Analysts See Weaker 2Q Earnings
This story appears in the July 11 print edition of Transport Topics.
A series of weak second-quarter earnings reports in the weeks ahead should document evidence that truck freight markets have suffered this year amid excess capacity and overstocked inventory, analysts believe.
Just two of 17 truckload and less-than-truckload carriers are projected to top the earnings per share in last year’s second quarter, based on Transport Topics’ review of estimates compiled by Bloomberg News. The average decline among those with weaker results is 23%.
Reports start rolling in this week with an expected 19% decline at railroad CSX Corp. and continue next week for truckers.
Only J.B. Hunt Transport Services, No. 3 on the Transport Topics Top 100 list of the largest U.S. and Canadian for-hire carriers, and No. 34 Forward Air Corp. are expected to do better year-over-year. Airfreight specialist Forward Air’s earnings are projected to rise 14%, while a 12% improvement is pegged for Hunt, whose largest unit offers truck-rail service.
The only broad earnings growth is projected in the non-asset-based sector and at package specialist UPS Inc., No. 1 on the for-hire TT100.
But the slump isn’t limited to publicly traded companies.
“Generally speaking we believe the trends for the larger LTL and truckload carriers are being felt by the smaller carriers. The two big call-outs this quarter are weak demand and rising fuel prices. While certain geographic regions may have greater strength or even weakness than the broader market, it’s hard to hide from industry fundamentals,” Stephens Inc. analyst Brad Delco told TT on July 6.
“The truckload environment overall remained challenged in the second quarter of 2016, pressured by weaker demand levels for most of the quarter [and particularly the first half], rising fuel prices and a more competitive bid season,” Delco added.
He said likewise: “Expect mostly weaker earnings results from our truckload universe this quarter as previewed by Werner Enterprises and Covenant Transportation Group’s negative pre-announcements. The quarter could be better than feared with what we believe were strengthening and more encouraging trends in the month of June.”
Both No. 16 Werner and No. 46 Covenant announced that earnings would lag earlier analysts’ forecasts by about 50%.
On the other hand, Benjamin Hartford, an analyst at Robert W. Baird, detected a different trend.
“June began with a solid uptick in spot volumes but softened through the month,” Hartford wrote, saying that trend was counter to the typical trajectory that shows freight levels increasing during the quarter. He tied early June activity to some truckers’ decision to stop running during the Commercial Vehicle Safety Alliance’s 72-hour International Roadcheck, June 7-9.
Non-asset-based companies as well as UPS are forecast to show improvement.
At UPS, a 6% rise in earnings per share is forecast at $1.43 per share. That result would follow the upward direction of No. 2 FedEx Corp. results announced in mid-June.
Brokers are capitalizing on the mismatch between supply and demand, which is expected to raise earnings 7% at C.H. Robinson Worldwide and 10% at Echo Global Logistics. No. 14 XPO Logistics is expected to earn 18 cents per share, with help from acquisitions, and reverse a 16-cent loss in the second quarter of 2015.
Ryder System Inc. earnings are slated to drop 7% to $1.54 per share amid weak resale prices for used trucks. The company ranks No. 13 on the for-hire TT100.
LTL should be helped by pricing discipline, BB&T Capital Markets analyst Thom Albrecht said.
“While [LTL contract rate] numbers show a deceleration since early 2015, the overall trend is much stronger than truckload pricing,” he said. “Lack of fragmentation is probably the biggest influence with the top 10 and top 25 carriers having 77% and 94% of the market, respectively. Institutional memory of the LTL pricing war of 2009-2010 doesn’t hurt either. Many LTL carriers are still positing negative volumes and yet pricing has been resilient.”
Delco expects weaker LTL results because of the industrial sector malaise, which remains under pressure even though the closely watched Institute for Supply Management, or ISM, Purchasing Managers Index, or PMI, has improved for four consecutive months. That improvement only brought the index back to March 2015 levels.
Keybanc Capital Markets analyst Todd Fowler had a different view.
“While manufacturing activity has been fairly lackluster and a headwind for freight dynamics, particularly for LTL, we view recent stabilization in the PMI as potentially supporting improving freight activity going forward,” he said.
Fowler was less optimistic about inventory.
“Inventories relative to sales remain at their highest levels since mid-2009,” he said. “Destocking may dampen freight activity over the intermediate term, with our proprietary inventory analysis suggesting inventories may remain elevated until mid- to late-2017,” Fowler said.
