Trucking Share Prices Remain Volatile After Lengthy Downturn, Analysts Say

This story appears in the June 27 & July 4 print edition of Transport Topics.

Trucking stocks continue to ride the roller coaster — mostly down — that they have been on for the past year with little sign of positive momentum to push prices back up, according to five trucking and freight analysts.

The Standard & Poor’s trucking index — including household names such as YRC Worldwide, which ranks No. 5 on the Transport Topics Top 100 list of the largest U.S. and Canadian for-hire carriers — has dropped 15% since mid-June 2015.

“In general, stocks have done pretty poorly on a year-over-year basis,” said Thom Albrecht, an analyst at BB&T Capital Markets. “But they have bounced back from early 2016 valuations that have not been seen since the recession.”

Embedded in that 12-month drop-off was a trucking free fall of about 30% during late 2015 that was tempered by better overall trucking share performance so far in 2016. Even after the 2016 improvement, trucking shares did worse than the 1.4% drop in the benchmark Standard & Poor’s 500 over the same 12-month period.

All but three of 28 U.S. trucking- related stocks have declined in the past year. Last week, Werner Enterprises and Covenant Transportation Group warned that their profits would be lower than expected for the current quarter.

“Don’t expect any truckload earnings and stocks to improve,” Avondale Partners analyst Donald Broughton told Transport Topics.

“Fleets are getting paid less and driving more empty miles to move what freight there is,” he said. Lower prices for used trucks also are hurting results by reducing their gains on sales.

“Talk to any trucker and freight broker out there, and they will say on a daily basis [that] in most markets there are more trucks than loads. If that is true in June, the busiest freight month, that does not portend well for the rest of the year.”

Stifel Nicolaus & Co. analyst David Ross said he was “very hesitant to put any hope in a back-half recovery — seems like we’ve been hearing that almost annually for the past 10 years.”

“The good news is that if we see improvement in volumes later this year and into next, there should be significant upside in the stocks,” he said.

Trucking stocks “are headed nowhere fast,” Todd Fowler, an analyst with KeyBanc Capital Markets, told TT. “The group is stuck in neutral. Underlying economic demand is OK, but not great. It’s not quite a recession, but the freight base is not expanding.”

Fowler cited overcapacity that has resulted from strong infusions of new equipment last year and a drop-off in turnover and pay pressure as fleets improved driver retention efforts.

Stephens Inc. analyst Brad Delco told TT the economy will be the main factor in determining how the second half unfolds.

“If you are of the opinion that we will stay in a slow growth environment, then I think what will happen is that we will see inventory destocking continue, and we will see a turn toward normal freight patterns,” Delco said.

Broughton agreed that an improving economy, particularly consumer demand, is the key to reversing the share-price slide.

“Though lower fuel prices reduced the amount the consumer is spending on commuting and heating and cooling their homes, they are not taking money and spending it on consumer goods and other things that truckers move,” Broughton said.

As a result, truck tonnage and shipments often are in negative territory and the increases that have occurred are small, he said. For example, American Trucking Associations’ tonnage index has slipped sequentially three of the past five months.

Similar to other analysts, BB&T’s Albrecht believes no immediate improvement is in sight for trucking shares as fleets adjust to lower contract freight rates that will squeeze their profits.

He believes there is about 4% overcapacity for the current freight levels. About 1 percentage point could be worked off per quarter through capacity reductions as more trucks are parked, fleet failures rise as profits evaporate and from low orders of new trucks.

Fleets must emphasize capacity reductions because there is nothing in the intermediate term that will cause demand to dramatically accelerate, he said.

Fowler foresees only incremental improvement in share prices amid gradually rising fuel prices, slowing equipment orders and the limited prospects for improved pricing.

When depressed 2016 spot market pricing improves to past levels, that should be a leading indicator of better contract prices ahead, Fowler said.

Albrecht identified another uncertainty factor — a yo-yo effect among individual stocks.

“Trucking stocks are a very emotional group,” he said, adding they react quickly to anecdotal carrier comments about business conditions and spot market data.

Share prices can swing by 30% in a month and 100% over two months, Albrecht noted, based on that limited information.

For example, No. 6 Swift Transportation jumped 30% from early January to early February.

Other 2016 movers were No. 46 Covenant Transportation Group and No. 17 Roadrunner Transportation Systems. Covenant jumped more than 60% from mid-January to mid-March and maintained the upward trajectory. However, Roadrunner went from the Jan. 21 $6.65 close to $13.45 two months later, but slipped back below $8 as of June 15.

The gyrations have left the overall trucking stock index about 10% higher since Jan. 1.

“Coming into 2016, there was concern that the bottom was falling out of the economy,” Fowler said. When that didn’t happen, he said, most shares improved. As a result, trucking stocks outpaced the S&P 500’s 1% increase this year through June 15.

Shares fell last year as investors’ confidence waned with weak economic indicators, Delco said.

The S&P 500 and its trucking index were performing nearly identically from June through early September. Over the next four months, trucking shares dropped nearly 25%, while the S&P 500 barely moved.

A broader question, Delco said, is when, not if, conditions and share prices will improve.

Albrecht foresees a “crescendo” effect over the next several quarters that could help shares to rebound. The reason, he said, is that the electronic logging device mandate is likely to have a gradual effect on the industry with some fleets adopting them more quickly than others.

Since stock prices reflect future expectations, Albrecht said, the shares will rebound once investors are convinced that there is not going to be any more pressure on earnings estimates because of weak results.

“When I speak with investors, their question is when, not if, to act,” Delco said. “They want to start buying before the electronic logs. They want to be positioned in anticipation of that tighter capacity, because when that does happen it is good for pricing, good for margins and good for earnings.”

Albrecht believes another time, such as in 2014 when earnings surged, lies ahead, but possibly not before mid-2018.

On a sector-by-sector basis, Fowler believes truckload shares will gain the most when ELD regulations tighten, but they won’t improve much before then.

LTL carriers have slightly more positive pricing trends, Fowler said.

The five largest LTL carriers generate 57% of LTL revenue, but the top 50 truckload carriers barely top 10% of that sector, based on data compiled by TT.

“As inventories remain a drag on freight volumes, LTLs should not see too much margin expansion this year aside from internal improvement initiatives [XPO expecting the most, as it had more fat to trim],” Ross said.

Brokers have the most potential benefit from the imbalance of supply and demand because they can improve margins by taking advantage of lower transport costs, Fowler said.

Analysts still see individual bright spots.

Broughton cited Marten Transport which ranks No. 48 on the for-hire TT100. The refrigerated carrier is benefiting as smaller rivals return to hauling California produce and intermodal service and export opportunities both improve.

Albrecht believes two carriers are better positioned to take advantage of opportunities that do arise. No. 3 J.B. Hunt Transport Services’ well- developed, diverse services that include brokerage and intermodal as well as trucking represent an advantage, he said. Knight Transportation, No. 31, stands to gain from its higher exposure to the spot market when conditions improve in the transactional freight business, he said.

Meanwhile, Delco said he favors Hunt, Knight and No. 11 Old Dominion Freight Line because they can benefit from tighter capacity and have proved to be efficient operators.