Trucking Shares Rebound, Outgain Market Index

This story appears in the June 24 print edition of Transport Topics.

Trucking stocks have risen more than 20% so far this year, generally outperforming the overall market and re-bounding from a downturn in the second half of 2012, when truckers lagged behind.

In the months ahead, trucking companies could face a “capacity crunch” driven by changes to federal hours-of-service rules and the ongoing driver shortage, especially if the economic recovery picks up steam, analysts and carriers said. But this constrained capacity could actually lead to higher rates and profits, even as freight growth slows.

Through June 17, the overall Standard & Poor’s 500 Index had grown by 14.9% this year, while S&P’s index of nine trucking companies surpassed that pace with 20.6% growth. The Dow Jones transportation index gained 18.7% over the same timeframe.

“It’s been a good year for most transportation names,” David Ross, an analyst at Stifel, Nicolaus & Co., told Transport Topics. “First-quarter results were better than expected, pricing was still decent and companies were able to rein in costs.”

Truck stocks underperformed for much of 2012, as some companies were missing market expectations at the back half of the year, but most of them exceeded expectations in the first quarter of this year, Ross said.

Deutsche Bank analyst Justin Yagerman said trucking stocks’ outperformance for the year to date is “clearly a sign of anticipation, or at least hopes, that the economy is getting a bit better.”

“The more troubling piece is that the economic data that we’ve seen hasn’t been as supportive of that,” he told TT.

Although U.S. manufacturing had been expanding in previous months, factory activity contracted in May at the fastest rate since June 2009, according to the Institute for Supply Management’s monthly manufacturing index.

On the other hand, trucking has been bolstered by improvement in the housing market and the automobile industry.

“There was, and continues to be, a decent amount of optimism around the idea that trucking stocks will benefit from that,” Yagerman said.

On the whole, stock prices have been steadily climbing since a pullback in the fourth quarter.

The Dow Jones industrial average closed above the 15,000 mark for the first time on May 7, energized by better-than-expected corporate earnings, Bloomberg News reported. The Dow had slipped to 15,318 on June 18 after peaking at 15,409 on May 28.

The high-water mark for S&P’s trucking index so far this year was May 21, when it was 24.6% above the Dec. 31 starting point. The overall S&P 500 at that time was up 17%.

In the weeks that followed, though, both indexes lost some of that ground.

Yagerman attributed that downturn to the softening of economic indicators, such as the May ISM figure.

“Transportation stocks in general, and trucking stocks specifically, are very economically sensitive and typically lead by at least a little bit,” he said.

Yagerman said pullbacks, even in a bull market, are normal and healthy, “but I think, after a pretty torrid pace for the majority of this year, we’re now at a point of reevaluation, where folks are looking at the market and asking themselves which way they think the economy is going to trend in the back half.”

John Steele, chief financial officer at truckload carrier Werner Enterprises Inc., recently cited “fits and starts” in demand caused by an “inconsistent economy,” according to a Bloomberg News report.

“It’s been a two-steps-forward, at least one-step-back” environment, Steele said at a May 15 conference.

Steele also said demand trends improved in early May following a “softer” April, Bloomberg reported.

Less-than-truckload stocks have been rising at a faster clip than truckload equities, analysts said. Ross of Stifel Nicolaus said LTL stocks have “crushed it” over the past year.

“They haven’t been the best sector over the past five or 10 years, but over the past 12 months coming off of their lows, they’ve been very strong,” he said. “Also, LTL has more operating leverage than truckload, so if people think the economy is getting better, they tend to buy those names as there’s more upside to earnings.”

Some large LTL carriers that had been trading near all-time lows, such as Arkansas Best Corp. and YRC Worldwide, “have had a couple things go their way,” Ross said.

Arkansas Best’s LTL unit, ABF Freight System, has reached a tentative contract agreement with the Teamsters union, “which would be hugely accretive for the company and certainly have them less at risk,” he said.

Arkansas Best’s stock had surged to $19.41 a share on June 17 from $10.55 on May 3, the day the tentative labor agreement was reached.

Ross also cited “incremental progress” at YRC, which had a “pretty decent” first quarter in its Freight division, he said.

