North America Equity Research09 August 2019Transportation FDX represents a Dec-20 price targetJPM Mkt Cap Price Dec '19 Implied % ? % ? 2 Year Net DebtCompany Ticker Rating (Bn) 8/8 Target Return YTD QTD 18 19E 20E 18 19E 20E PEG 18 19E 20E 18 19E 20E to EBITDAParcelsFedEx* FDX N $42.8 $164.23 $172.00 4.7% 2.6% 0.0% 10.9x 10.8x 11.1x $15.11 $15.26 $14.74 0.8x $15.34 $15.54 $14.60 6.4x 6.7x 6.8x 2.0xUPS UPS N $100.9 $117.55 $114.00 (3.0%) 22.7% 13.8% 16.3x 15.7x 14.5x $7.20 $7.50 $8.12 1.4x $7.24 $7.40 $7.85 12.3x 11.3x 10.5x 2.1xRailroadsCanadian National Railway CNR CN N $89.5 $124.23 $125.00 0.6% 24.0% 2.5% 23.0x 19.9x 17.8x $5.40 $6.26 $6.98 2.0x $5.50 $6.25 $6.95 14.7x 13.4x 12.4x 1.9xCanadian Pacific Railway CP CN OW $42.9 $307.11 $345.00 12.3% 27.4% (0.4%) 21.6x 18.4x 16.3x $14.21 $16.66 $18.83 1.0x $14.53 $16.50 $18.65 14.7x 13.1x 12.2x 2.3xCSX Corp CSX OW $53.3 $66.74 $83.00 24.4% 8.1% (13.7%) 17.5x 16.0x 14.7x $3.82 $4.16 $4.54 0.5x $3.84 $4.13 $4.50 10.7x 10.8x 10.4x 2.3xGenesee & Wyoming GWR N $6.3 $109.89 $112.00 1.9% 48.5% 9.9% 29.4x 25.4x 22.3x $3.74 $4.33 $4.93 1.3x $3.87 $4.33 $4.80 12.6x 11.9x 10.6x 3.8xKansas City Southern KSU N $11.9 $119.16 $136.00 14.1% 25.6% (2.2%) 20.0x 17.9x 15.7x $5.95 $6.65 $7.59 1.6x $5.97 $6.75 $7.55 11.2x 10.8x 9.9x 2.1xNorfolk Southern Corp NSC OW $47.5 $180.51 $220.00 21.9% 22.5% (9.0%) 19.5x 16.9x 15.0x $9.24 $10.69 $12.04 0.7x $9.52 $10.75 $12.20 11.7x 11.0x 10.2x 2.2xUnion Pacific Corp UNP N $119.6 $169.70 $176.00 3.7% 24.0% 0.3% 21.6x 18.9x 16.7x $7.87 $8.96 $10.17 0.9x $8.00 $8.55 $9.50 13.1x 12.7x 11.9x 2.3xTruckload Carriers & BrokersC.H. Robinson Worldwide CHRW N $11.8 $86.06 $82.00 (4.7%) 3.6% 2.0% 18.7x 18.0x 17.3x $4.60 $4.77 $4.96 0.9x $4.74 $4.75 $4.80 12.9x 12.6x 12.2x 1.0xEcho Global ECHO OW $0.6 $20.97 $22.00 4.9% 3.1% 0.5% 11.8x 14.1x 13.5x $1.78 $1.49 $1.55 0.3x $1.88 $1.60 $1.50 7.0x 8.2x 8.0x 1.9xHeartland Express HTLD UW $1.6 $20.06 $19.00 (5.3%) 9.9% 11.0% 24.0x 20.2x 21.1x $0.84 $0.99 $0.95 0.7x $0.86 $0.93 $0.80 8.1x 7.3x 7.1x -1.0xKnight-Swift KNX N $6.2 $35.81 $38.00 6.1% 43.4% 9.0% 14.1x 14.8x 14.4x $2.54 $2.41 $2.48 0.3x $2.56 $2.38 $2.15 6.9x 6.9x 6.6x 0.9xSchneider National SNDR N $3.5 $19.93 $20.00 0.4% 7.4% 9.3% 13.1x 14.9x 14.3x $1.52 $1.33 $1.39 0.7x $1.55 $1.32 $1.32 5.2x 5.4x 5.0x 0.1xU.S. Xpress USX OW $0.2 $4.50 $6.00 33.3% (19.8%) (12.5%) 2.7x 7.4x 5.8x $1.68 $0.61 $0.78 N/A $1.68 $0.60 $0.90 3.3x 3.6x 2.9x N/AWerner Enterprises WERN UW $2.2 $32.21 $32.00 (0.7%) 23.5% 3.6% 13.8x 13.2x 13.3x $2.33 $2.44 $2.41 0.3x $2.38 $2.43 $2.15 5.1x 5.0x 4.9x 0.7xLogistics & LTLRyder System R UW $2.7 $49.93 $52.00 4.1% 5.5% (14.4%) 8.6x 8.8x 8.3x $5.79 $5.69 $6.03 0.7x $5.78 $5.60 $5.75 4.6x 4.9x 4.8x 3.5xXPO Logistics XPO OW $6.5 $70.48 $82.00 16.3% 23.6% 21.9% 21.3x 18.4x 15.4x $3.32 $3.83 $4.59 0.5x $3.19 $3.94 $4.71 6.8x 7.1x 6.3x 3.3xIntermodalJ.B. Hunt JBHT N $10.6 $99.28 $106.00 6.8% 7.5% 8.9% 18.4x 18.2x 16.3x $5.40 $5.47 $6.09 0.8x $5.64 $5.49 $6.05 9.3x 9.0x 8.3x 1.3xHub Group HUBG N $1.4 $42.48 $51.00 20.1% 14.6% 1.2% 15.2x 12.6x 12.4x $2.80 $3.36 $3.43 0.3x $2.91 $3.40 $3.65 8.4x 5.9x 5.5x 0.7x8.1% 16.4% 2.1% 17.1x 16.0x 14.8x 0.8x 9.3x 8.9x 8.3x11.1% 18.6% 0.1% 17.8x 16.1x 14.6x 0.8x19.3% (1.8%)12.4% 13.6% (1.2%) 13.7x 12.3x 11.1x 0.8x0.9% 12.7% 6.9% 13.6x 13.2x 12.8x 9.4x 9.0x 8.7x11.3% 25.7% (1.8%) 21.8x 19.1x 16.9x 12.7x 12.0x 11.1x4.9% 10.2% 3.3% 14.0x 14.7x 14.3x 6.9x 7.0x 6.7x10.2% 14.6% 3.8% 14.9x 13.6x 11.8x 5.7x 6.0x 5.6x13.4% 11.1% 5.0% 16.8x 15.4x 14.3x 8.8x 7.5x 6.9xEV/EBITDAGroup AverageLogisticsIntermodalConsensus P/E and EPSS&P 500Industrials ETFDJ TransportsParcelsRailsTruckloadJPM EPS5North America Equity Research09 August 2019Brian P. Ossenbeck, CFA(1-212)

