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BusinessCompany earningsFinanceIntermodalNewsTrucking

Trucking rates may be moving toward a ‘melt-up’: Majors

A report released Wednesday by Susquehanna Financial Group would be music to the ears of truck drivers: Rates may have a “melt-up.”

The report by analyst Bascome Majors expressed enough confidence in a coming upturn in trucking economics that it raised its ratings from neutral to positive for four companies: C.H. Robinson (NASDAQ: CHRW), Echo Global Logistics (NASDAQ: ECHO), Landstar (NASDAQ: LSTR) and Werner (NASDAQ: WERN).

“Truckload’s supply-side overhang on asset-based pricing and margins looks like the primary problem, as underlying volume grew (Susquehanna’s italics) through 4Q and spot pricing showed more than seasonal m/m tightening despite falling y/y for 16 straight months,” the report said. 

Majors noted that both the economy and truckload volumes are on the rise, while supply is expected to shrink 1% this coming year compared to a 4% increase in both 2018 and 2019. “Seasonal-plus patterns (are) returning to volatile real-time rates.” 

The end result? “We see the risk of a ‘melt-up’ in spot rates in 2020 as far greater than a meltdown,” the report said.

With that, Susquehanna sees both stock price multiples and share prices following, resulting in the four companies that had a neutral rating being boosted to the positive category. But at the same time, Susquehanna left its positive rating on Schneider (NASDAQ: SNDR) and Knight-Swift (NYSE: KNX)

The report spells out all the carnage that has led to consistently poor quarterly results for the trucking sector: contract rates in November down 3.5% y/y based on TruckloadRate.com data after declines the two prior months of 3.7% and 2.5%, respectively, and spot rates that have declined for 16 straight months. 

But the Susquehanna report is more positive on the direction of those rates, projecting that the decline will “moderate.” Majors looked at “evidence of tightening rates to close out 2019, better than the usual seasonal improvement … and just a few points behind the ELD-inflated upside trend of December 2017.” 

“We expect dry van spot rate declines to moderate from high single digits to low- to mid-single digits in early 2020 before inflecting favorably with a month or two of rate increases during spring bid season,” the report said. “In short, a supply-side shock (weather or consistent capacity reductions) has a real potential to drive a ‘melt-up’ this year.”

Majors’ report cites the well-known numbers on how much capacity has increased. Federal Motor Carrier Safety Administration data shows that the Class 8 tractor count has grown for 13 consecutive months. The data is up for both big and smaller fleets.

But it’s coming to an end, the report said. “Most carriers expect a slow bleed of this extra capacity as we move through 1H20 aided by depressed rates, increasing insurance costs and new regulations that are expected to limit supply,” the report said. Among those regulations are the Drug & Alcohol Clearinghouse, AB5 (though it’s on the shelf for now) and hair-follicle testing. The report cites various numbers showing that capacity is already starting to slide, including the enormous drop in new Class 8 orders, down 45% y/y in the fourth quarter through November. “As rates have cooled, net orders and backlogs have followed,” the report said.

The economics behind the upgrade in the C.H. Robinson and Echo Global ratings are fueled by what Majors sees as a moderation in the decline in spot rates while contract rates remain lower. “Contract rates have continued to outpace the spot market for the 16th straight month,” with contract rates down 3.8% y/y while spot rates are down 13.3% during the same period, the report said.  

But the report adds that “our recent conversations with shippers and carriers point toward a tightening spot market, aided by capacity-rationalizing events,” and then repeats the same factors as in truckload: clearinghouse, high insurance costs and hair-follicle testing. That sets up a situation for brokers in which spot rate declines in the first part of 2020 slow their pace and could turn positive “while contract rates continue their y/y declines and continue to track subseasonal as we move closer to 2020 bid season,” the report said.

Susquehanna’s report was not bullish on intermodal, though it did not make any cuts in the rating for Hub Group (NASDAQ: HUBG), which held at positive, or for J.B. Hunt (NASDAQ: JBHT), which held at neutral. However, Susquehanna’s earnings estimate for Hunt was reduced 4% “on downside margin messaging for both intermodal and brokerage/ICS.” Hub Group had its estimate increased 12% on the results of recent cost-savings operations.

Although the long-term outlook is positive, most of the changes Susquehanna made in earnings forecasts were in the red. For example, for the fourth quarter of 2019, Knight-Swift’s earnings per share forecast was reduced 18%, Werner’s was cut 16% and Schneider took a 10% haircut. But the forecast was flat for Landstar and down just 4% for Robinson. (Knight-Swift already has projected lower earnings for the quarter.) 

And even with talk of a rates melt-up, it was mostly red in the forecast changes in EPS for all of 2020, though far less than the 4Q 2019 projections. Werner was down 7%, Knight-Swift was down 11%, Hunt was cut 4% and Echo was down 3%. Hub Group saw a 12% increase.

Susquehanna is bearish enough that it said it is still below Wall Street consensus on most big companies. It’s 9% less for Echo, 9% for Werner, 5% for both Knight-Swift and Robinson and 4% for Hunt. But Majors noted, “We expect street estimates to drift downward as we move closer to company earnings.” 

