This year could be an “inflection point” for trucking and truck pricing, particularly if the economy gains speed just as new driver work rules constrain truckload capacity later in 2013, investment research analysts from Stephens said in an interview.
If capacity tightens significantly, “over the next two or three years, truckers will have the opportunity to get the pricing they need to have two or three great years,” said Brad Delco, a research analyst covering the truckload and less-than-truckload sectors.
In addition to regulatory pressures, truckers face inflationary equipment costs, Delco noted. The price of new and used heavy-duty tractors has risen substantially since 2006, boosted by new federal diesel engine emissions requirements.
From 2014 to 2016, Delco said, many carriers finally will be forced to replace aging tractors purchased before the recession. “As we get there, we’ll be hitting the 10-year anniversary of when truck sales were the highest in history,” he said.
“There’s a lot of capacity that’s going to have to be replaced,” he said. In the third quarter, The Journal of Commerce Truckload Capacity Index hit a four-year low point of 83.7, indicating capacity was still down 16 percent from 2006.
“The cost of the equipment is so much higher it’s prohibiting some companies from expanding their fleet,” he said. Smaller companies, in particular, will feel more pressure. “You're going to see a very dramatic separation between the haves and the have-nots.”
Little Rock, Ark.-based Stephens is expanding its transportation coverage, transferring senior analyst Jack Waldo to investment banking and moving Delco to the trucking desk, where he works with Justin Long and Jack Atkins.
Long was promoted to research analyst and covers railroads and transportation suppliers. Research analyst Atkins covers air freight and logistics, expanding the number of publicly owned logistics companies covered by the research firm.
“We’re expanding into new verticals, and a lot of that will come from looking at more companies on the transportation supplier side,” Delco said. “We see potential on the rail supplier side as well as on the trucking industry supplier side.”
With housing starts and industrial production rising late last year, and a surge in the spot truck market in January that began in November and December, the analyst said transport operators are a bit more upbeat than might be expected after 2012.
“I think there is a sense of optimism since the year started,” Delco said. “We’re hearing less commentary about concerns, and people are relieved they’re seeing fairly stable trends at this point,” despite ongoing concerns about the federal fiscal impasse.
For the rail industry, “the fundamentals remain pretty strong,” Long said. “There have been significants headwinds on the coal front, but this year there will be much easier year-over-year comparisons, and we expect the coal decline will moderate some.”
Railroads continue to get price increases “where inflation is tracking,” he said. Air freight may accelerate in the second half of the year, “but it’s too early to make that call,” Atkins said. “We thought there would be improvement in the second half of 2012 as well.”
Trucking operators did well in the fourth quarter “despite a challenging operating environment,” he said. In the first quarter, motor carriers will face tough comparisons with the year-ago quarter, when the weather gave freight a boost.
Swift Transportation, the largest U.S. truckload carrier, increased profit 27.3 percent in the fourth quarter and 26.5 percent for the full year, while revenue rose only 7.2 percent and 4.8 percent in the same periods, despite a drop in tractor count.
“There should be easier comps on the back half of the year,” Delco said, which is when many observers expect the pace of economic growth to pick up, and also when new truck driver hours-of-service rules, if unchanged, could squeeze capacity.
Like many observers, Delco sees post-recession trucking companies focused more on bottom-line profit than top-line revenue or market share. Carriers are rebuilding profits and reinvesting in their operations while cautiously expanding.
In a slow but steady recovery, “you could see an effort to essentially right-size the capacity or the truck count to get greater utilization out of a more expensive piece of equipment,” he said “As a result, you get better margins or return on investment.”
Werner Enterprises, the third-largest truckload operator, and Swift “have stayed very disciplined in maintaining their fleet count, and it’s paying dividends,” Delco said. Other carriers, such as Celadon Trucking, have expanded by buying “distressed assets.”
“Over the last several years, a lot of our peers have suggested we’re getting closer and closer to the point of equilibrium” between carrier supply and shipper demand, he said. If current trends hold up in 2013, “We’re another year closer to that point happening.”