Trucking Shares Outpace Other Transport Equities, Standard & Poor’s 500

Trucking stocks may not have boomed over the past 12 months, but on average, their improvement has outpaced other transportation equities and the stock market as a whole.

In a recent check of stock prices, the Standard & Poor’s 500 Index added just 2.78% during the 52 weeks ended June 6, while over the same period, S&P’s index of nine trucking companies gained 7.53% but the Dow Jones transportation index lost 1.43%.

In general, stock prices have been falling since early April, wiping out gains made in the year’s first quarter. At best, the U.S. economy has grown slowly, but not enough to ease fears that European financial woes might swamp the slender national recovery. As for the realm of trucking, though, business looks sturdy and durable.

“Freight’s pretty steady, although it’s slow growth,” said David Ross, who follows trucking for Stifel, Nicolaus & Co. “Europe does

not have a huge influence on trucking. It has little to do with what Wal-Mart is shipping through its distribution centers.”

Ross added, “From the freight perspective, things are OK. We are optimistic buyers of trucking stocks.”

Domestic manufacturing and industry have been rising steadily since the bottom of the recession. The Federal Reserve’s index of industrial production has been rising slowly but consistently since June 2009.

“Freight-hauling capacity continues to be constrained, which is a positive for the industry, and diesel prices are coming down, which also helps,” said Donald Broughton of Avondale Partners. He said the industry faces a number of significant challenges, but there is “a lot of opportunity out there” for fleet managers who can hurdle the barriers.

“The economy and operating environment is pretty much as forecasted and continues to move in a northerly direction, albeit in a slow and sometimes choppy pace,” said Henry Gerkens, chairman and CEO of Landstar System, Jacksonville, Fla., in a May 29 mid-quarter update for his company.

The flatbed sector is doing better than average for now, Gerkens said.

“From a revenue-per-load standpoint, average flatbed pricing remains very strong, as capacity continues to be tight in that portion of our business,” he said.

The stock price for Landstar, which ranks No. 8 on the Transport Topics Top 100 list of the largest for-hire carriers in the United States and Canada, gained 21.5% from June 8, 2011, through June 6.

Some typical stars of the transportation world did not fare well during the test period. Eastern U.S. railroads CSX Corp. and Norfolk Southern Corp. saw their share prices decline by 71.8% and 7.1%, respectively, although Canadian Pacific and Kansas City Southern posted price gains in excess of 20% each.

Lower shipping volumes of coal have affected railroad performance, said several analysts interviewed for this story. Through June 2, year-to-date carloads of coal shipped decreased 8.55%, year-over-year at BNSF Railway, which is part of Berkshire Hathaway. At Union Pacific, through June 2, carloads of coal shipped declined 13%, year-over-year. CSX Transportation, through June 2, saw its carloads of coal shipped down 17.5% over the same period last year. And Norfolk Southern’s carloads of coal in the first quarter of 2012 were down 11.6%, year-over-year, while Kansas City Southern’s carloads of coal in the first quarter of 2012 were down 11.3%, year-over-year.

Non-asset-based logistics providers, often touted as a superior model to fleets owning trucks, posted some noticeable price declines, including: C.H. Robinson Worldwide Inc., Eden Prairie, Minn., down 23.9%; Expeditors International of Washington, down 18.5%; and UTi Worldwide Inc., Long Beach, Calif., down 22%.

Looking at Robinson, Broughton said intermediaries are not doing as well now because the supply of trucks is tight, shipping volumes are rising — slowly — and the number of freight brokers is rising, with many trucking companies offering brokerage as an additional service.

A number of trucking companies did better, such as truckload carrier Celadon Group, up 25.6%; intermodal specialist J.B. Hunt Transport Services, up 27.8%; and less-than-truckload carrier Old Dominion Freight Line, up 24.1%.

Celadon, Indianapolis, ranks No. 42 on the TT for-hire list; J.B. Hunt, Lowell, Ark., is No. 5 and ODFL, Thomasville, N.C., is No. 18.

In its first-quarter earnings report released on April 24, Robinson said, “Through April 23, our North American truckload-volume growth per business day was approximately 10%. Through the same period, our total net revenue growth per business day [gross revenue less purchased transportation costs] was approximately 1%.” While the freight broker’s business volume has been rising, trucking companies working with Robinson have been getting a bigger cut, on average.

Robinson, Expeditors, CSX and Norfolk Southern are all members of the Dow’s transportation average, which tracks a total of 20 companies.

Among other major indexes, the Dow Jones industrial average gained 3.04% during the 52 weeks ended June 6, the Nasdaq Composite Index grew by 6.33%, while the Dow Jones trucking subindex lost 4.39%. Those changes refer to the index levels and do not include dividend payments.

In its first-quarter earnings report, released April 18, truckload carrier Werner Enterprises offered an assessment of trucking: “We continue to believe that favorable truckload demand trends are caused to a greater degree by supply-side constraints limiting truckload capacity, as compared to growing demand generated by increased economic activity.”

Furthermore, the Werner report said, the cost of a new truck is about 30% more than one purchased four years ago, and there are safety and regulatory challenges to operation. Despite those challenges, the Omaha, Neb.-based carrier, which ranks No. 11 on the TT for-hire list, has posted nine consecutive quarters of year-over-year profit growth of more than 20%.

During the test period, though, Werner’s share dipped by 0.3%.

Trucking share prices could well continue to grow through the year, said Jeffrey Kauffman, who follows transportation for Sterne, Agee & Leach.

“The environment is good now for asset-based providers,” Kauffman said. “On the macroeconomic level, there is a sell-off of stocks due to the euro crisis, but it’s different when you’re looking at trucking from the bottom up.”

While Kauffman described tonnage growth as “anemic,” diesel prices have declined from higher levels earlier this year, and “carriers have been careful in adding capacity” — and that has allowed freight rates to grow.

“Despite all of the global fears, the outlook is not as bad for trucking. It’s not a question of ignoring the macro issues, but trucks are mainly domestic, except for going across the borders in Canada and Mexico,” Kauffman said. Given the current situation, Kauffman said he expects to see a traditional year-end rally for trucking stocks.

Within trucking, Kauffman said, flatbed availability is very tight, but even dry vans — the largest segment — are enjoying good demand. Among less-than-truckload carriers, he said, those that made the biggest percentage gains were those that suffered a year ago. In particular, Con-way and other LTLs that tried to put the final nail in YRC’s coffin last year did very poorly then, but now they’ve come back. This means they closed the gap with perpetual profit leader Old Dominion Freight Line. ODFL did not gain as much now because it didn’t fare poorly last year.

Avondale’s Broughton, who has followed the relationship between diesel prices and trucking failures, is now looking keenly at the ability of trucking managements to master regulatory challenges. In particular, he mentioned the federal Compliance, Safety, Accountability program and electronic onboard recorders, or EOBRs.

“If you have a newer fleet, no leverage and you made the transition to EOBRs, you’re in the catbird seat. But EOBRs are like Tommy John surgery for pitchers. Once you’ve gone through it and done the rehab, it’s fine. But the actual process is not fun,” Broughton said.

As a whole, he expects trucking earnings to increase, year-over-year, through next year.

Stifel’s Ross said his firm anticipates a stable environment for trucking.

“If volume growth is flat or up, that’s good for trucking. You’d worry if you see a long string of negative numbers on tonnage. But right now, inventories are lean and there’s no sign of businesses

destocking their shelves, so we anticipate slow growth,” Ross said.

“Everything’s OK, but there’s nothing too exciting.”