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John Kingston

John has an almost 40-year career covering commodities, most of the time at S&P Global Platts. He created the Dated Brent benchmark, now the world’s most important crude oil marker. He was Director of Oil, Director of News, the editor in chief of Platts Oilgram News and the “talking head” for Platts on numerous media outlets, including CNBC, Fox Business and Canada’s BNN. He covered metals before joining Platts and then spent a year running Platts’ metals business as well. He was awarded the International Association of Energy Economics Award for Excellence in Written Journalism in 2015. In 2010, he won two Corporate Achievement Awards from McGraw-Hill, an extremely rare accomplishment, one for steering coverage of the BP Deepwater Horizon disaster and the other for the launch of a public affairs television show, Platts Energy Week.

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  1. HAPPY CIVIL RIGHTS DAY !!!

    WORKERS RIGHTS !

    Speaking of which : Right to fair wages for work performed !!!

    Quote:

    “Labor rights or workers’ rights are a group of legal and human rights relating to labor relations between workers and employers, codified in national and international labor and employment law. In general, these rights influence working conditions in relations of employment. One of the most central is the right to freedom of association, otherwise known as the right to organize. Workers organized in trade unions exercise the right to collective bargaining to improve working conditions.”

    REQUOTE :

    ” In general, these rights influence working conditions in relations of employment. ”

    UNITE & ORGANIZE ! IT’S YOUR RIGHT !

    Quote:

    “Article 23
    Everyone has the right to work, to free choice of employment, to just and favorable conditions of work and to protection against unemployment.

    -Everyone, without any discrimination, has the right to equal pay for equal work.

    -Everyone who works has the right to just and favorable remuneration ensuring for himself and his family an existence worthy of human dignity, and supplemented, if necessary, by other means of social protection.

    -Everyone has the right to form and to join trade unions for the protection of his/her interests”

    REQUOTE !

    “-Everyone who works has the right to just and favorable remuneration ensuring for himself and his family an existence worthy of human dignity, and supplemented, if necessary, by other means of social protection.”

    Article 24
    Everyone has the right to rest and leisure, including reasonable limitation of working hours and periodic holidays with pay.

    “Hour Limits
    Many labor movement campaigns have to do with limiting hours in the work place. 19th century labor movements campaigned for an Eight-hour day. Worker advocacy groups have also sought to limit work hours, making a working week of 40 hours or less standard in many countries.

    A 35-hour workweek was established in France in 2000, although this standard has been considerably weakened since then. Workers may agree with employers to work for longer, but the extra hours are payable overtime. In the European Union the working week is limited to a maximum of 48 hours including overtime”

    HAPPY CIVIL RIGHTS DAY !!!

    UNITE & ORGANIZE ! IT’S YOUR RIGHT !

    1. Quote Secretary Pompeo March 13 2019

      U.S. Department of State

      2018 Country Reports on Human Rights Practices

      At 43 seconds into broadcast of 2019 report :

      “The State Department through this report PUT THE WORLD ON NOTICE that we will expose the violation of human rights WHEREVER THEY OCCUR !

      WE HAVE TOLD THOSE WHO DISGRACE THE CONCEPT OF HUMAN DIGNITY THEY WILL PAY A PRICE ! THAT THEIR ABUSES WILL BE METICULOUSLY DOCUMENTED AND THEN PUBLISIZED !

      Quote :

      “The Universal Declaration was formally adopted in 1948 – in the aftermath of Second World War and is often seen as the beginning of the modern-day human rights movement. It was built around the idea that all human beings have a certain dignity and worth.

      Dignity is the right of a person to be valued and respected for their own sake, and to be treated ethically. It is of significance in morality, ethics, law and politics as an extension of the Enlightenment-era concepts of inherent, inalienable rights.

      By the time the International Covenant on Civil and Political Rights (ICCPR) was conceived a few decades later, it was clear that this concept was the foundation of human rights. So much so, it was again in the preamble, adding that: “recognising that these rights derive from the inherent dignity of the human person.”

      What is Dignity?
      Dignity is the quality of being honourable, noble, excellent or worthy. With a human regarded as the most supreme living creature, dignity, in its appealing sense, is better referred to as human dignity. It is the conceptual basis for the formulation and execution of human rights and is neither granted by the society nor can it be legitimately granted by the society. An imperative implication of human dignity is that every human being should be regarded as a very invaluable member of the community with a uniquely free expression of their right to life, integrated bodily attributes and their spiritual nature (Chapman, Audrey R, 2010).”

      “The English word dignity comes from the Latin word, dignitas, which means “worthiness.” Dignity implies that each person is worthy of honor and respect for who they are, not just for what they can do.  In other words, human dignity cannot be earned and cannot be taken away.  

       As the Universal Declaration of Human Rights puts it, “recognition of the inherent dignity…of all members of the human family is the foundation of freedom, justice and peace in the world.”

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