2010 John Larkin

2010 Food Shippers of America
Conference Equity Research

Some Seasonal Strengthening Has Occurred In The Freight
Markets; However, The Road To Recovery Will Be Gradual

John Larkin, CFA
Stifel, Nicolaus & Company, Incorporated
(443) 224-1315
jglarkin@stifel.com

Images courtesy of KNX, SAIA, FDX and BNSF February 23, 2010

All relevant disclosures and certifications can be found on pages 46-47 of this report.
Transportation & Logistics
Freight Transportation & Logistics Group CONFIDENTIAL 1 1

2010 Food Shippers of America
Conference Equity Research

Outline

I. The Economy Is Gradually Recovering: Sustainability Is An Issue
II. Freight Volumes Are Reflecting The Economic Recovery
III. Each Freight Transportation Sector Is Driven By Unique Factors
IV. Short Term Predictions – “Not Out Of The Woods Yet”
V. Longer Term Predictions – “The Future Will Be Bright”


Macroeconomic Indicators Remain
Relatively Soft Equity Research

Real Consumer Spending “Cratered” in 2008 But Hasn‟t Improved Much

Real Retail Sales Increased 2.4% Y/Y in December; It Appears
That The Worst May Be Behind Us
CPI-Adjusted Retail Sales Y/Y% Change
190 8.0%

6.0%

180 4.0% Decline From
Monthly Retail Sales ($ bn)

2.0% Peak

Y/Y % Change
170 0.0% -9.5%
-2.0%

160 -4.0%

-6.0%

150 -8.0%

-10.0%

140 -12.0%
Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09

Chart displays seasonally adjusted data
Source: St. Louis Federal Reserve Bank, Company data


U.S. Consumers Are Saving More to Offset
Real Estate and Investment Portfolio Losses Equity Research

Increased Savings = Reduced Consumption; Is This a Permanent Change in Behavior?
U.S. Personal Savings ($ in Billions) U.S. Personal Savings Rate (%)
1952 - 2009
1952 - 2009
DPI Less Personal Outlays - Inflation Adj. to 1952 ($ BN)

80 15.0%

70

Personal Savings / Disposable Inc. (%)
60
10.0%
50

40

30
5.0%
20

10

0
0.0%
1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008
1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008

Monthly U.S. Personal Savings ($ in Billions) Monthly U.S. Personal Savings Rate (%)
Figures Seasonally Adjusted at Annual Rates Figures Seasonally Adjusted at Annual Rates
Jan. 2007 - Dec. 2009 Jan. 2007 - Dec. 2009
850
7.0%
750
DPI Less Personal Outlays ($ BN)

Personal Savings / Disposable Inc. (%)
6.0%
650
5.0%
550
4.0%
450
350 3.0%

250 2.0%

150 1.0%
50 0.0%
(50) -1.0%
Aug-07

Aug-08

Aug-09
Apr-07

Apr-08

Apr-09
May-07

May-08

May-09
Mar-07

Mar-08
Feb-07

Nov-07

Nov-08

Mar-09

Nov-09
Jul-07

Sep-07

Feb-08

Jul-08

Sep-08

Feb-09

Jul-09

Sep-09
Jan-07

Jun-07

Dec-07
Oct-07

Jan-08

Jun-08

Dec-08

Dec-09
Oct-08

Jan-09

Jun-09

Oct-09

Apr-07

Aug-07

Apr-08

Aug-08

Apr-09

Aug-09
Feb-07

May-07
Mar-07

Jul-07

Sep-07

Nov-07

Feb-08

May-08

May-09
Mar-08

Jul-08

Sep-08

Nov-08

Feb-09
Mar-09

Jul-09

Sep-09

Nov-09
Jan-07

Jun-07

Oct-07

Jan-08
Dec-07

Jun-08

Oct-08

Jan-09
Dec-08

Jun-09

Oct-09

Dec-09
*DPI less Personal Outlays in May 2008 and Personal Saving as a Percentage of Personal Disposable Income in May 2008 are not comparable due to the Economic Stimulus Act of 2008, when the Government issued rebate payments of $1.9 billion in April, $48.1
billion in May, and $27.9 billion in June and $13.7 billion in July. The stimulus package effectively reduced the level of personal taxes, which are part of the calculations for Savings in dollars and percentage savings rate.
Personal savings is disposable personal income net of personal outlays
Source: Bureau of Economic Analysis


ISM Index Suggests Manufacturing Growth Equity Research

ISM Index in January Suggested Growth in the Manufacturing Economy
For the Sixth Consecutive Time Since July ‟09; Export Growth Had Been
Masking Domestic Manufacturing Weakness For Most of „08
65.0