[email protected] Picks in Transports & Logistics#1: NSC –We can still imagine the possibilitiesDespite the lack of operating leverage to a significant headcount reduction in 2Q19, we remain confident the Norfolk network can achieve a sub-60% operating ratio by narrowing the performance differentialwith CSX to historical levels. The gap widened evenfurther during 2018 on key labor efficiency and train productivity measures,before the company adopted many of itscurrent initiatives. Sentiment remains mixed considering Norfolk’s exposure to export met coal prices and challenging OR comps in 2H19. However, we believe the last wave of the ELD implementation effective in mid-December 2019 is being underestimated and will help underpin Norfolk’s growthin the shorter haul Eastern region. In addition, the company is targeting and has delivered strong core yield expansion without the help of demurrage that gives us confidence in the momentum of the “yield up“ initiative.#2: CP –Still the easiest rail stock to ownWe believe sentiment has not fully come around to a unique combination of volume momentum and margin expansion. The company has bucked fears of the “freight recession” through market share gains and strategic investments as part of a disciplined growth strategy we expect remains intact in 2H19 and beyond. CP also made good on its promise to deliver an operating ratio with a “five handle” during 2Q19,which also featured record volumewith limited capital requirements. Crude by rail activity provides upside to a strong fundamental outlook based onlonger grain trains,new hoppers,and improved intermodal service.Unlike peers in the U.S., CP does not have the same PSR potential left but we see gradual OR gains supported by incremental improvements in back-office efficiency and maintenance operations.6North America Equity Research09 August 2019Brian P. Ossenbeck, CFA(1-212)

[email protected] 2Q19 ReviewRevisiting Accumulates and AvoidsUncertaintywas the one constant theme during 2Q19 earnings...Expectations fell far enough ahead of earnings results to trigger a relief rally in most groups, especially where sentiment was decidedly negative such as intermodal and brokers. Guidance cuts and lowered outlooks were initially received poorly (CSX) after J.B. Hunt's positive view but ultimately were fairly bifurcated with greater optimism around the consumer and more caution noted on industrial exposure.…and it played out in above average stock volatilityAs shown in the following figures, the range of performance during the quarter was significantly wider than recent periods despite loweredexpectations. After a solid 1Q19 performance, we mean reverted in 2Q19 with a wobbly NSC print bringing down our CP Positive callwhile ECHO’s cut was anticipated and UPS cleared a low bar with some ease after improved operating performance. Our neutral bucket was relatively flat on average again but the wide range typified 2Q19, although several pre-announcements pulled forward some performance prior to the official release.Figure 2: Recap of 2Q19performance on stock reaction to earningsBased on JPM ViewSource: Bloomberg, J.P. Morgan estimates. Note: no calls made on GWR, FDX in 2Q previewsFigure 3: Low expectations drove outperformance in 2Q19% ? after earnings releaseSource: Bloomberg, J.P. Morgan estimatesFigure 4: Range of average performance grouped by JPM view on earningsSource: J.P. Morgan estimates, Bloomberg# of companiesAverage return? % vs. group? % vs. coverageNegative Neutral Positive2 14 27.7% 1.1% (3.1%)7.9% 1.2% (1.0%)8.3% 1.8% (1.8%)Group JPM View Sentiment Average Max MinParcels Neutral Mixed 8.7% N/A N/ARails Positive Mixed 0.2% 5.9% (10.3%)Intermodal Neutral Negative 7.5% 9.4% 5.6% Truckload Neutral Mixed (0.4%) 5.7% (4.9%)Brokers Neutral Negative 2.9% 7.1% (1.2%)Logistics Neutral Mixed 0.5% 11.0% (10.0%)7North America Equity Research09 August 2019Brian P. Ossenbeck, CFA(1-212)

