Why new truck buyers need to watch the used market

Paccar used truck center

If residual value is not there, some fleets may alter purchasing plans going forward

Many fleets may be ignoring the used truck market, but that could be a mistake when it comes to the financial bottom line. The fact is pricing in the used market affects the value of the fleet equipment that will become tomorrow’s used trucks, and that could alter fleet purchasing plans for new vehicles.

In 2008 through 2010, an oversupply of equipment hit the market following several years of record production, including a high of 284,000 units built in 2006, and helped drive down prices significantly. The current slide in prices is not as severe – that previous downturn was also affected by the Great Recession – but it bears watching following strong production numbers of the past two years and another year where production is shaping up to be solid.

“A very large volume of used trucks sold in the business are 3, 4, 5 or 6 years old,” Steve Clough, president of Arrow Truck Sales, said on Tuesday on a conference call hosted by Stifel Financial Group. “What happened 3 years ago, 4 years ago, 5 years ago, drives the supply of [current used trucks].”

Prices of used trucks jumped in recent years, Clough said, because there was a low supply following years of low production rates of just 151,000 in 2007, followed by years of 133,000, 95,000 and 107,000 in 2010. Clough also said that Navistar’s issues with its MaxxForce engine, which has cost the company hundreds of millions of dollars in warranty claims and write-downs, also contributed to the price rise as customers shied away from those trucks, removing part of the inventory.

We believe that as used truck prices dropped from record highs in 2015 and 2016, we saw a direct impact on new truck demand in 2016 that has continued somewhat into 2017.
— Steve Tam, vice president-commercial vehicle sector for ACT Research

The MaxxForce issues should be clearing up, though, as Navistar offers new engine options that meet modern emissions requirements. The company also recently said it would export thousands of MaxxForce 13-liter-equipped trucks to foreign markets and took a $60-million charge on its second-quarter financials.

“When you have such extremely low supplies coming in and demand escalating, that really pushed up used truck values during that time frame,” Clough said.

Clough anticipates a used truck supply of 177,000 units this year, down from 2016’s 193,000. The recent high was in 2015 when there were 249,000 Class 8 trucks available.

Clough also noted that the number of trucks from the higher production years of 2012-2014 (600,000 units total) that are now on the used market is one of the reasons prices have dropped recently. That can have an impact on fleet decisions in terms of purchasing new trucks and trading in older ones.

“We believe that as used truck prices dropped from record highs in 2015 and 2016, we saw a direct impact on new truck demand in 2016 that has continued somewhat into 2017,” Steve Tam, vice president-commercial vehicle sector for ACT Research, told FreightWaves. “As truckers were upside down (owed more than their trucks were worth) or they were not worth as much as they had planned at trade, they extended their normal trade cycle in hopes of values coming back into alignment. It is one of our hypotheses that this ‘correction’ has contributed to the better-than-expected demand in 2017.”

A report on Trucks.com said that May’s used truck market dropped for the third straight month, according to Price Digests’ Price Stability Index. The Index was 96.40 in May, down from 97.54 in April. Trucks.com noted that a reading of 99 to 100 is considered a stable market.

The firm did note that prices were up slightly in May compared to April due to smaller inventories.

Trucks on the auction market also took a hit, due in part to a 75% increase in inventory. “Volume and pricing of our benchmark model decreased notably in May,” wrote Chris Vasser, a J.D. Power Valuation Service analyst in a recent blog posting. “Pricing of this model was 10.1% lower month-over-month on average, which is a major change from the flat pricing seen in the first quarter and April.

Model-year 2011 vehicles dropped 13.4% in value; 2012s were down 5.2% and 2013 models fell 11.6%.

“May’s disappointing results increased monthly depreciation averages,” Vasser wrote. “In the first five months of the year, trucks of model-year 2011 averaged 3.1% depreciation per month, trucks of model-year 2012 depreciated 1.1% per month, and trucks of model-year 2013 essentially lost no value in this period.”

Conversely, new truck sales have remained robust. Despite a 30% drop in May compared to April, Class 8 orders remain well above the year-ago average. ACT said that May’s orders were 16,800 units and many in the industry are still forecasting truck orders in the range of 200,000 to 228,000.

Clough sees production need to fulfill replacement volumes at 185,000 units per year. Actual production numbers have been above that number since 2012. 

“The fact that new truck retail sales have been above that replacement demand for all these years … the tendency would be to have prices drop a little bit more over the coming years,” he says. “But it is possible the economy could grow enough that we could see volumes grow, tonnage grow, that you could see prices firm, but not likely next year.”

The uneven performance of the economy is also impacting used truck sales right now, however there are enough positive signs that buyers remain engaged.

“Predictability is important,” Clough said. “It’s been more comfortable [for used truck buyers] to spend their savings getting another truck.”

Spot rates and tonnage have seen starts and stops, but overall have remained relatively consistent. In fact, national van spot rates have been climbing steadily this year and are now at a 2-year high of $1.79 per mile, according to DAT.

The American Trucking Associations’ advanced seasonally adjusted (SA) For-Hire Truck Tonnage Index increased 6.5% in May, suggesting there is plenty of freight currently to keep truck buyers engaged. Compared with May 2016, the SA index increased 4.8%, which was the largest year-over-year gain since November.

“After three straight declines totaling 2.6%, truck tonnage snapped back in May,” said Bob Costello, ATA chief economist. “One month does not make a trend, but the nice gain last month fits more with the anecdotal reports I’ve been hearing from fleets, at least more so than three straight months of decreases. Despite the robust jump in May, I still expect moderate growth going forward as key sectors of the economy continue to improve slowly.”

“If there is more product to haul, that’s going to drive demand for trucks, therefore people who own trucks look at that as their revenue opportunity,” Clough said. “The last 12 months or so, there has been an evening out [of spot rates] … so the used truck buyers have had more predictable revenue and if it’s more predictable … they are more comfortable in saving and spending toward another truck.

“The last several months that [spot rate] line has been trending up … and if that continues, that would create more confidence in the used truck buyer [to buy more trucks],” Clough adds.

Tam concurred that the economy is still the biggest driver of truck sales – both new and used.

“The strong production in 2014 and 2015 does have some fleets, especially the larger ones, evaluating their purchase plans for new equipment in future periods,” Tam noted. “However, from the conversations that we have had, I can’t say that any fleets have made a concrete decision to alter their buying plans as a result of what they think the used market will be doing. While that is one consideration, freight (and subsequently profitability) and business expectations are the primary drivers of the buy decision.

“What I can say is that the equity of used equipment is essentially cash on the barrelhead,” Tam added. “The more a fleet has, the more likely they are willing to purchase or purchase more. Lower equity has the ability to impact new purchasing conversely. Again, it is not the sole consideration, but can influence the decision.”