Trucking Shares Rise Despite Wall Street’s June Setback

Most publicly traded trucking, logistics and railroad companies saw their stock prices rise over the past 12 months, despite the recent downturn on Wall Street caused by rising fuel prices, natural disasters and political unrest in the Middle East and North Africa.

But the recent stock decline did not come near to wiping out the gains made by the transportation sector as a whole. In the 12-month period ending June 8, the Dow Jones transportation average rose 24.3% and the Standard & Poor’s Trucking Index recorded a 19.2% gain. In comparison, the overall S&P 500 rose 21.2%.

While there is widespread agreement among trucking executives and analysts that the downturn has limited the growth potential of some transportation firms, others have flourished.

A financial executive for a publicly traded truckload carrier, who spoke on the condition of anonymity because of the closeness to the end of the June 30 quarter, acknowledged a significant amount of general economic turmoil that also affects trucking: the battered housing industry, persistent high unemployment slicing into retail sales and auto sales that are improving but still not close to pre-recession highs.

Despite all that, he said well managed carriers can do well. Not only did the recession eliminate a lot of former competitors, but he thinks the attrition will continue.

“In looking at acquisition candidates, there are a lot of balance sheets that are the worst I’ve ever seen,” he said, adding that poorly managed firms have just tried to survive on cash flow, but haven’t set aside reserves to purchase good replacement equipment. These carriers, he said, will be racked by high maintenance costs for old equipment but will not be able to modernize. Hence, they will fail, too, he predicted.

“There may be an economic lull now, but professionally managed trucking companies can still do well because there will be multiple opportunities for them to improve: more capacity going out, the economy getting better and self improvement.”

The truckload executive said he thinks the next two years might be even better: “There’s a lull now, yeah, but there’s a huge upside for this industry. I think there could be more opportunity coming than there was in ’04 and ’05.”

“We’ve got sub-par growth — but growth. And that means every week, month or quarter won’t be stellar. [Gross domestic production] is choppy now. That’s today’s problem,” said Bob Costello, chief economist for American Trucking Associations.

Costello said that while the United States is a very mature economy and 2% to 3% GDP growth might be the ceiling for the present, he said trucking could do well under those conditions.

And many fleets are thriving.

Truckload carrier Quality Distribution, a tank-truck fleet based in Tampa, Fla., saw its stock rise 99.6% to $10.74 a share from $5.38 over the period. The next two big TL gainers were Covenant Transportation Group, Chattanooga, Tenn., and J.B. Hunt Transport Services, Lowell, Ark., at 37.5% and 33.9% respectively.

Of the 15 companies in the TL sector, however, only seven of them saw their share prices rise over the 12-month period. The biggest decline was experienced by Integrated Freight Corp., Sarasota, Fla., which saw its stock take a 70.5% hit, losing 67 cents a share.

In the less-than-truckload sector, six of the seven publicly traded firms showed net gains in their share prices. Con-way Inc., San Mateo, Calif., led the way with a 20.9% increase based on its $6.18 per share price rise, while YRC Worldwide, Overland Park, Kan., dropped $5.17 a share, or 89.6%. Growth in the rest of the sector increased between 0.5% and 9.2%.

Truck leasing company Ryder System, Miami, and package carriers UPS Inc., Atlanta, and FedEx Corp., Memphis, Tenn., all posted double-digit increases. Ryder rose 22.2%, UPS 18.2% and FedEx 10.4%.

Four of the five public Canadian trucking companies posted profits, with TransForce Inc., Saint-Laurent, Quebec, posting a 57.9% increase in its stock. Two others — Mullen Group Ltd., Okotoks, Alberta, and Clarke Inc., Halifax, Nova Scotia, — also saw double digit gains of 50% and 13.8% respectively.

Eight of nine logistics companies saw their stocks rise — led by Express-1 Expedited Solutions, St. Joseph, Mich., which jumped 59.3%. In fact, all the logistics sectors gains were double-digit — the others ranging from 14.4% to 46.5%. Clark Holdings Inc., Trenton, N.J., was the lone loser, dropping 14.3%.

CSX Corp., Jacksonville, Fla., led the railroads with a 50.4% gain. Of the six companies in the sector, only Canadian Pacific, Calgary, Alberta, did not post a double-digit gain.

Aside from the TL sector, the only group that had a majority posting losses was the multimodal companies. Of the three firms, only Forward Air Corp., Greenville, Tenn., posted a gain — 22.4%.

As for the second half of this year, trucking executives and analysts said that carriers, as a group, should continue improving their bottom line.

Terry Croslow, chief financial officer of Bestway Express, a privately held Vincennes, Ind., dedicated contract carrier, said he expects rates will have to increase for surviving carriers.

