Wall Street Expects Better News as Fleets Report Latest Results

This story appears in the July 12 print edition of Transport Topics.

While Wall Street and economists are fretting about the staying power of the economic recovery, good news is expected to begin arriving this week in the form of sharply higher second-quarter earnings for publicly traded trucking firms.

Average profit for publicly traded companies is up 54% from the second quarter of 2009 for truckload, less-than-truckload, logistics and parcel carriers, based on earnings estimates by Bloomberg News.

“Trucking executives were generally very upbeat about the current operating environment as they have benefited from strong freight demand and an improved supply/demand dynamic,” Deutsche Bank analyst Justin Yagerman said in a July 1 investor note about an industry conference.

The profit improvement ranges from an estimated 55% at UPS Inc. — which ranks No. 1 on the Transport Topics 100 list of the largest U.S. and Canadian for-hire carriers — to smaller fleets such as Forward Air, whose earnings could rise 130%.

In all, 24 of 26 companies are bettering their profit performance from both the second quarter of last year and the first quarter of 2010. Only less-than-truckload firms YRC Worldwide Inc. and Arkansas Best Corp. are expected to post losses.

The earnings picture has brightened to the point that five companies — including four truckload carriers — are projected to have second-quarter profits per share that top the same period of 2008, the last full quarter before the latest recession took hold.

That group includes Knight Transportation, Marten Transport, P.A.M. Transportation and Covenant Transportation Group.

Logistics firm C.H. Robinson Worldwide also is expected to raise earnings above 2008 levels, and Heartland Express is projected to earn 16 cents a share, as it did in the second quarter of both 2008 and 2009.

Truckers are helped by shippers’ concern that capacity is shrinking and rates are rising, one analyst said.

“Many large industrial areas don’t have enough truckload capacity,” said analyst Jason Seidl of Dahlman Rose & Co., citing the Midwest as one such region. “Shippers are afraid of not having enough truck capacity in the near future.”

“Earnings performance will be sustainable for the truckload carriers” as a result, he told TT.

Whether that will happen remains to be seen, as some analysts worry about freight levels — and profits — in the third quarter.

“Multiple economic indicators — including consumer confidence, leading indicators and broader concerns over Europe — support evidence of potentially slowing trends,” analyst Jon Langenfeld of Robert W. Baird & Co. Inc. said in a July 1 report.

Consumer confidence slipped nearly 10 percentage points in the latest Conference Board report, factory orders fell and the Institute for Supply Management’s purchasing manager’s index recently declined to its lowest level since December.

Pessimism continues to depress financial markets as well.

The Standard & Poor’s 500 had lost nearly 10% of its value over the past two weeks, before reclaiming half of the losses last week before closing at 1070.25 on July 8.

Part of the reason for caution, said John Larkin, analyst for Stifel, Nicolaus & Co. Inc., was the fact that trucking demand growth flattened as the second quarter progressed.

That trend was reflected in the 0.9% drop from April to May in American Trucking Associations’ tonnage index.

Larkin said he fears that federal economic stimulus programs and low interest rates haven’t done enough to foster steady growth.

At the same time, job creation remains weak, he noted, as evidenced by weaker than expected private-sector payroll growth (click here for p. 4 story from this week’s issue).

Despite the recent weakness, these analysts see some potential bright spots in the industry outlook for the rest of the year.

Langenfeld said that trucking earnings will be buoyed by higher rates and lean inventories that will have to be replenished steadily.

Larkin noted that some shippers have started to raise rates on contract shipments, following the upward path of spot freight rates.

“Further pricing relief in the second half of 2010 likely will be a function of the economic recovery,” Larkin said.

Seidl believes LTL carriers in particular will need a stronger economy to further boost earnings.

Among railroads, similar profit increases of 50% or more are expected at Union Pacific and Kansas City Southern, and other major railroads also are expected to post better results than for the second quarter last year.

Stronger intermodal volumes and a better rate picture for rail/truck freight are helping to boost rail results, Seidl said.

“Railroads have tremendous leverage,” Seidl said. “They are handling more business without a lot of extra people. It’s possible that one railroad could bring in an operating ratio below 70.”

He declined to identify that carrier, however.