Analysts Predict Lower Profits for Trucking in First Quarter
By Rip Watson, Senior Reporter
This story appears in the April 14 print edition of Transport Topics.
Unfavorable economic trends and fuel prices will collaborate to propel trucking companies’ first-quarter earnings below year-ago levels and will lead to a shrinkage of the fleet in the truckload sector, industry analysts said.
UPS Inc. gave an indication of what’s to come when the quarterly parade of earnings reports begins this week by lowering its profit forecast to 86 cents or 87 cents a share. Earlier, UPS had said its earnings would range from 94 cents to 98 cents a share.
“The U.S. economy has continued to weaken, causing a reduction in package volume,” UPS said in a statement issued April 9. “Significantly increased fuel costs also contributed to the lower-than-expected results.”
“These numbers suggest the U.S. economy is in a recession,” Rick Paterson, a UBS Warburg analyst, said in an investor note.
The UPS forecast would produce results that trail earnings for last year of 95 cents a share, excluding charges for asset writedowns and severance costs.
UPS ranks No. 1 on the Transport Topics 100 list of the largest U.S. and Canadian for-hire carriers.
Declines also are expected for virtually every general commodities truckload and less-than-truckload carrier.
TL carriers Werner Enterprises Inc. and Covenant Transportation Group Inc. previously told investors that results would trail profit estimates.
The unfavorable outlook reflects diesel prices around $4 a gallon as economic trends have been weak with a falloff in factory and durable goods orders and an expected 0.5% decline in first-quarter gross domestic product.
Quarterly results are expected to improve on a year-over-year basis at “asset-light” companies, including those with logistics and brokerage services that benefit from abundant capacity.
Publicly traded truckload companies are moving to correct that supply/demand imbalance by cutting their fleets for the first time in 15 years, R.W. Baird & Co. analyst Jon Langenfeld said in an investor note.
During past economic downturns, carriers continued to increase their fleet size to maintain market share and prepare for renewed growth. This time, however, “we expect further reductions and failures from small and midsized carriers, driven by the tough operating environment and elevated fuel prices,” Langenfeld said.
Avondale Partners analyst Donald Broughton, who has issued periodic reports about trucking bankruptcies since 1998, said that “the preliminary data for the first quarter indicate there was an increase in failures, both sequentially and year-over-year.
“The question is how big of a reduction in capacity there was,” said Broughton. A total of 625 companies failed and exited the market in the fourth quarter. That total was 385 in the first quarter last year.
Credit Suisse analyst Jason Seidl said he was “shocked” that more bankruptcies hadn’t been reported at smaller carriers because they lack pricing leverage with shippers and often rely on brokers whose fees lower carrier revenue.
However, analysts noted bright spots in the outlook.
Langenfeld’s report said exports of trucks and the cutback in purchases of new tractors by U.S. carriers that further reduce equipment supply “should support more stable 2008 rates and stronger (potentially meaningfully stronger) truck freight rates in 2009.”
Some analysts also said they saw an approaching end to the recent downward cycle.
The Federal Reserve’s “significant rate cuts should stimulate demand by mid-2008,” John Larkin, a Stifel, Nicolaus & Co. analyst, said in an April 4 report. “Declining truckload capacity should speed rebalancing of supply and demand. [The] fiscal policy stimulus package should provide a spark for retail markets.”
Right now, however, trucking appears to be bumping along at the bottom of a difficult stretch.
“While rising fuel, weather and an inconsistent freight environment will impact first-quarter results, freight trends have not meaningfully deteriorated,” Morgan Keegan analyst Arthur Hatfield said in an April 8 investor note. “We may have reached the trough from a fundamental standpoint.”
Langenfeld agreed, saying that “freight trends haven’t deteriorated from the fourth quarter to the first quarter as carriers focus on reducing capacity.”
Weak earnings expectations didn’t stop investors from pushing up trucking stock prices 29% in March, however. Langenfeld said investors bought trucking shares because they are betting that truckers will repeat past patterns, in which motor carriers have produced better results before an overall improvement in the economy.
Although tough times are expected for motor carriers, earnings are expected to rise at the four biggest U.S. railroads, Seidl and Larkin said.