[email protected] Frequently Asked Questions from 2Q19FAQ #1: Where is sentiment across the groups and specific stocks post-2Q19? In Figure 5we present a summary of sentiment by group and covered stocksbased on our view coming out of 2Q19 earnings. In addition, we summarizedtrends andthemes based on recent conversations and inbound requests over the last several months. Overall, momentumappears to have tilted positive on the parcel carriers after the UPS results while JBHT, CHRW, and R screenthe mostnegative on sentiment. JBHT still attracts the most long-only interestwhile trucking gained the most new attentionoverall.Rails are selectively in favor, with an emphasis on the newer PSR rails like KSU with more potential self-help to offset soft volumes.Figure 5: Sentimenthas pickedup on the parcel carriers after 2Q19 and rail investors appear to be increasingly picking their spotsSource: J.P. Morgan estimates? Gaining some positive momentum – UPS and FDX.The UPS results and reiterated 2019 guidance surpassed not only low expectations, but showed signs of improving unit cost dynamics and U.S. Domestic margins after likely benefitting from Amazon’s one-day Prime spending spree. However, asset life adjustments also provided a tailwind -see Theme #4. Visibility remains challenging given the recent flare up in trade tensions and difficulty bending the cost curve in e-commerce, but the UPS results and FDX's “clearing the deck“ with the FY20 guide appear to havetriggered more interest in the stocks recently.? Rail rotation following PSR progress.CSX was hardly alone in guiding 2019 lower, but 2Q19 missed a high bar and the efficiency story is increasingly viewed as approaching the later innings. It appears sentiment is shifting toward the earlier stage PSR rails such as KSU with more potential offsets to a softer volume backdrop, but has not gone 100%defensive toward the Canadian rails with fully implemented PSR operations and relatively strong volume growth.? Strongest negative sentiment –JBHT, CHRW, andR.A persistent lack of volume growth is an overhang for CHRW and its perceived competitive positioning. Used truck valuations have begun sliding and pulled R's outlook down, but the downside is difficult to estimate. JBHT's view took a 180° turnagainin 2Q19 although the skeptics appear unmoved and remain focused on margins based on weaker intermodal volume and declining truckload rates.? Attracting long-only interest –JBHT. Management's confidence in the 2H19rate outlookand positive load growth not only triggered a short squeeze given the negativity was at a peak for JBHT into earnings, but it seemingly re-invigorated interest in abusiness model many still contend is at risk of disintermediation. Potential highway conversion opportunities and valuation are the two most common questions which underscores theuncertain growth outlook.? Most incremental work being done – Trucking industry. A combination of the recent calls for an inflection in rates (including our own), railroad management teams citing increased truckload competition, and concerns over intermodal fundamentals have brought a wide range of attention tothe trucking industry.Group JPM View SentimentParcels Neutral Mixed FDX UPSRails Positive Mixed UNP KSU CNR CP NSC GWR CSXIntermodal Neutral Negative HUBG JBHTTruckload Negative Mixed KNX WERN HTLD SNDR USXBrokers Neutral Negative ECHO CHRWLogistics Neutral Mixed XPO R← Relative sentiment from most favored to least favored →8North America Equity Research09 August 2019Brian P. Ossenbeck, CFA(1-212)

