Analysts View Truck Orders Dip as ‘Pause’ in Growing Market

This story appears in the May 14 print edition of Transport Topics.

The decline in truck orders — including the 55% drop last month compared with a year ago and declines in the previous three months — represents a “pause” in the fleet replenishment process rather than a sign of fundamental market weakness, several analysts and dealers have said.

ACT Research’s report that heavy-duty truck orders dropped to 17,200 in April from 38,094 a year earlier was the steepest one-month decline in orders since March 2007, Steve Tam, an ACT vice president, told Transport Topics on May 9.

Tam called the drop-off a “pause,” as did W.M. “Rusty” Rush, CEO of Rush Enterprises, and Jefferies & Co. analyst Stephen Volkmann.

“This is a pause, and all it does in my mind is elongate the cycle,” said Rush, whose company operates dealerships in 11 states. “I’m not going to get caught up in every month’s order intake.”

“We are not too concerned about order rates,” Tam said, because April 2011 was the highest level of order activity since March 2007. “Because build schedules are not full, there is no urgency on the part of fleets to hurry up and place that order.”

Two manufacturers also see an uneven market but also remain optimistic.

“We continue to see fluctuations from month to month, confirming our expectation of a choppy 2012. However, our market outlook for the entire year remains strong,” Ron Huibers, Volvo Trucks president of North American sales and marketing, told TT. “Customers continue to combat upward-trending diesel prices by replacing their aging fleets with more fuel-efficient, fully certified EPA 2010 models.”

“We do not believe that soft April orders are an indication of an impending downturn for the trucking industry,” said David Hames, general manager, marketing and strategy, for Daimler Trucks North America. “Several factors that could be shifting order patterns this year, including the orders pulled ahead in 2011 for tax benefits, the length of industry backlogs and short-term supply chain constraints.”

“The current order weakness is a pause before reacceleration in the coming months,” Volkmann said in a May 4 report. The overall heavy-duty truck fleet “is exceptionally old, and freight growth remains positive.”

Tam and Rush also based their long-term optimism on the need to replenish the truck fleet, which remains at near-record age levels.

While expressing confidence in a strong order cycle, Tam and Rush sounded some notes of caution, and other truck dealers also reported weakness.

“In general, things are improving,” Tam said, but he noted uneven growth in key indicators such as industrial production and light vehicle sales. “But these indicators still give truckers a reason to hesitate” before ordering.

“If we start seeing numbers that come in for two or three months between 10,000 and 15,000, yeah, we might have a problem in the cycle,” Rush said in an April 25 conference call.

Several dealers from around the country contacted by Transport Topics confirmed the slowdown, linking it to several factors, including high diesel prices.

“We saw an uptick at the beginning of the year, and then fuel went up and that pretty much shut the phones off,” said Tom Stassens, vice president and general manager at DSU Peterbilt and GMC Inc., which has four locations in Washington state and Oregon.

“I think there are two things going on,” said Kyle Treadway, president of Kenworth Sales Co., Salt Lake City, which has 20 locations in seven western states. “One is the accelerated depreciation that everybody took in 2011, and this pulled forward a lot of orders. The second is the high price of diesel. This has crimped the cash flow of many carriers.”

“We typically find how business is doing from our customers, and there’s a slowdown any time there’s a hike in fuel prices,” Treadway added.

Jim Lagana, general manager of McDevitt Trucks Inc., which operates five New England dealerships from Manchester, N.H., said there was “a complete lack of vocational activity” at McDevitt locations that rely on construction and homebuilding for “a very substantial part of our business.”

Dealers elsewhere are feeling the pinch, too.

“Most of the traffic we’ve seen over the last several months is buying for absolute necessity,” said Mike Parker, a salesman at Baltimore Freightliner in Maryland. “There’s no additional equipment being bought, and we won’t see any change until after the election.”

Fleets that normally buy in five-year cycles are replacing their equipment every six or seven years, Parker said.

Ramon Chavarria, general manager at Vanguard Truck Center, Tucson, Ariz., also mentioned buyer reluctance.

“It’s the upfront costs,” said Chavarria, whose dealership sells Volvo and Mack tractors, noting price increases on new tractors of about $8,000 each to bring the price to as much as $126,000.

Fleets “don’t want that type of commitment, even though there is an upswing [in freight volume]. They don’t want to put themselves out there . . . spending whatever profit they have.”

ACT expects to see orders climb back above 20,000 in the months ahead, Tam said, and they could approach 25,000, the same range as May through July last year.

“There is still a lot of pent-up demand,” Tam said. “We are facing an increasing scarcity of trucks to haul the freight for the economy we have.”

Volkmann’s report also said orders are being driven by the high-cost maintenance on older trucks.

On average, maintenance costs leap to 16 cents per mile when a truck passes 550,000 miles, compared with just 6 cents a mile at the 500,000 mile mark, Jefferies noted in his report.