After reporting positive first-quarter operating profit for the first time in six years, YRC’s stock nearly tripled from $7.76 on May 2 to $23.05 on May 21.

Another LTL carrier, Saia Inc., is “more efficient than they were a few years ago,” Ross said. “They continue to take costs out. Even though their tonnage is down year-over-year, they’re actually making more money.” Saia’s stock had more than doubled since Dec. 31.

On the truckload side, stocks have been “decent,” Ross said, adding that supply and demand for that sector are roughly in balance and carriers are getting some rate increases, but not as much as LTL providers.

Nevertheless, all 15 truckload stocks on TT’s Transportation Stocks list rose since the beginning of the year. The sector’s fastest-growing stock was refrigerated carrier Frozen Food Express Industries, which jumped 96.6% since the start of 2013, followed by 88.4% growth for USA Truck and a 78.6% gain for Swift Transportation Co.

Deutsche Bank’s Yagerman said the outlook for LTL stocks is stronger than truckload.

“We’re more favorable on LTL companies than truckload companies because we don’t think they’re facing the same level of cost inflation on a relative basis,” he said. “The question for the truckload guys is going to be how effectively they can leverage any tightening in the environment to compensate for the inflationary costs — equipment and drivers — in their business.”

Package delivery giants UPS Inc. and FedEx Corp. both saw their stock prices rise during the test period, posting gains of 17.4% and 7.3%, respectively.

Stock results were less favorable for non-asset-based transportation companies, with prices for three out of seven third-party logistics providers declining from a year earlier. C.H. Robinson Worldwide’s stock fell 10% to $56.90.

Railroad stocks rose across the board, led by a 31.7% gain at Kansas City Southern and 25.9% growth at CSX Corp.

Looking ahead, a potential capacity crunch could be looming for the industry, but that tightening of the market might provide a boost for rates as demand increases, analysts said.

Yagerman said the new hours-of-service regulations set to go into effect July 1 “are going to put pressure on the productivity of the capacity on the road, much more so in truckload than on the LTL side of the equation.”

If the economy continues to expand and capacity doesn’t keep pace with that growth, that should affect the freight-pricing environment, he said.

“The question is obviously going to be driven by the magnitude of demand that’s out there,” Yagerman said. “The last two years in a row, we’ve seen the economy be muted or fizzle in the back end of the year. This year, I think there’s high hopes that things are going to be different, but you have to wait and see how things play out.”

On the other side of the equation, carriers — both LTL and TL — will face “a heck of a lot of cost inflation” down the road because trucks are more expensive than they were in the past and drivers will become more difficult to find as the economy improves, Yagerman said.

Ross, on the other hand, said he expects the economy to continue its slow growth, but he doesn’t see “a big uptick in freight volumes right now.”

Even in that environment, however, supply and demand could further tighten because of limitations on capacity, he said.

Truckload carrier Knight Transportation Inc. recently said it expects the hours-of-service changes to constrain capacity.

“If these rules are adopted, and our customers are unable to provide more flexibility in terms of pickup and delivery times, it will have a negative effect on productivity and available capacity,” the truckload carrier said in its first-quarter earnings report. “We have and will continue to work closely with our customers to help them understand the practical impacts of these changes to driver available hours, and to understand how driver available hours constrains capacity and affects the cost of our services.”

Refrigerated carrier Frozen Food Express Industries Inc. also cited those factors in its first-quarter report.

“The trucking industry continues to be challenged by operating costs increasing at a faster rate than pricing due, in part, to increased government regulations and recruiting and retention costs related to driver shortages,” the company said, adding that it “continues to focus on holding its pricing yields gained throughout 2012 and improving upon them in 2013.”

Bob Costello, chief economist at American Trucking Associations, said he, too, believes the trucking industry eventually will experience a capacity shortage.

“You figure, eventually, we’re going to get better economic growth,” he said. “That’s going to increase demand.”

The number of trucks on the road, however, is still off from its peak in 2007, he said.

At the same time, productivity could potentially decline due to the upcoming hours-of-service changes, combined with fewer qualified drivers and other factors such as the federal Compliance, Safety, Accountability safety ratings program, Costello said.

“You add all this up, and I think a capacity crunch is coming for the industry,” he said.