Morgan Stanley Wonders: Where Is The Peak Trucking Season Demand?
The new industry view on the trucking sector at Morgan Stanley is Cautious.
In a report that included the downgrade of several key trucking stocks, the research team at Morgan Stanley led by Ravi Shanker said its actions were focused on demand. "Note that we are not calling for a macro recession in 2019," the report released Monday said. "Instead, we are concerned that 2019 could be similar to 2015-16, when the transportation complex went through a freight recession even as the overall economy held up."
That freight recession a few years ago, the report said, was caused by "slowing industrial production, high retail inventories and overhang from a heady 2014." But the report does not get as bearish on such factors in this current outlook. Rather, it cites data from several benchmarks, including the company's own Truckload Freight Index.
That index has been declining since spring, Morgan Stanley said. A decline in July and August was considered normal, but since then, "the slide has continued in September and October and the TFLI is now down to 10-year average levels," the report said. And that means that there is no sign yet of the seasonal peak that everyone has been talking about for months. "Most industry observers do not have a real explanation for why--similar to 2015," the report said.
There are other indices cited by Morgan Stanley. For example, the Morgan Stanley Shipper Survey sees shippers largely positive about macreconomic trends, "but expecting steady deceleration in transportation demand and pricing dynamics across the board."
One of the themes in the report is that some of the peak buying that normally would have gotten done in coming months is already baked into the market. "Could it be that shippers/retailers pre-ordered inventory (in the first half) to avoid the potential impact of tariffs?" the report suggests. Morgan Stanley says it's possible but downplays the possibility. And it says that maybe it's a bit premature to say the peak season isn't coming as expected and will be a "back-loaded spike." "However, we believe this will be highly disruptive to supply chains as truck capacity may simply not be there to service this demand and we think it is unlikely that shippers will repeat the same mistake twice in the same year," the report said.
The report at several points makes clear that the issue is in transportation, not the broader macroeconomic picture. "What we are doing in this report is trimming our earlier growth expectations slightly, while sounding the alarm on excessively rich valuations in certain parts of the group," the report said.
In terms of valuations, Morgan Stanley took the entire sector's forecasted earnings down approximately 2 percent across the board through 2021. "Truckload companies continue to remain our top ranked vertical though this is now a relative rather than absolute call," the report said. "We remain most bearish on brokers, rail and parcel." Specific stock recommendations that were downgraded were Union Pacific Corporation (NYSE: UNP) and the short-rail conglomerate of Genesee & Wyoming Inc (NYSE: GWR) to Underweight from Equal Weight, and Old Dominion Freight Lines (NASDAQ: ODFL) to Equal Weight from Overweight. The split now on the two dozen stocks Morgan Stanley rates is seven overweight, seven equal weight and 10 underweight.
There were no signs of a broader selloff of trucking stocks in reaction to the Morgan Stanley report. Although the overall report was bearish on the outlook for 3PL firms: C.H. Robinson Worldwide Inc (NASDAQ: CHRW) was up slightly and Forward Air Corporation (NASDAQ: FWRD) was up about 0.36 percent. Knight-Swift Transportation Holdings (NYSE: KNX) was up 1.28 percent.
Morgan Stanley was most favorable to the truckload sector because it says valuations there are already "cyclically de-risked." The LTL sector "does not have the same valuation support" as the truckload companies. Rails are "probably the least cyclically de-risked," and there are some "lofty valuations" in the 3PL sector. The parcel sector, like United Parcel Service, Inc. (NYSE: UPS), is "probably the most exposed to global trade/tariff and consumer discretionary spending risks."
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