Prospects for Toll Holdings: Will the freight industry move forward in 2014?

Early signs of a pick-up in retail sales this festive season are adding to the prospects of a turnaround in the freight industry in 2014. While certain rail freight operators such as Aurizon (ASX: AZJ) and Asciano (ASX: AIO) have been shielded from lacklustre consumer demand thanks to their volume based bulk freight services to the mining industry, other trucking and logistics players have not been as immune to the weak economic environment.

Toll Holdings (ASX: TOL) is one of the largest transport and logistics players in the domestic market and recent announcements by the firm suggest the New Year could bring an upswing in business. Earlier in December it was reported that Toll and Coca-Cola Amatil (ASX: CCL) had signed a 5-year $380 million contract involving bulk distribution and interstate road, rail and sea transport. The contract effectively doubled the amount of business Toll is contracted to perform for Coca-Cola Amatil.

This win was followed by an announcement that Toll had entered a 13-year rail haulage agreement with Asciano, which will see Asciano take over operation of the North Queensland rail service of the Toll Intermodal business. As part of this agreement Asciano will acquire from Toll 5 terminals for around $70 million, with the majority of employees currently working for Toll transferring to Asciano.

More positive sentiment within the transport and logistics sector is also on display via the takeover offer from K&S Corp (ASX: KSC) for fellow trucking company Scott Corp (ASX: SCC). While this tie-up has been on the cards for many years and would appear to make strategic sense as it will boost economies of scale, the fact that it has occurred now highlights not only that there could be value within the sector, but also that there is more optimism amongst senior transport executives.

Foolish takeaway

While the economy may not be ‘firing on all cylinders’, the freight industry is renowned for its high fixed cost base, which makes it highly leveraged to increased volumes of business. A small pick-up in volumes can have a significant boost to profitability.

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Motley Fool contributor Tim McArthur owns shares in Toll Holdings.

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