Stifel: Truckload fundamentals not matching sentiment

Truckload carriers are bullish on the potential of the Trump administration and Congressional proposals to ease regulations and stimulate the economy, but rate levels remain a concern.    Bullish attitudes among truckload carriers early in 2017 are not necessarily matched by behavior or fundamentals, the transportation and logistics group of the investment bank Stifel noted Friday.
   In a note to investors, Stifel said post-election euphoria had carriers eyeing reduced safety regulations, lower corporate tax rates and infrastructure investment, among other positive indicators.
   But Stifel went against that sentiment in mid-December, when it downgraded its rating on six bigger truckload carriers to “sell.”
   “Several investors we spoke with thought we had lost our minds/senility had finally set in,” the note said. “Instead, we were merely suggesting that fundamentals were still lousy and that they were unlikely to improve significantly until mid-2017 at the earliest.
   “By then, we might see sufficient incremental fleet downsizing and enough installations of incremental electronic logging devices to shrink industry supply enough to, combined with the increased demand created by the rightsizing of inventories and the initial incremental demand created by the Trump euphoria (increased confidence in hiring and investing on the part of businesses, increased consumer confidence, and the tangible impact of specific Trump endorsed stimuli) — to drive a meaningful inflection in contract pricing across the truckload industry.”
   Stifel said there’s even cause to doubt whether that expected mid-year bump will occur.
   “We continue to maintain some skepticism about the often touted mid-year turn in fundamentals, if for no other reason than if shippers survive through the 2Q17 peak, why would they be inclined to pony up rate increases in the otherwise soft freight markets that often materialize in the July/August timeframe?” the note said. “At that point, they may come to the conclusion that they have dodged the rate increase bullet and that they have been granted a reprieve until late 1Q18 or early 2Q18.”
   The group also noted pricing behavior over the holiday season was cause for some concern.
   “Aside from the e-commerce surge, which lasted three to four weeks starting on Cyber Monday, freight demand has remained soft, and rates, while stabilizing in the contract market and firming some in the spot market, remain at depressed levels,” the note said. “We are just surprised that so many were willing to fully discount in such a bullish tight supply/demand dynamic before fundamentals showed clear evidence of a turn for the better. While fundamentals have stopped deteriorating, they haven’t meaningfully improved, and while they may improve, the market has already factored in the bulk of the potential associated with all but the most bullish of scenarios.”