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The Trucking Industry

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1The Trucking Industry Empty The Trucking Industry Tue Nov 15, 2016 8:46 am



Trucking is an interesting sector for two reasons, one is of course as an investment, while the other is as an indication of the economic health of the nation. More demand for trucking means that there is more demand for goods which should increase GDP and consequently corporate revenues and profits.

  • Trucking data hasn’t been stellar year to date which questions the strength of Q3 economic growth.
  • No trend is clear yet, however the trucking index is an important indicator.
  • Trucking stocks aren’t tempting given the forecasted growth and inherent risks.

Nearly 70% of the tonnage moved in the U.S. is transported by truck, so it is very important to look at the industry as an indicator for the general economy. Trucking in the U.S. collected $726.4 billion in revenues during 2015 and hauled nearly 10.5 billion tons of freight.Not surprisingly, lately the industry is in a situation very similar to the economy. In one word, volatile.The seasonally adjusted American Trucking Association (ATA) tonnage index shows long term growth but has been choppy throughout 2016.
Truck tonnage index.:

This choppiness eliminated growth for the index year to date which is a strong warning sign for the economy. On top of no growth, the monthly spikes indicate the possibility that the last quarterly GDP data isn’t that sustainable given the recent decline in trucking.

The fact that the trucking index has grown 32% since 2000 while the economy has grown 35% in real dollars reiterates the importance of the index. As products have to be shipped first and then sold, the trucking index can help in predicting economic growth. However, the current volatility makes it difficult to use as no trend is clear.

The ATA forecasts the trucking industry to grow 35% in the next 10 years with annual truckload volumes growing 2% year over year up to 2022, and 1.6% up to 2027. Less-than-truckload volume is expected to grow 3% year over year through 2022, and 2.8% from 2023 to 2027. Private carrier volumes are expected grow 2.3% annually until 2022, and 2.1% each year over the next five years.

Such forecasts are made under the assumption that the economy will develop linearly. Therefore, we have to expect shocks to hit the industry in the next 10 years which will make the above expectations more volatile. Volatility in revenues leads to volatility in prices and cheap buying opportunities.

Unfortunately, there is no trucking ETF to invest in, so the only option is to invest in specialized individual trucking companies. Therefore, I’ve selected five trucking stocks to use in an analysis of the sector. These are: Ryder System Inc (NYSE: R), JB Hunt Transport Services Inc (NYSE: JBHT), Amerco Inc. (NYSE: UHAL), Landstar System Inc (NYSE: LSTR) and Old Dominion Freight Lines Inc (NYSE: ODFL).

An analysis of their revenues confirms the relation to economic growth. Revenues were severely down during the Great Recession but have enjoyed a smooth recovery since. Year to date revenue growth has stalled which could be a temporary issue or an indication of a negative economic trend.
Trucking revenues in millions of $ in the last 10 years:

However, earnings per share increased disproportionately, with the exception of R.
Earnings per share in the last 10 years:

Alongside demand stagnation, year to date earnings have also stabilized. In order to see if trucking could be a good investment, we have to take a look at valuations and debt.
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A quick look at the valuations tells us that the sector isn’t cheap, especially given that revenues and EPS have stabilized. Companies with lower PE ratios have very stretched balance sheets which will lead to trouble if there is an economic slowdown or higher interest rates. Dividends are also relatively low.

Trucking companies in general have strongly outperformed the S&P 500 in the last 5 years growing at 59%, while all of the companies already discussed in this article have grown more.
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Given their sensitivity to the economy, current stagnation, equal to market valuations, future expected growth similar to the economy, and inherent economic slowdown risk, rebalancing away from trucking seems like a good thing to do, especially after the huge outperformance in the last few years.

A big warning comes from the extreme earnings growth that some companies have enjoyed during the last 5 years as a result of the growing economy and low interest rates. If one of those factors changes, we could see tighter margins and a return to pre-boom values. As future expected growth is around 2%, the risk reward situation isn’t tempting.


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