As the economy goes, so goes the $682 billion trucking industry, and then some.
Trucks move roughly 70% of all freight tonnage in the U.S. — everything from consumable goods and housing materials to business equipment and chemicals.
"Trucking at its core is a classic case of supply and demand," said Deutsche Bank analyst Robert Salmon.
Economic and freight growth typically move at the same pace. But freight growth has outpaced the economy in the current recovery, says economist Noel Perry of freight transportation research firm FTR.
The growth is largely due to a "strong recovery" in manufacturing, growing exports and inventory buildups.
But it has been a long, bumpy road from the start of the downturn. Truckers began to see business tail off in the second half of 2006 as the housing market soured. Things went downhill from there, with many top fleets seeing earnings and revenue slow or decline over the next three to four years.
Freight volumes rebounded in late 2012 as the economy improved. But demand growth hasn't tracked higher on a steady curve.
Demand flattened in mid-2013 as rising interest rates nicked the housing market's recovery. Fewer home sales and refinanced mortgages mean less demand for lumber, appliances and countless other building and remodeling goods. Gross domestic product growth slowed in 2013 to 1.9%, down from 2.8% in 2012.
But freight volume grew more than the economy did. Demand improved again later in 2013 as the overall economy picked up, but it took a hit when fierce winter storms slowed shoppers and truck traffic.
"It's been a fit-and-start recovery," said Eric Starks, FTR's president. "Some parts of the economy were heating up and other parts slowing down. Everybody was not in lock step.
With a particularly harsh winter now gone, the trucking recovery seems on a smoother course.
"We've seen a significant rebound in overall trucking freight volumes," Salmon said. "After the weather started to clear, there was a lot of pent-up demand for movement of freight by retailers and manufacturers.
Meanwhile, import volumes at West Coast ports have recently increased. Volume matters to truckers since West Coast ports handle about 70% of retailers' container traffic, Salmon says.
"When you see that pick up, you see shipments move through the nation's supply chain," he said, adding that there's typically a one-month lag for truckers.
Port volumes at Los Angeles, Long Beach and Oakland were up 11.5% in April vs. the earlier year and up 20% month-to-month, Salmon says. Monthly growth was higher than the usual seasonality-related upticks, he added.
Werner Enterprises (WERN) said that its daily loads in April were either the best or second best in six years.
Old Dominion Freight Line (ODFL) was hit hard by the severe winter, but it still logged revenue growth of 15.2% in the first quarter vs. a year earlier and a per-share earnings gain of 13%. "Our momentum has continued thus far into April," CEO David Congdon said in the firm's April 24 first-quarter report.
Freight trucking is generally a low-margin business. Many well-managed, publicly traded companies can squeeze out profit margins above the 5% industry average.
One critical factor is capacity, which fleets have judiciously trimmed to keep supply and demand in balance.
"We've done the exact same thing airlines did," said Bob Costello, chief economist with the American Trucking Associations (ATA), a federation of multiple trucking trade groups. "We're operating about 8% fewer trucks than at the end of 2007, prior to the recession.
Truckers with IBD's highest earnings-per-share rankings include Old Dominion, Saia (SAIA), Quality Distribution (QLTY) and Knight Transportation (KNX).
In the face of improving business fundamentals, truckers are starting to add capacity again.
"(Trucking companies) will purchase trucks roughly a half year before they need them in anticipation of what volume will be," Salmon said.
The North American trucking industry peaked at 360,000 newly purchased large trucks in 2006, Perry says. FTR expects 290,000 new truck buys this year, up from 265,000 last year. Truckers are "buying up a little bit of growth. They would be buying more if they could find drivers," he said, pointing out the industry's perennial lack of skilled labor.
Old Dominion recently increased its 2014 capital budget by an extra $25 million for tractors and trailers to $1.88 million, which also includes some related equipment.
The bigger trucking companies do a lot of contract freight work with Wal-Mart (WMT), Target (TGT), Home Depot (HD), Procter & Gamble (PG) and their like, Costello says.
Contract rates being negotiated now are up 5% over last year, says Perry. Spot rates were up 15% in April, though down a bit from March.
Expanding Customer Base
Not only are rates improving, but the customer base may be expanding as well.
"Kraft Foods (KRFT) just got rid of its private fleet. So it will go entirely to 'for-hire' trucks," Costello said.
