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Stifel: market fundamentals strong; partner up to tackle tech issues

STIFEL SEES STRONG MARKET FUNDAMENTALS ACROSS TRANSPORT SECTOR.

John Larkin at Stifel Financial Corp. released his Transportation & Logistics Industry Note yesterday based on his team’s conversations with transportation professionals, service providers, and investors at this week’s ATA conference in Orlando, DAT User conference in Portland, and Armstrong & Associates 3PL conference in Chicago. We can break down Stifel’s findings into short-, medium-, and long-term outlooks. 

In the short term, spot market rates remain elevated (20%+), giving carriers an advantage in rate negotiations. Larkin writes that “irregular route truckload carriers have been the first to see the benefits of a tightening supply and demand dynamic.” Stifel expects spot and contract markets to stay high through the middle of 2018—by that time, the capacity eliminated by the full effects of the ELD mandate will force even the most parsimonious shippers to accept higher rates. Those high prices will cause freight to spill over to LTL carriers and intermodal, where they will have disproportionate impacts on rates.

Even though GDP growth has accelerated to 3%, Stifel expects transportation companies to outperform the market due to faster revenue growth, expanding margins, and strengthened balance sheets. The stable, strong market fundamentals reported across the industry mean that every company, no matter its debt load, can make moves that will please investors: highly leveraged firms should be able to re-balance their books; optimally leveraged companies can increase share buybacks and dividend growth; and under-leveraged outfits will be able to make acquisitions to build density, add complementary services, and expand geographic coverage. 

Stifel’s report mentions a number of long term megatrends that will affect the transportation sector—the aging population and the concomitant shrinking of the labor pool, global urbanization, e-commerce, mobile computing, automation of manual and intellectual functions, data analytics, blockchain, and futures markets. Larkin counsels a proactive yet prudent approach to adopting future technology: “stand still and be crushed. Advance the ball too quickly and bleed cash.” 

In other words, companies who choose to bury their heads in the sand and ignore the industry’s transformations will see their competitiveness evaporate; but there’s also a danger for individual shippers and carriers who invest heavily in unproven technology because they might exhaust their liquidity without ending up with a commerce-ready product. The ‘goldilocks solution’—not too cold, not too hot—for companies facing these new technologies is partnering with outside organizations that can shield companies from the risks of operating on the bleeding edge. This means companies should like at vendors with a proven track record of satisfying clients, industry trade associations, and industry alliances.

Larkin specifically mentions BiTA (Blockchain in Trucking Alliance) as a model for industry participants to mitigate their risk of under- or over-investing in new technology and stay abreast of the state of the art. To that end, on Friday afternoon, Stifel hosted a conference call with the BiTA team and 228 industry participants who were interested in the alliance and its potential to educate the industry and develop standards for blockchain in trucking.

The recording of Stifel’s BiTA conference call is available for download here

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John Paul Hampstead

John Paul conducts research on multimodal freight markets and holds a Ph.D. in English literature from the University of Michigan. Prior to building a research team at FreightWaves, JP spent two years on the editorial side covering trucking markets, freight brokerage, and M&A.