Many Trucking Shares Gain During 2008 Despite Ongoing Industry Woes

By Rip Watson, Senior Reporter

This story appears in the June 30 print edition of Transport Topics.

Despite trucking’s struggles to overcome record fuel prices, weak demand and overcapacity, many carriers’ stocks have gained thus far in 2008.

Share prices of 27 of 36 publicly traded U.S. fleets rose between January and mid-June, based on a Transport Topics review of their performance. Investors either looking for bargains or anticipating a rebound pushed Standard & Poor’s Trucking Index up 31% by midyear. The S&P Trucking Index comprises 11 large companies, including YRC Worldwide.

Over the same period, the benchmark S&P 500 index declined 4.4%.

“Most people would be surprised to learn that trucking stocks have done so well, considering how high fuel prices have gotten and how weak demand continues to be,” said Donald Broughton, an Avondale Partners analyst. “In the past two years, valuations of some companies had fallen 25% to 50%. The market now is trying to predict a recovery.’’

Among the strongest performers so far in 2008 are J.B. Hunt Transport Services, Arkansas Best Corp., Ryder System and Landstar System. Shares of those companies advanced at least 30%.

The gain in trucking shares occurred at a time when the skyrocketing fuel costs and overcapacity drove down first-quarter profits at nearly all trucking companies from a year earlier.

“Performance of the companies and the stocks are two different things,” Robert W. Baird analyst Jon Langenfeld said. “Investors in stocks are looking six to 12 months ahead.”

Despite the 2008 gains, however, from a longer-term view, trucking share performance in the first half doesn’t look quite as good.

Stock values for three of every four U.S. trucking companies actually are behind June 2007 levels. The S&P Trucking Index showed the same trend: It was 3.7% less on June 5 this year than on the same date last year.

By comparison, however, the Dow Jones Transportation Index, which includes all types of freight and passenger transportation companies, rose 4% between June 5, 2007, and June 5, 2008. The annual percentage gain for the Dow Jones Transportation Index during 2008 was 20%, nearly matching the trucking index.

“The trucking stocks are up for the most part [for 2008], even though freight stinks and fuel prices continue to be punitive,” said analyst Thom Albrecht of Stephens Inc. “Recent earnings aren’t a deterrent. Investors now are looking ahead to the recovery.”

But when that recovery will happen and whether or not stock prices will keep rising are questions that remain.

Merrill Lynch analyst Ken Hoexter said the value of trucking stocks is too high now, in light of fuel prices and the run-up in shares so far this year.

That sentiment was shared by UBS analyst Rick Paterson, who said in an investor note that this year’s rally was “driven more by hope than anything else, and invariably [hopes are] dashed by the hard reality of having to report earnings every 13 weeks.”

He said he believes supply and demand may remain out of balance until the fourth quarter.

Paterson said truckload carriers such as Werner Enterprises and Heartland Express “are strong stocks, if you can get the cyclical timing right. The trouble is that you’re competing against 500 other hedge funds that are trying to do the same thing.”

Investors could push prices up during the balance of this year in anticipation that capacity will continue to evaporate at a record pace, opening the door for sharp increases in rates — and eventually profits, Albrecht said.

He said he believes as many as six carriers with more than 1,000 trucks could fail in the current economic environment, compared with just one during the latest recession and that capacity could drop up to 10% in the coming months. The largest company that has failed so far this year is Jevic Transportation, which operated 1,100 tractors and was No. 71 on the Transport Topics 100 list of the largest for-hire companies in the United States and Canada.

The result will be record price increases of 10% or more, compared with 6% to 7% during 2004 and 2005, Albrecht said.

In addition to capacity reductions, stock prices could benefit later this year by a continued rise in manufacturing, Broughton said. The weaker U.S. dollar has boosted domestic manufacturing and made exports cheaper to the point that, as of mid-June, unfilled orders for manufactured goods were at an all-time high, Broughton noted.

While analysts differ on second-half stock performance, they agree fuel prices will continue to be a dominating factor. The Energy Information Administration’s latest short-term outlook predicted diesel will remain close to $4.80 a gallon until September.

“Fuel is finally having an impact on both the economy and on transport providers’ ability to automatically pass through fuel surcharges” as they have done in the past, Ed Wolfe, president of Wolfe Research, said in an investor note.

“If 20 truckers are calling [customers] each day to offer capacity at reduced rates and surcharges, it’s difficult to enforce fuel surcharges,” he wrote.

Among all transportation companies, the gap is widest for truckload carriers, spending 41% of revenue on diesel and getting back only 32% of that revenue in the fuel surcharges collected, he said.

“We expect continued volatility,” Langenfeld said. “The freight environment will remain difficult through 2008. It comes down to macroeconomic trends — fuel prices and whether the consumer will be in a healthy condition. The pickup in demand that we are seeing now is temporary; it’s the outcome of removing some excess capacity.” Langenfeld sees greater potential for stocks next year.

“Investors will begin to focus on the earnings power of the companies looking forward into 2009 and 2010,” he said.

Langenfeld estimated that truckers’ profit growth in one of those years could top the 30% mark reached during past recoveries because of the potential for rate increases. Broughton said that whenever the broader market turns around, there is one important change since the latest economic recovery: The number of investment choices has shrunk.

Companies such as Swift Transportation and U.S. Xpress Enterprises have been taken private. Companies such as Smithway Motor Xpress have been acquired and others have folded, such as Consolidated Freightways, which went out of business over the Labor Day weekend in 2002.

Another difference in the current investment market is the variation in expectations and performance among truckload, less-than-truckload and non-asset-based companies, such as C.H. Robinson Worldwide.

Companies that don’t own their own assets fared better in the first half and should continue to thrive because they don’t have direct exposure to fuel cost swings,  Langenfeld said.

He and other analysts expect shares of J.B. Hunt Transport Services Inc. to remain strong because its intermodal profit continues to grow.

Broughton said a recovery isn’t likely to be as strong for LTL carriers because less capacity is being taken out of that market, when compared with truckload companies. The market also has changed with the acquisition of LTL capacity by package-industry giants UPS Inc. and FedEx Corp., he said.

At an investment conference last month, Myron “Mike” Shevell, chief executive officer of New England Motor Freight, said a 20% reduction in LTL capacity will be needed to restore adequate profitability in that sector.

Albrecht said truckload carriers should have the advantage of a faster recovery than the LTL sector because of the capacity reductions and anticipated price increases. Truckload carriers also haul staples such as food and benefit when retail sales improve because they supply those companies.