[email protected] #2:What are the implications of a protracted trade war on transports?Trade disruptionsare a clear negative for our sector and the ramifications of over a year of tariffs are not yet fully determined, but will likely have a permanent effecton global supply chains and freight flows. With List 4 tariffs on the horizon at the beginning of next month, we lookedat the potential impact of further escalation with China and some of the lasting implications. The key takeaways include: there are no real winners in trade wars (possiblythe Canadian rails), retail-focused tariffs would disproportionately impact trucking, expectlimitedoffset from another pre-shipment, and U.S. soybeans could permanently lose export share while the recent slide in corn export activity is a concern worth watching for the U.S. rails.? Weaker trade activity hurts domestic air and rail volume.The negative implications of tariffs and broader uncertainty caused by lingering disputes are a clear negative for airfreight carriers based on their global operations and exposure to high value items such as semiconductors. Transportingimports and exports representsa significant source of domestic freight activity which is often overlooked, amountingto 21% of total value shipped in 2017 and 11% of total volume. Air derivedthe highest mix of international activity by volumefollowed by rails and trucking although these statistics likely understate the total exposure given multiple modes (intermodal) is included in a separate category and trucking excludes moves to and from airports(Figure 6).Figure 6: International trade comprises a significant portion of U.S. freight activityMix by volume in tonsSource: U.S. DOT7%23% 33% 14% 11%0%10%20%30%40%50%60%70%80%90%100%Truck Rail Air Multiple modes TotalDomestic activity International trade9North America Equity Research09 August 2019Brian P. Ossenbeck, CFA(1-212)

[email protected]? List 4 tariffs could have a bigger impact on trucking.Retail and consumer products comprise the majority of the next tranche of tariffs initially proposed in May,they are also the largest truckload end market byrevenue at 50-60%. Specifically, we note TL hauls the highest value of electronics, mixed freight and other manufactured products of any mode (Figure 7). A mix of discounted retail combined with food and beverage could buffer any potential trade turmoil, but truckload volumes appear more at risk from the potential List 4 tariffs heavily weighted to its largest end market than prior sanctions.Figure 7: Truck carries 60%+ of the category value potentially affected by List 4 tariffs2017 trade activity (2012 $ in B)Source: U.S. DOT10North America Equity Research09 August 2019Brian P. Ossenbeck, CFA(1-212)

[email protected]? Current timeline of the next round suggests a limited pull-forward. We believe any shipping to the U.S. from China ahead of the potential List 4 implementation will be muted for several reasons. The announcement came as a surprise and the September 1 effective date suggests a limited opportunity to ship products ahead of the deadline. Last year was in many ways an extended pull-forward given the multiple rounds of tariffs, including those which amplified normal seasonality such as the Chinese New Year. The West Coast ports have finally started to work through these excess inventory levels, but inland warehouse space remains tight. The majority of our covered companies expected a normal peak season based on recent commentary during 2Q19 earnings calls but these comments were made prior to the potential tariff escalation.Figure 8: LA-LB dwell times n