This story appears in the April 14 print edition of Transport Topics.
Unfavorable economic trends and fuel prices will collaborate to propel trucking companies’ first-quarter earnings below year-ago levels and will lead to a shrinkage of the fleet in the truckload sector, industry analysts said.
UPS Inc. gave an indication of what’s to come when the quarterly parade of earnings reports begins this week by lowering its profit forecast to 86 cents or 87 cents a share. Earlier, UPS had said its earnings would range from 94 cents to 98 cents a share.
“The U.S. economy has continued to weaken, causing a reduction in package volume,” UPS said in a statement issued April 9. “Significantly increased fuel costs also contributed to the lower-than-expected results.”
“These numbers suggest the U.S. economy is in a recession,” Rick Paterson, a UBS Warburg analyst, said in an investor note.
The UPS forecast would produce results that trail earnings for last year of 95 cents a share, excluding charges for asset writedowns and severance costs.
UPS ranks No. 1 on the Transport Topics 100 list of the largest U.S. and Canadian for-hire carriers.
Declines also are expected for virtually every general commodities truckload and less-than-truckload carrier.
TL carriers Werner Enterprises Inc. and Covenant Transportation Group Inc. previously told investors that results would trail profit estimates.
The unfavorable outlook reflects diesel prices around $4 a gallon as economic trends have been weak with a falloff in factory and durable goods orders and an expected 0.5% decline in first-quarter gross domestic product.
Quarterly results are expected to improve on a year-over-year basis at “asset-light” companies, including those with logistics and brokerage services that benefit from abundant capacity.
Publicly traded truckload companies are moving to correct that supply/demand imbalance by cutting their fleets for the first time in 15 years, R.W. Baird & Co. analyst Jon Langenfeld said in an investor note.
During past economic downturns, carriers continued to increase their fleet size to maintain market share and prepare for renewed growth. This time, however, “we expect further reductions and failures from small and midsized carriers, driven by the tough operating environment and elevated fuel prices,” Langenfeld said.
Avondale Partners analyst Donald Broughton, who has issued periodic reports about trucking bankruptcies since 1998, said that “the preliminary data for the first quarter indicate there was an increase in failures, both sequentially and year-over-year.
“The question is how big of a reduction in capacity there was,” said Broughton. A total of 625 companies failed and exited the market in the fourth quarter. That total was 385 in the first quarter last year.
Credit Suisse analyst Jason Seidl said he was “shocked” that more bankruptcies hadn’t been reported at smaller carriers because they lack pricing leverage with shippers and often rely on brokers whose fees lower carrier revenue.
However, analysts noted bright spots in the outlook.
Langenfeld’s report said exports of trucks and the cutback in purchases of new tractors by U.S. carriers that further reduce equipment supply “should support more stable 2008 rates and stronger (potentially meaningfully stronger) truck freight rates in 2009.”
Some analysts also said they saw an approaching end to the recent downward cycle.
The Federal Reserve’s “significant rate cuts should stimulate demand by mid-2008,” John Larkin, a Stifel, Nicolaus & Co. analyst, said in an April 4 report. “Declining truckload capacity should speed rebalancing of supply and demand. [The] fiscal policy stimulus package should provide a spark for retail markets.”
Right now, however, trucking appears to be bumping along at the bottom of a difficult stretch.
“While rising fuel, weather and an inconsistent freight environment will impact first-quarter results, freight trends have not meaningfully deteriorated,” Morgan Keegan analyst Arthur Hatfield said in an April 8 investor note. “We may have reached the trough from a fundamental standpoint.”
Langenfeld agreed, saying that “freight trends haven’t deteriorated from the fourth quarter to the first quarter as carriers focus on reducing capacity.”
Weak earnings expectations didn’t stop investors from pushing up trucking stock prices 29% in March, however. Langenfeld said investors bought trucking shares because they are betting that truckers will repeat past patterns, in which motor carriers have produced better results before an overall improvement in the economy.
Although tough times are expected for motor carriers, earnings are expected to rise at the four biggest U.S. railroads, Seidl and Larkin said.
