Thursday afternoon David G. Ross, transportation equities analyst for Stifel Financial Corp., sent out a barrage of research notes announcing that Stifel was back in the business of regularly covering the trucking industry. Ross attached notes about HUB Group, Marten, Knight-Swift, Werner, Daseke, Heartland, JB Hunt, USA Truck, TFI International, and Covenant, as well as a more extensive analysis of the trucking industry and the outlook for 2018. We’ll go through the industry update piece by piece.
The overall picture Stifel paints of the trucking industry will be familiar to many observers: healthy freight volumes creating strong demand for trucks, a boa-constrictor-like regulatory environment slowing squeezing supply, and low unemployment and demographic shifts making the driver shortage worse. LTL and intermodal, as the traditional ‘safety valves’ of the truckload sector, will see benefits from an exceptionally tight trucking market.
“Just as everyone wants to fill up their car at the gas station with the cheapest price, when the price triples, they still have to fill up,” wrote Ross. “It’s the same for trucking, in our view. Shippers won't pay a penny more than they have to for truckload capacity, but they'll pay whatever they have to. We expect truckload rates to be up, on average, 12% y/y in 2018.”
Stifel’s analysts cited truckers’ bullish comments like “you have to be a moron not to make money today” and “we haven’t found the ceiling [on pricing] yet.” Ross reported that weekly turndowns at Heartland Express were about 500 in January 2017 but exploded to over 10,000 per week in January 2018.
Stifel’s investment thesis for trucking companies is multi-pronged and comprehensive: “There will be more goods to move around the country this year than there was in 2017 and likely fewer drivers to move them, causing a continued squeeze on shipper rates in order to get driver pay higher… This capacity tightness should lead to strong revenue and earnings growth for the asset-based trucking companies that can seat their trucks with competent, safe drivers.” Ross pointed out that trucking stocks are already at record valuation multiples, and that “from here, it should be an execution story and a stock picker’s sector.”
But which carriers will deliver the best returns to investors in 2018? “Granted, the stocks should continue to move in tandem around macro issues,” Ross wrote, “but the better run companies (and most improved) give shareholders the greatest rewards. With that in mind, our top picks are the growthy DSKE, the under-appreciated TFII-TSE, the turnaround USAK, and the quality WERN.”
“One of the biggest areas where we find investors get confused is in mistaking revenue per loaded mile for pure price,” wrote Ross. “Similar to LTL, there are many more factors that go into it. Besides length of haul, empty mile %, and utilization, freight selection also comes into play with reported yields, as a carrier in this environment can realize significant yield gains in a market like we see today without raising a single contract rate, either by playing the spot market more, or by simply reallocating its capacity to better paying customers (i.e., higher contract rates).”
Stifel thinks that in the current environment, driver pay raises are increasing churn, without creating any additional drivers. “We are even hearing now that private fleets, such as Wal-Mart, are having a difficult time finding drivers,” wrote Ross, “and private fleet jobs pay, on average, about $20K more per year (or anywhere from 30%-40% more) than regular for-hire truckload positions.”
FreightWaves reported on BNSF’s exposure to coal volumes earlier this week; Stifel thinks that BNSF can benefit from a growth in its intermodal business even as coal volumes decline. “We believe intermodal is the future growth avenue for the railroads,” said Stifel’s analysts. “Historically, it had lower returns than coal or other commodity types, so in an internal competition for investment dollars, intermodal was left behind. But given the weak demand for coal and an unlikely rebound, we believe rails will give intermodal a chance… The shortage of truck capacity is presenting intermodal with an historic opportunity to reverse intermodal share (drifting down since 2015) – but the industry is in danger of blowing it due to a lack of box capacity, poor rail service, and unsatisfactory dray service.”
Stifel’s analysts also addressed the question of Amazon: at what point does Amazon start building or acquiring their own truckload capacity? “Anytime a retailer has as much volume as Amazon does, it will look to consolidate shipping quantities into truckload quantities whenever possible. We don’t believe Amazon has been able to fully capitalize on this consolidation yet, because it is growing too quickly to effectively optimize its supply chain for a static environment,” wrote Ross. “As the company grows, we believe it will be an even bigger shipper of truckload. It may even make sense for Amazon to have its own private fleet of trucks at some point (like Walmart, who has >6,000 trucks in its private fleet and still spends billions on for-hire trucking services); however, we believe the preferred path for Amazon is to use carriers (large and small) to provide the service, as the company is focused on free cash flow, and owning trucks is a cash commitment.”
Stay up-to-date with the latest commentary and insights on FreightTech and the impact to the markets by subscribing.