Rising Freight Volumes, Rates to Buoy First-Quarter Earnings

This story appears in the April 11 print edition of Transport Topics.

Most trucking companies are expected to post a fifth consecutive quarter of better earnings because freight volumes and rates are rising, but sharply higher fuel prices likely will put a dent in the increases, analysts said.

First-quarter announcements, set to begin April 14, should show 23 of 27 companies’ earnings improved over the first quarter of last year, based on a Transport Topics review of analysts’ forecasts compiled by Bloomberg News.

J.B. Hunt Transport Services should be the first to report, with a projected 31% rise in net income to $47.5 million. Carriers large and small are expected to follow, including a forecast 20% increase at UPS Inc. and earnings that will more than double at smaller fleets, such as Celadon Group and Universal Truckload Services.

“Freight-volume recovery [is] stronger and earlier than seasonally normal,” analyst John Larkin of Stifel, Nicolaus & Co. Inc., said in an April 4 report, citing the 6% improvement in American Trucking Associations tonnage index so far this year. Larkin and other analysts also said they see rates rising about 5% in 2011.

“January and February actually were pretty good months, when one backs out the harsh weather impact,” Larkin said in his report.

However, he ques-tioned “the sustainability and magnitude of the current freight rally, given high fuel prices and geopolitical uncertainties.”

Edward Wolfe, analyst for Wolfe Trahan & Co., said in an April 1 investor note that diesel costs rose 18% in the first quarter, the largest increase over a prior quarter since 2008, hurting earnings growth.

“Truckload carriers are typically well-protected from rising fuel costs,” he said. “However, during periods of quickly spiking fuel costs, truckload carriers face material earnings risk because they have the most exposure as a percent of total costs,” Wolfe said.

He said he believed fuel costs will eat up 25% of revenue for truckload carriers, compared with 10% to 15% for railroads, package carriers and less-than-truckload fleets.

On average, he said the higher fuel costs will shave 2 cents to 4 cents a share off profits at major truckload carriers such as Swift Transportation and Werner Enterprises. In dollar terms, a 3-cent-a-share fuel hit cuts profit by about $2.2 million for each carrier.

Swift Transportation late last month acknowledged the weather and fuel-cost effects, saying earnings would lag Wall Street’s earlier estimates of 11 cents a share. Swift’s profit could be as high as $6 million, or 8 cents a share, reversing a prior-year loss.

Even with the fuel and weather factors, higher profits are predicted at every truckload fleet except P.A.M. Transportation, whose loss is expected to widen, and Covenant Transport Group, which is expected to repeat last year’s loss of about $2.2 million.

Earnings are expected to rise at least 10% at prominent truckload fleets, such as Werner, Knight Transportation and Heartland Express.

Besides P.A.M.’s projected loss of $1.5 million, the only carrier whose profits are expected to fall is less-than-truckload fleet Vitran Corp., whose loss is expected to widen modestly to $1.1 million from $929,000.

While losses are continuing at many publicly traded LTL fleets, whose volume and rate declines during the recession were greater than those of truckload carriers, LTL fleets still are showing improvement.

Con-way Inc. is expected to return to profitability with projected earnings of about $2 million after a 2010 period loss. Losses are expected to be narrowed at YRC Worldwide Inc., Arkansas Best Corp. and Saia Inc.

Logistics operators such as C.H. Robinson Worldwide and Hub Group Inc. also are expected to increase earnings.

“On top of fuel, we also believe that bad weather will have a modest negative impact on driver productivity and maintenance costs in the first quarter,” Wolfe said in his report.

Avondale Partners’ Donald Broughton said he believes actual earnings will be far below forecasts, saying that factors beyond weather and fuel costs are at work.

“[Profit] margins are going to be lower than the first quarter of last year,” Broughton said. “The same could be true in the second and third quarters.”

In addition to fuel, fleets are being pressured by rising driver wages, higher maintenance and truck acquisition expenses and increased commodity costs such as rubber for tires, he told TT.

Another reason for weakness: Other forecasters’ predictions of rate increases are too high, Broughton said.

“As you are coming out of a recession and coming into a recovery, margins are supposed to improve,” he said, en route to what he called “trucking’s land of milk and honey.”

“Both the truckload carriers and Wall Street are completely ignoring that between where we are now and where we are going is a large dry desert full of rattlesnakes and cactus, a not-so-promised land,” Broughton said, adding that he believed fleets will eventually attain record level profits and margins.