. Increased demand for rail vehicles is driving growth among rail vehicle lessors, while intermodal container lessors are benefiting from improved trade volumes and container demand. Industry executives expect the favorable demand environment to continue in the near term due to strong consumer demand.

Expected rise: At the January meeting, the Fed hinted at a rise in March. Multiple increases are expected in 2022 to curb inflation. The rise does not bode well for the industry, as it will increase financing costs and could weaken borrowing activity. Nonetheless, as of now, the expected increase in March may induce consumers and businesses to undertake capital expansion activities at the current low interest rates, thereby boosting rental demand.

Zacks Industry Rankings Bode Well for the Future

The Zacks Transportation – Equipment & Leasing industry is located in the broader sector and currently holds a Zacks Industry Rank of #54. This ranking places it in the top 21% of more than 250 Zacks industries.

The group's is essentially an average of the Zacks Rank for all member stocks, indicating a solid near-term outlook. Our research shows that the top 50% of the Zacks Rank outperforms the bottom 50% by more than 2 to 1.

The industry is in the top 50% of Zacks-ranked industries.

Before we present some noteworthy stocks, it is necessary to take a look at the stock market performance and current valuations of the sector.

Sector outperformed the industry and the S&P 500

The Zacks Transportation-Equipment & Leasing sector outperformed the broader transportation industry and the Zacks S&P 500 Composite Index over the past year.

During this period, the sector rose 23.3% compared to the broader industry, with the S&P 500 up 8.7% and 18.7%, respectively.

One year price performance

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Current valuation of the industry

Based on the forward price-to-earnings ratio (F12M), a common multiple used to evaluate equipment and rental stocks, the industry is currently trading at 12.05 times compared to the S&P 500 index of 20.41. It is also below the industry's price-to-earnings ratio (F12) of 16.48 times.

Over the past five years, the industry has traded at as high as 17.13 times and as low as 8.92 times, with a median of 14.98 times, as shown in the chart below.

Forward P/E Ratio (F12M) Ratio

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Forward P/E Ratio (F12M) Ratio

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3 Transportation equipment and leasing stocks to be closely monitored

Trinity: Headquartered in Dallas, Texas, Trinity has market-leading businesses that provide rail transportation products and services in North America. Improved demand for railcars should drive the company's growth through 2022. Cost containment measures are expected to continue to improve TRN's profitability. Trinity's commitment to rewarding shareholders in the face of adversity is indicative of its strong financial position. In December 2021, the company announced a 9.5 percent increase in its quarterly dividend to 23 cents per share (annual: 92 cents).

Trinity's shares have risen 7.3% over the past six months. The company has a Zacks Rank #1 (Strong Buy). You can see.

Price and Consensus: TRN

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GATX: Based in Chicago, Illinois, GATX is a global railcar lessor with its own fleet in North America, Europe and Asia. The continued recovery of the North American railcar leasing market is expected to drive the company's growth through 2022. Improved market leasing rates and increased gains on asset disposals are expected to boost profits in the North American rail division, which contributes the majority of GATX's revenue.

Shares of GATX, a Zacks Rank #2 (Buy), have risen 11.7% in one year. The Zacks Consensus Estimate for the company's 2022 earnings has been raised by 2 cents in the last 60 days.

Price and consensus: GATX

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Ryder: Headquartered in Miami, Florida, Ryder provides integrated logistics and transportation solutions. As economic and freight market conditions improve, R is benefiting from higher rental income due to strong demand and favorable pricing. Ryder's acquisitions of Whiplash and Midwest Warehouse & Distribution System have expanded its e-commerce fulfillment network and enhanced its multi-customer warehousing capabilities. These transactions are expected to drive growth in the company's Supply Chain Solutions division.

Shares of Ryder, which owns the No. 2 Zacks Rank, have risen nearly 10% in one year. The Zacks Consensus Estimate for the company's 2022 earnings has been raised by 1.9% in the last 60 days.

Price and consensus: R

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