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    5.000
    4.9%
Company earningsNewsTruckload Carriers

Analyst lowers earnings forecasts, truckload hardest hit

Morgan Stanley analyst trims earnings estimates across all modes of transportation

In a note to clients providing a 2020 outlook and a preview of fourth-quarter earnings, Morgan Stanley analyst Ravi Shanker lowered earnings estimates for most of the transportation companies he covers.  

The analyst took down earnings estimates for less-than-truckload (LTL) carriers and railroads in the fourth quarter of 2019, with mixed actions taken on global logistics companies, as some estimates moved higher and some lower. The bulk of the earnings cuts were made to the fourth quarter, with more modest alterations made to 2020.

The average estimate reduction for the railroads was 6% in the fourth quarter and 1% in 2020. LTL estimates were reduced by 11% on average for the fourth quarter and virtually unchanged for 2020. However, more meaningful estimate reductions were made for the truckload (TL) carriers. On average, Shanker reduced estimates 15% for the fourth quarter and nearly 10% for 2020.

“Based on recent conversations with [management] teams, we believe 4Q could be one of the toughest quarters in recent memory across the board,” said Shanker. Further, he said that he expects “2020 guidance issued over the next four weeks to be muted.”

TL outlook

On the TLs, Shanker said that spot rates have rebounded off the bottom and that recent proprietary surveys have been reflective of an improving capacity and rate dynamic. He called out five regulatory catalysts that will curb truck capacity meaningfully in 2020. They are the final implementation of the electronic logging device (ELD) rule requiring carriers to convert from automatic on-board recording devices (AOBRDs); an increase in insurance rates in reaction to nuclear verdicts; required reporting of failed tests with the Drug & Alcohol Clearinghouse; the potential for increases in diesel fuel due to the International Maritime Organization (IMO) 2020 regulation; and California Assembly Bill 5 (AB5) limiting the scope of what is considered an independent contractor.

DAT Longhaul Van Freight Rate (National) – SONAR: DATVF.VNU

Shanker’s thesis contends that as truck capacity exits the industry, forced or otherwise, TL rates will move higher and earnings will improve. He sees these catalysts as reasons to favor the TL stocks.

He said that near-term earnings results may not matter as the stocks have “divorced” from fundamentals, pointing to the fact that when Knight-Swift Transportation Holdings Inc. (NYSE: KNX) negatively preannounced earnings expectations for the fourth quarter, the stock ended the next trading session flat.

In its announcement, Knight-Swift blamed an oversupply of TL capacity and a muted sequential improvement in demand from the third to the fourth quarter. This resulted in fewer seasonal project freight opportunities that normally carry a high yield. The carrier said that “rate increases were less than anticipated, leading to reduced revenues and lower-than-expected operating income.”

Shanker said that most investors will look past fourth quarter 2019 earnings results, focusing more intently on 2020 rate and demand expectations from management teams. Shanker believes that valuation multiples for the TL stocks remain within “historical averages” compared to the stocks of companies in other modes of transportation.

He said that while most investors are likely looking for slightly negative to flat contract rates in 2020, he sees a scenario in which spot market TL rates could increase in the double-digit range by the second half of 2020 given the aforementioned potential capacity restricting catalysts. He noted that cost headwinds including increases in insurance premiums could weigh on margins (operating ratios, ORs) but that improved revenue due to rate increases could “soothe” OR headwinds.

Other modes

Shanker cautioned on a blanket trade and recommended against adding exposure to all transportation stocks on the premise that year-over-year comparisons will be easier in 2020.

He noted a continuation in year-over-year rail volume declines, which accelerated through the fourth quarter as a reason for caution. Further, he cited secular declines in demand for commodity groups like coal, energy, automotive and intermodal as headwinds. Intermodal volumes were down 5% in 2019, according to the Association of American Railroads, as lower TL spot rates have narrowed the normal cost savings gap between TL and intermodal. Additionally, Shanker said that slowing pricing momentum was another headwind for the rails and cautioned on the stocks even though year-over-year volume comparisons ease in 2020.

Further, he believes that future cost savings and network fluidity improvements gained from precision scheduled railroading (PSR) may not be as easy to come by given the recent success most railroads have had on this front. In November, rail employment hit a more than five-year low, down 10.6% year-over-year.