Wal-Mart runs its own huge fleet of trucks but also hires "tons of companies" to help get all its goods to distribution centers and stores, he says.
The retail giant may be hurting from slower sales and profits, but it is still adding more stores, all of which need products to fill shelves. And current stores constantly need replenishing.
Most of the big names in trucking haul for Wal-Mart, Costello says, Swift Transportation (SWFT) being the largest. Swift is the biggest trucking company in the U.S. by fleet size. Winter storms played havoc on its first-quarter results; earnings fell 43% from a year ago.
Swift focuses heavily on what in industry parlance is called full truckloads, or simply truckloads, as opposed to less-than-truckloads, or LTLs.
As the name implies, full-truckload carriers move full loads — for one customer. The truck goes from one point to another in long or short hauls. Werner, Knight, Heartland Express (HTLD) and J.B. Hunt (JBHT) are all full-load carriers.
J.B. Hunt is also the biggest player in intermodal transport. Intermodal involves moving a customer's load from a shipping container to a truck at a port, rail terminal or other location for further transport.
Another subsector, tanker trucks, is doing well hauling sand, water and chemicals in and out of fracking sites, Costello says.
Tanker-truck operator Quality Distribution runs the largest chemical bulk logistics network in North America and also provides transportation to unconventional oil and gas sites, including the Bakken Shale in North Dakota and Eagle Ford Shale in Texas.
LTL carriers collect partial loads from multiple shippers and consolidate them on one vehicle. The consolidated loads are moved to distribution terminals, where they are sorted and placed on other trucks for various final destinations.
LTL carriers build and manage terminals and networks of trucks. The LTL sector is smaller than the full-truckload sector, but yields are higher.
"Cost per mile is probably comparable to the truckload business. But it's a business with better operating margins in general," said David Campbell, analyst with Thompson, Davis & Co.
Old Dominion is the largest LTL carrier. Con-way (CNW), ArcBest (ARCB) and Saia are also big LTL carriers.
"Full truckloads are geared more to retail than manufacturing (60%-40% split)," Salmon said. "LTL is more geared to manufacturing than retail (60-40), with equipment and parts a big driver of overall volumes.
Fuel costs have been stable for the last year and a half, says analyst Brad Delco of Stephens Inc.
To save on long-haul fuel costs, shippers have been turning more to intermodal rail-and-truck combinations over the last decade, Delco says.
For portions of the trip, freight is carried by rail, which has lower fuel costs than trucks. Using rail shortens the distance that the trucks must travel.
The driver shortage isn't as bad for LTL carriers as for full-truckload companies. Their drivers typically spend less time on the road and get to spend nights at home.
Things That They Carry
Of all the many things that trucks carry, food is the biggest piece of the pie. Dry foods comprise 21% of the total for tractor-trailers and refrigerated foods 8%, FTR says.
Food volumes don't change much from year to year, averaging 1.5% annual volume growth, says Starks.
"It is less cyclical than some other commodities, such as housing-related crushed stone, lumber, roofing and wallboard," he said.
Housing and automotive are two of the biggest drivers of overall truck volume, Salmon says. Both need trucks to carry heavy freight.
Every new home going up creates 10 to 20 truckloads of freight, according to industry dictum. Housing data has bumped up and down throughout the winter and spring, with new home starts slowing. But forecasts expect increases throughout the year.
In the auto market, it's not just about finished cars. Truckers also haul a large share of the parts and materials, such as steel, rubber and motors, that go into making them.
Demand in "the automotive sector has been relatively healthy," Starks said.
Down The Road
The economy is seen as growing faster this year than last, at about a 2.5% clip. ATA expects truck freight volumes to gain steam through 2014, buoyed by an improving housing market and upticks in manufacturing and energy production. It sees more robust gains in 2015.
FTR forecasts trucking loads to increase 3.9% this year, driving a 9.8% jump in revenue. The trend compares with last year's 4.8% load gain and 3.9% revenue bump.
Stephens expects truckload rates to rise more than 3% this year. For LTLs, it expects yield, which in that sector is determined by pricing, weight and fuel, to go up 3% to 3.5%.
Trucking companies "are all very economically sensitive, and right now the economy feels a little better," said analyst Delco. "So they're all feeling some strength right now."