“Shippers have been slow to realize the CSA effect,” he said referring to the new federal Compliance, Safety, Accountability program that appears likely to cut the supply of qualified drivers. “With the carrier failures during the recession and the driver shortage that CSA contributes to, there will be upward pressure on rates to pay for drivers.”

“We’re even seeing the shortage on dedicated lanes. Drivers are getting more picky,” Croslow continued. “Shippers would like it if rates just treaded water, with any new money going only to drivers, but rate increases will also have to provide some margin rates.”

“We’ve seen the economic growth rate slowing,” said David Ross, who follows trucking stocks for Stifel, Nicolaus & Co. “Fuel started rising up last year and into this year. We didn’t see problems with that immediately, but it always works its way in. Basically, oil got high enough to do some harm, and then it retreated.”

“Our forecasters’ view is that the economy is OK, not great but OK, and it will continue to grow. We’re not looking for a double-dip recession,” Ross said. He added that most of the carriers he watches are benefitting from tight freight hauling capacity.

“This is like a baseball team in first place that loses five or six games in a row in midseason, but they can still come back and win,” said Jim Meil, Eaton Corp.’s chief economist of the current economy.

Cleveland-based Eaton is a major supplier of components and systems for commercial vehicles.

ATA’s Costello said the consensus forecast for U.S. GDP growth has been cut to 2.5% for 2011. While that is less than last year’s 2.8% growth, growth in the second half might approach a 3% per year rate.

“First-quarter growth was 1.8%, so we’ll have to grow faster than 2.5% in the second half to have that be the average for the year,” he explained.

“Moderating demand trends are reflective of an economy transitioning from early-cycle recovery to slow-growth expansion, requiring more selective transport investing,” analyst Jon Langenfeld said earlier this month for Robert W. Baird & Co.

“Overall freight growth continues to slow across modes, a function of strengthening comparisons and an economy in transition. Positively, spot-market demand has shown seasonal strengthening in recent weeks, which should continue through June; however, industry contacts note that West Coast trends — a primary read on consumer/retail demand — remain weaker than expected,” Langenfeld said.

He also predicted that “truckload rates remain on pace for 3% to 5%, year-over-year growth; but pockets of capacity availability in the second quarter are limiting pricing upside.”

Stifel’s Ross also sees rate in-creases for trucking, but offered a caution on timing.

“In the less-than-truckload sector, given the outlook, carriers should be able to raise rates so that they recover toward historical norms. But if we see growth in truck capacity before rates, that would throw a wrench into our thesis,” he said.

A particularly thorough report came out June 7 when Wolfe Trahan & Co. published an 83-page assessment of the truckload industry called “Changing Lanes.”

Partner Edward Wolfe and analyst Scott Group said that for four to five years they heard “constant assurances from the public and private carriers that truckload pricing was about to re-tighten to 2004-05 levels,” yet it never happened.

Now, though, the research firm has told its clients that “truckload carriers are in the early innings of a multi-year pricing upswing” that will greatly favor large carriers over small- and medium-size firms, “regardless of the economy.”

The report looks at multiple factors, including shipper attitudes, the build rate for Class 8 highway tractors, federal regulation of the industry, the credit standards of lenders and truckload industry fundamentals since 2004.

In summary, the report says a majority of large shippers already think truckload capacity is tight, even though the economy is not roaring. There is already a shortage of recent-model tractors on the road. Larger carriers report they are hesitant to expand their fleets. Banks and other lenders are far more careful about lending to small, new businesses than they were five years ago. And trucking is now more difficult.

A substantial, lingering problem for the economy as a whole and trucking in particular is the housing market. Eaton Corp.’s Meil said housing is still an “opaque mess,” meaning that it remains so tremendously troubled it is very difficult to predict with any certainty the future of that important sector of the economy.

Meil said there is a substantial list of potential economic problems that could explode without warning, but the best thing to hope for is “an absence of negatives” — meaning the less bad news coming from Japan, the Middle East and government budget debates, the better things will get

And Costello warned that fleet managers will have to remain vigilant in order to prosper as trucking costs rise more quickly than prices for the economy at large. Diesel fuel, tractors, driver wages, tires and regulatory compliance costs are all “rising higher and faster,” he said.

A financial executive for a publicly traded less-than-truckload carrier, who spoke on the condition of anonymity, said, “We don’t see a double-dip recession coming.”

He said his company and many other LTL carriers have historically done a lot of work for the still reeling housing industry. Because housing is not yet recovering, that cuts into his optimism.

However, he said he still thinks earnings will increase during the next four quarters.