Lastly, Shanker said that the outlook for intermodal marketing companies and freight brokers remains lackluster with gross and operating margin compression likely to persist. He said that margin pressure could accelerate in 2020 as TL spot rates improve faster than contract rates – forcing some brokers to pay up for truck capacity – and as newer, digital brokerage houses continue to compete for market share on pricing.

All of Shanker’s fourth-quarter forecasts sit below the current consensus estimates. 

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Todd Maiden

Based in Richmond, VA, Todd is the finance editor at FreightWaves. Prior to joining FreightWaves, he covered the TLs, LTLs, railroads and brokers for RBC Capital Markets and BB&T Capital Markets. Todd began his career in banking and finance before moving over to transportation equity research where he provided stock recommendations for publicly traded transportation companies.

8 Comments

  1. quote :

    “He called out five regulatory catalysts that will curb truck capacity meaningfully in 2020. They are the final implementation of the electronic logging device (ELD) rule requiring carriers to convert from automatic on-board recording devices (AOBRDs”

    Ya see ! ELD’s have an effect on price, route, and services , LOL !

    You can’t have your cake and eat it too , you FAAAA preempt advocators ! LOL !

    IMHO !

  2. And a 1 and a 2 …..

    Bye-Bye Miss American pie ………..

    Quote:

    “Basically in ‘American Pie,’ things are heading in the wrong direction,” McLean told Christie’s. “It is becoming less idyllic.”

  3. ELD isn’t worth the added stress. IMHO. Nature never hurries yet everything always gets done. Truckings a big job one cannot expect to get big jobs done quickly. it should be a choice not a mandate. Higher rates most likely will offset higher cost of business. Something not addressed is high amounts of inventory in both durable and non durable goods. Good stuff noble always enjoy your humble opinion

  4. Everyone I know in this biz is scrambling for better technology so they can fire people to save money. It seems everyone is struggling on margin and all the digital brokers who were losing money when the market was soft are now starting to lose a lot more money now that carriers have a little more power. It’s an interesting swing.

    1. Thousands of brokers out there undercutting each other like thousands of carriers undercutting each other.
      Extremely competitive business.
      Race to the bottom.

      What’s the difference between brokers? None.
      They all are middle men/women reposting on loads boards buying the cheapest carrier.

  5. What’s that slogan Trump popularized and borrowed from Ronald Reagan ?

    “Make America Great Again” !

    What are truckers waiting for to “MAKE TRUCKING GREAT AGAIN” ?

    YOU ARE AMERICANS ! YOU ARE LEGEND !

    I’ll borrow a comment I made on Freight Futures daily curve: 1/7

    Remove the ” S ” !!!
    Make it “FREIGHT FUTURE” .

    Why ?

    Cause that’s what you are !

    Drivers YOU are the future of freight ! That doesn’t mean in 5,10,20, or 30 years from now .
    It’s means you’re the future such as in the next minute , hour , day ,week , month , year , and all depending on what you choose to do “will shape it” .

    Trucking has unfortunately became a mirage , an illusion . It’s not what it once was and certainly not what it could be . It has changed for the worst .

    Some of you refer to yesteryear when one upon a time there was camaraderie among drivers . That brings us back into the 70’s !
    While looking back in the 70’s , in 1978 there was a song that was released that became a worldwide hit and success . It’s a bit tacky but the “words” have meaning .

    Perhaps you should listen to it and focus on what the message is . You can perhaps change the title and that one word throughout the song to ” UNITING ” !

    I found an interesting video on youtube where the singer is singing it on July 4th , America’s birthday ! Incredible that he still has the same voice and sound from his youth despite his age .

    This is the title of the youtube video . I’m referring to the first song :
    Frankie Valli July 4th – Grease, Can’t Take My Eyes Off You, Let’s Hang On

    Replace “Grease” with UNITE / UNITING .

    Think about the industry , how you’re being treated , what you’re being lead to believe , and what became of it since yesteryear , the lying , deception , exploitation etc . Think about how YOU can change it for the better rather than allow the powers that be continuously destroy this industry of yours at your expense .