60.0

55.0
ISM Index

50.0 Jan-10

45.0 58.4

40.0

35.0

30.0
Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10

ISM Index values over 50 indicate industrial growth while ISM Index values below 50 indicate industrial contraction.
Source: Institute for Supply Management


Industrial Production Recovering Slowly Equity Research

Tonnage-Weighted Industrial Production Has Been Slightly Weaker Than Value-Weighted Industrial
Production Due to Steep Declines in Heavy Building/Construction Materials and Automotive Volumes
and Emphasis Given to More Concentrated/Compact Products With Smaller Packaging

U.S. Industrial Production Index Tonnage-Weighted Industrial Production Index
Jan. 1999- Jan. 2010 Nov. 1998- Nov. 2009
Industrial Production Y/Y% Change Tonnage Weighted IP Index Y/Y % Change
110.0 10.0% 120.0 10.0%

100.0 5.0% 100.0 5.0%
Industrial Production Index

Tonnage-Weighted IP Index
90.0
0.0% 80.0 0.0%

Y/Y % Change
Y/Y % Change
80.0
-5.0% 60.0 -5.0%
70.0
40.0 -10.0%
-10.0%
60.0
20.0 -15.0%
50.0 -15.0%

0.0 -20.0%
40.0 -20.0%
Nov-98

Nov-99

Nov-00

Nov-01

Nov-02

Nov-03

Nov-04

Nov-05

Nov-06

Nov-07

Nov-08

Nov-09
Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Data in both graphs are adjusted for PPI, excluding food and energy

Source: St. Louis Federal Reserve, American Trucking Associations


Credit Managers Index Somewhat
Encouraging Equity Research

Recent Credit Managers Index (CMI) Data Suggests Commercial Business Transactions Have
Expanded in Each of the Past Three Months; December ‟09 CMI Highest Since January „08

60
Combined Manufacturing and Services CMI (SA Index)

55

50 Dec-09
52.9

45

40
4

9
4

9
4

5

8

9
8
07
5

6

07
06

07
l- 0

l- 0
-0

-0

-0
-0

r- 0

-0
-0
-0
-0

n-

n-
g-

v-
b

p

b
c

c
t

ar
ay
Ju

Ju
Oc

Ap
De

De
Fe

Se

Fe
Ja

Ju
Au

No
M
M

CMI Index values over 50 indicate expansion while CMI Index values below 50 indicate contraction.

Source: National Association of Credit Management


Manufacturing Orders Showing Growth Equity Research

New Manufacturing Orders Weakened Dramatically Through the End of 2008; 2009
Comparisons Rebounded, With July Through December Showing Increasing Y/Y Growth;
January Growth Pulled Back Slightly From December; Is This Growth Sustainable?
Manufacturing New Orders
Jan. 1997 - Jan. 2010
New Orders (SA) Y/Y % Change
75 210%

180%
65
150%
ISM New Orders Index

55 120%

Y/Y % Change
90% Jan-10:
45 98.5%
60%

35 30%

0%
25
-30%

15 -60%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: Institute for Supply Management


Manufacturing Inventories Growing While
Customers’ Inventories Continue Decline Equity Research

Was 2H09 Strength Tied to Inventory Replenishment at the Supplier and Manufacturing Levels?
Manufacturing Supplier Deliveries Manufacturing Inventories
Jan. 1997 - Jan. 2010 Jan. 1997 - Jan. 2010
Supplier Deliveries (SA) Y/Y % Change Manufacturers' Inventories (SA) Y/Y % Change
70 40% 70 40%

30%

ISM Manufacturing Inventories Index
20% 60 20%
ISM Supplier Deliveries Index

60

Y/Y % Change
10%

Y/Y % Change
0% 50 0%

-10%
50
-20% 40 -20%

Jan. 32.7% Jan. 24.0% -30%

40 -40% 30 -40%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Manufacturing Customers' Inventories Retail Inventories
Jan. 1998 - Jan. 2010
Jan. 1996- Dec. 2009
Customers' Inventories (SA) Y/Y % Change
65 30% Retail Inventories (SA) Y/Y % Change
ISM Manufacturing Customers' Inventories Index

550 10%
60 20%
Retail Inventories (SA in 000's)
10% 500 5%
55
Y/Y % Change

Y/Y % Change
0%
50 450 0%
-10%
45
-20% 400 -5%
40
-30%

35
Jan. -42.3% 350
Dec. -10.9%
-10%
-40%

30 -50% 300 -15%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Manufacturing Data through January 2010, Retail Inventories through December 2009
Source for top two and bottom left graphs: Institute for Supply Management; Source for bottom right graph: U.S. Census Bureau


