Trucking Stocks Post Gains; Likely to Extend Into 2015

This story appears in the Jan. 5 print edition of Transport Topics.

Most trucking company share prices last year recorded solid increases, including a few that were spectacular.

Shares rose for 24 of 30 companies tracked by Transport Topics, with an average 36% gain from Jan. 2 through Dec. 26, 2014. The largest increase was 225% at Covenant Transportation Group, while logistics firm UTi Worldwide fell the most at 32%.

It has created expectations for the upward trend to continue in 2015, industry analysts said.

Trucking shares nearly tripled the 13% improvement of the benchmark Standard & Poor’s 500 Index. Trucking also outpaced the average 22% railroad stock rise.

2014 started poorly with “lousy weather, poor rail service, fears of a port strike and then a port slowdown,” Thom Albrecht of BB&T Capital Markets told TT.

“At the same time, demand, especially industrial production, improved significantly. This set the stage for 2014 pricing to accelerate and the stocks to work,” he added.

Stifel, Nicolaus & Co. analyst John Larkin said trucking stocks outperformed the overall market for the third straight year because “investors anticipated further price increases driven by continued economic recovery and a tightening supply/demand dynamic.”

The driver shortage, federal regulations, increasing demand and lower oil prices were factors, Larkin said.

“A few months ago, people were worried that there was going to be a reduction in the pace of earnings improvement because fleets couldn’t get drivers,” said Jason Seidl, an analyst at Cowen and Co.

In fact, nearly every truckload carrier is expected to post strong fourth-quarter earnings growth that’s reflected in share prices, he said.

A prime example is Covenant, which ranks No. 43 on the Transport Topics Top 100 list of the largest U.S. and Canadian for-hire carriers. Covenant said fourth-quarter earnings would be about $12 million, quadruple the 2013 quarter and about 60% above Wall Street’s average earnings estimate compiled by Bloomberg News.

As a group, 16 truckload carriers’ shares rose an average of 44%. The next-largest gains were 150% at No. 63 P.A.M. Transportation Services and 99% at No. 50 USA Truck.

Non-asset-based logistics companies rose 21%, on average.

Among less-than-truckload carriers, whose average rise was 44%, Seidl singled out No. 13 ArcBest Corp. That company, he said, will benefit from the combined effects of a stronger LTL market and expected gains in the expedited business that should boost its Panther Expedited subsidiary.

“The real question going forward is how long this [share price improvement] is going to last,” said Seidl.

He thinks the industry’s profitability will continue to improve as long as economic growth continues and carriers continue to struggle to add drivers, Seidl said.

“It is rare for a group to outperform [the overall market] for four years in a row,” Larkin said.

Factors that drove up rates, such as the weather and port disruptions, aren’t likely to recur, relieving some of the capacity pressure that fueled higher rates, profits and stock prices, he said.

Arthur Hatfield of Raymond James Financial was more optimistic.

“After a strong fundamental year for the trucking sector in 2014, we believe the pricing trend will continue, given the bottleneck of drivers,” he said. “This should lead to continuing tightness of capacity and strong earnings growth in 2015. We believe this will lead to another year of outperformance in the equity markets for the trucking sectors.”

“Rates will still rise, but the percentage increase could be less,” Albrecht said. “The next round of regulatory crunches hits in the fall of 2015, implying 2016 could see tightening again, but 2015 could be a lull between the frenetic activity of 2014 and the anticipated tightness of 2016-2017.”

“Just as accelerating rate growth was a catalyst to asset-based transports’ outperformance in 2014, we are mindful of the risks presented to the group,” said a report from Robert Salmon at Deutsche Bank, particularly economically sensitive truckload and LTL carriers.

Salmon said investors and analysts are now turning their attention from the recent round of price increases to assess how sustainable that improvement will be.

Kevin Sterling at BB&T told TT he believes 2015 should continue favorable developments in the airfreight sector, where volume and rates improved in 2014 for the first time since the Great Recession.