    YOU ARE AMERICA ! YOU’RE SUPPOSE TO BE NUMBER 1 ! How can you allow the powers that be do this to YOUR INDUSTRY ?
    I’ll copy and paste the lyrics , however I took the liberty of changing that one word to “UNITING”

    Grease(UNITING)
    Frankie Valli
    I solve my problems and I see the light
    We got a lovin’ thing, we gotta feed it right
    There ain’t no danger we can go too far
    We start believing now that we can be what we are

    UNITING is the word

    They think our love is just a growing pain
    Why don’t they understand, it’s just a crying shame
    Their lips are lying only real is real
    We stop the fight right now, we got to be what we feel

    UNITING is the word

    It’s got groove it’s got meaning
    UNITING is the time, is the place, is the motion
    Now, UNITING is the way we are feeling

    We take the pressure and we throw away
    Conventionality belongs to yesterday
    There is a chance that we can make it so far
    We start believing now but we can be who we are

    UNITING is the word

    It’s got groove it’s got meaning
    UNITING is the time, is the place, is the motion
    Now, UNITING is the way we are feeling
    This is the life of illusion
    Wrapped up in trouble, laced with confusion

    What are we doing here?

    We take the pressure and we throw away
    Conventionality belongs to yesterday

    There is a chance that we can make it so far
    We start believing now that we can be who we are

    UNITING is the word

    It’s got groove it’s got meaning
    UNITING is the time, is the place, is the motion
    Now, UNITING is the way we are feeling
    UNITING is the word, it’s the word
    That you heard

    It’s got groove it’s got meaning
    UNITING is the time, is the place, is the motion
    Now, UNITING is the way we are feeling

    UNITING is the word

    In my humble opinion ………..

      1. What I can tell you for now is that the “concept” is being thrown around on the web such as on sites like this one .

        The “actual” recruitment will not be done through social media . It will be done on the road over the CB(hands free) leading it to being confirmed in person . Recruiters need to possess a certain type of mentality . This is going to be “our thing” ! Not some amateur wannabe hocus pocus club .

        The point behind this method at the beginning is to get a good feel concerning potential “recruiters” and potential recruits . They will be well chosen and have a real clear understanding of the concept . This way the message will be clear when shared with potential recruits .

        It will also prevent unscrupulous characters from attempting to infiltrate in the beginning .

        Eventually you’ll hear about it through recruiters over the “hands free” CB and or at truck stops . You’ll know right away if it’s the real McCoy . You’ll be given a CB channel to tune into .

        We need to be shrewd with these distraction regulations . Some are incapable of using a CB without engendering distraction while driving . The last thing we need are road collisions due to using a hands held CB like some , ie: are supposedly incapable of placing a coffee mug in a cup holder while driving without causing a collision .

        Recruiting takes time . The word will be spread internationally at first between the USA & Canada , 2 important trading partners . By doing this over the road we will also be rejuvenating camaraderie among ourselves on the road . That’s a big point in the concept within the “Alliance” . If you’re a racist , then you’re obviously not the best candidate to be recruited . Why ? For ethical reasons and for when the time will come too expand in Mexico and beyond etc. However, a foreigner will be chosen as the best candidate to “recruit” foreigners sharing the same nationality as their own .

        OUR CAUSE : “MAKE TRUCKING GREAT AGAIN” !

        We will emphasize on when it’s “safe” to “use” the CB while on the road when in jurisdictions still allowing hand held CB’s . Example : In Ontario, Canada hand held two-way radio CB’s have been exempted from distraction driving until January 2021 . Then it will have to be a hands free CB .

        Quote :

        “Ontario Extends “CB Radio Exemption” from Distracted Driving Regulation

        Ontario extends “CB Radio Exemption”
        The exemption that, among other things, allowed CB’s to be used by Truck drivers, which was set to expire January 1st of 2018 has been extended three years to January 1st of 2021. Please see the official notice provided from the Province of Ontario below.

        In June 2017, the Ministry of Transportation posted information and proposed policy options publicly on the Ontario Regulatory Registry related to the expiry of Ontario Regulation 366/09 (Display Screens and Hand-Held Devices) of the Highway Traffic Act.  This regulation is set to expire on January 1, 2018. 

        After careful consideration of your input, and the input provided by other stakeholder groups, I am pleased to announce the following change to Ontario Regulation 366/09 (Display Screens and Hand-Held Devices):

        The current two-way radio exemption for licenced amateur radio operators and specified commercial, public transit, and public function drivers will be extended for a further three-years, effective January 1, 2018 until January 1, 2021.”

        End quote .

        That being said , I highly recommend the best option(s) to use are Bluetooth “all in one CB hands free devices” that can be paired with your cell phone .

        In my humble opinion …………

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