John Larkin and the market tigers at Stifel have increased estimates for many truckload and brokerage names. After doing a nationwide road show visiting trucking super cities and conferences in Des Moines, Indianapolis, Atlanta, Chattanooga, and Long Beach, the firm concluded that the stocks in their universe were set to to perform better than what was anticipated a few months ago.
The conclusions are both consistent with the view that FreightWaves discussed this week, but with additional insights and models to reinforce our bullish view of the strength of the truckload economy. The report, issued overnight, discusses the evolution of rate increases during 2017, culminating in back-to-back hurricanes, e-commerce peak season, and ELDs.
One of the insights that we had been debating internally was the impact to the brokerage community due to the market changes. In our view earlier in the year, spot rate increases were hurting margins as brokers were required to deliver against preset forward rates. At the CSCMP and NACV conferences, we spoke with a number of brokers that mentioned how great their margins were in the market that suggested margins were not being compressed and for the savviest players meant high surge spot rates.
In the second quarter, demand was not strong enough to put significant pressure on capacity, but spot market rates were increasing, nonetheless. This suggests that carriers with fixed forward commitments were not seeing tons of pressure to move into the spot market and pull capacity out of the contract market.
The hurricanes changed all this. It took a market teetering into one where demand far outstripped supply. As there was a scramble for trucks and carriers started to abandon their forward commitments to seek out higher spot rates, shippers with questionable relationships with carriers were forced to call spot brokers and source capacity.
As Larkin describes it:
“For shippers who treated carriers as partners during the 2015/2016 timeframe, it appears as though most carriers are willing to work with shippers to build rate increases into 2018 budgets so that rates can be adjusted upward upon the expiration of contracts currently in force. We expect these rate increases to be in the mid-single digit range. Those shippers that were excessively aggressive in demanding price reductions when supply exceeded demand, will not be extended this courtesy. Instead, rate rollbacks will be unwound and then some. These shippers may find themselves in a difficult situation, as they may need to take outsized rate increases now, say 10% +/-, in order to continue receiving the capacity they require.”
This view was also expressed to us by a number of brokers in Atlanta this week. An executive from a top five broker told us, “The hurricanes changed the trajectory of our whole year and made our quarter. Where we struggled to get the shippers to be sympathetic to our margin compression, they started to lean on us over the past few weeks and were reminded of our value.”
Another large broker, doing over $100M in revenue said this was the best year ever in the company’s history, suggesting that brokers that operated purely in the spot market are clear winners and those with fixed forward rates have a chance to change those relationships.