IS Ratio Spike Was Due to Dramatic
Downturn in Sales Equity Research

Inventory Levels Appear to Have Adjusted to “New Normal” Demand Levels; Did Manufacturers
Restock Too Early?
Manufacturers Inventories, total ($bn) Inventory/Sales Ratio Wholesale Inventories, total ($bn) Inventory/Sales Ratio

600 1.5 500 1.4
Manufacturers Inventories ($bn)

1.45

Wholesale Inventories ($bn)
1.35
550 Dec-09 I/S Ratio: 450 Dec-09 I/S Ratio:
1.4 1.3
1.29 1.35 1.12

I/S Ratio
400

I/S Ratio
500 1.25
1.3
450 350 1.2
1.25
1.15
1.2
400 300
1.15 1.1

350 1.1 250 1.05
Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09

Retail Inventories, total ($bn) Inventory/Sales Ratio Business Inventories, total ($bn) Inventory/Sales Ratio

550 1.7 1,600 1.50
Dec-09 I/S Ratio: 1.65 Business Inventories ($bn) Dec-09 I/S Ratio:
1,500 1.45
Retail Inventories ($bn)

500 1.37 1.6 1.26
1,400 1.40

I/S Ratio
I/S Ratio

1.55
450 1,300 1.35
1.5
1,200 1.30
1.45
400
1.4 1,100 1.25

350 1.35 1,000 1.20
Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09
Source: U.S. Census Bureau

Freight Transportation & Logistics Group CONFIDENTIAL 1010

Existing Housing Sales Showing Nice
Rebound; New Home Sales Remain Anemic Equity Research

Freight Tied to Residential Construction Remains Relatively Weak; Strength in Existing Home Sales
Has Generated Some Incremental Traffic

New Home Sales Remain Negative Even as Comps Existing Home Sales Reach Highest Level Since
Get Progressively Easier February 2007
New Home Sales Y/Y% Change Existing Home Sales Y/Y% Change
1,500 40.0% 7,500 50.0%
New Home Sales (Annual rate in 000's)

Existing Home Sales (Annual Rate in
30.0%
7,000 40.0%
20.0%
1,200

Y/Y % Change
10.0% 30.0%
6,500

Y/Y % Change
0.0% 20.0%
6,000

000's)
900 -10.0% 10.0%
-20.0% 5,500
0.0%
-30.0% 5,000
600 -10.0%
-40.0%
4,500 -20.0%
-50.0%
300 -60.0% 4,000 5/31/2005 -30.0%

10/31/2005

3/31/2006

8/31/2006

1/31/2007

6/30/2007

11/30/2007

4/30/2008

9/30/2008

2/28/2009

7/30/2009

12/30/2009
5/31/2005

10/31/2005

3/31/2006

8/31/2006

1/31/2007

6/30/2007

11/30/2007

4/30/2008

9/30/2008

2/28/2009

7/30/2009

12/30/2009

Left Graph current through December 2009, Right Graph current through December 2009

Sources: U.S. Census Bureau, National Association of Realtors


A Bottom Seen in New Home Construction? Equity Research

On an Absolute Basis, January Building Permits Took a Small Step Down From December; Many
Local Markets Still Appear Overbuilt; Lack of Credit Remains a Big Issue; Extended Tax
Credit For New Home Buyers Has Been Stimulating Activity
Monthly Housing Starts Fell 17.2% Year-Over-Year Building Permits fell 22.3% Year-Over-Year
in January; A Bottom Seen? in January
Housing Starts 6 mo. Moving Avg. Y/Y% change New Building Permits 6 Month Moving Avg. %Y/Y change
2,350 20.0%

New Building Permits (Seasonally Adjusted
2,400 20.0%

6 Mo. Moving Avg. Y/Y % Change

6 Month Moving Avg. Y/Y % Change
New Housing Starts (Seasonally Adjusted in

2,100 10.0%
2,150 10.0%
1,850 0.0%
1,900 0.0%

in Thousands)
1,600 -10.0%
1,650 -10.0%
Thousands)

1,350 -20.0% 1,400 -20.0%

1,100 -30.0% 1,150 -30.0%

850 -40.0% 900 -40.0%

600 -50.0% 650 -50.0%

350 -60.0% 400 -60.0%
Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10

Jan-10 Starts Jan-10 Permits
591,000 621,000

Fall From Peak Fall From Peak
Data through January 2010 -73.9% -72.6%
Source for all graphs: U.S. Dept. of Commerce


2010 John Larkin

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