The Zacks Transportation - Truck industry consists of truck operators transporting freight to a diverse group of customers, primarily across North America. These companies provide full-truckload (FTL) and /or Less-Than-truckload (LTL) services over short, medium or long haul. In addition to other services, most of these companies offer logistics and intermodal services. A few also offer asset-light services to other third-party logistics companies in the transportation sector.
Let’s take a look at the industry’s three major themes:
Most industry experts speculate a rise in fuel prices during 2019. With fuel expenses comprising a substantial portion of expenditure for truck operators, the projection certainly does not bode well for these companies. Though big names like J.B. Hunt Transport Services (JBHT) and Knight-Swift Transportation Holdings (KNX) pass on the burden of high fuel costs to the shippers with a fuel surcharge, those that are unable to do so are likely to bear the brunt.
Capacity crunch due to driver shortage continues to be a major challenge. Further exacerbating the situation are tight labor market conditions and the Electronic Logging Devices (ELDs). As old drivers are retiring, recruitment of new ones is becoming difficult, thanks to lack of unemployed people, the hefty nature of the job and low pay. Meanwhile, the installation of the ELDs last December did not go too well with a certain section of truck drivers. ELDs restrict truckers to work for only 11 hours, consequently lowering their ability to travel sufficient miles to earn a decent pay. Some drivers were also wary of being tracked all the time. These factors played in their minds, causing them to leave their jobs.
High freight demand and the resulting steep rates are major positives for the industry. In this regard, the ongoing capacity crisis has a favorable impact. The low truck count coupled with high freight demand is pushing up the already high shipping rates. It is believed that freight prices will continue to rise as long as there is a capacity crunch. Bob Costello, chief economist of American Trucking Associations (ATA), foretells that the industry could be short of nearly 175,000 drivers by 2026. Perhaps, capacity constraints will persist for a while now and rates will continue soaring. As far as freight demand is concerned, the ATA projects freight volumes to rise 35.6% by 2029. With trucks being the most widely used mode of freight transportation, this large number is highly beneficial to the industry. The trade association further forecasts truck volumes to expand 2.3% and 2.2% each year during the period of 2019-2024 and that of 2025-2029, respectively.
Zacks Industry Rank Indicates Gloomy Prospects
The Zacks trucking industry, housed within the broader Zacks Transportation sector, currently carries a Zacks Industry Rank #159. This rank places it at the bottom 39% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bleak near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. The groups’ current-year EPS estimate has decreased 1.8% since the end of November 2018.
Despite the industry’s drab near-term prospects, we will present a few stocks that have the potential to outperform the market. But, before that, it’s worth taking a look at the industry’s shareholder returns and current valuation.
Industry Lags Sector & S&P 500
The Zacks Truck industry has lagged both the broader Transportation sector and the Zacks S&P 500 composite over the past year.
Over this period, the industry has declined 20.7% compared with the broader sector and the S&P 500 index’s depreciation of 19% and 7.6%, respectively.
One-Year Price Performance
Industry’s Current Valuation
On the basis of trailing 12-month EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation and amortization) ratio, which is a commonly used multiple for valuing transportation stocks, the industry is currently trading at 10.49X compared with the S&P 500’s 9.62X. It is also above the sector’s EV/EBITDA ratio of 9.32X.
Over the past five years, the industry has traded as high as 22.41X, as low as 5.56X and at the median of 8.56X as the chart below shows.
Enterprise Value/EBITDA (TTM)
Enterprise Value/EBITDA (TTM)
With rising freight demand and escalating rates boosting the companies’ top lines, the trucking industry is well poised to overcome the shortcomings of capacity crunch and an anticipated fuel price hike in 2019. Moreover, the industry seems to be on a solid footing over the long haul as evidenced by the ATA’s bullish projections.
Below we present three stocks with a Zacks Rank #2 (Buy) that are well positioned to grow amid challenges. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
ArcBest Corp. (ARCB), headquartered in Fort Smith, AR, provides freight transportation services and solutions. The company boasts an impressive earnings history, having surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average being 144.6%. The Zacks Consensus Estimate for the company’s current-year EPS has moved 11.5% north in the last 90 days.
Price and Consensus: ARCB
Covenant Transportation Group, Inc. (CVTI) is a Chattanooga, TN-based truckload carrier offering just-in-time and other premium transportation service for customers throughout the United States and Mexico. The Zacks Consensus Estimate for current-year EPS has been revised 1.5% upward over the past 90 days. The company trumped estimates in three of the last four quarters, the average surprise being 6.2%.
Price and Consensus: CVTI
Heartland Express, Inc. (HTLD) is a leader in transportation and logistics services based in North Liberty, IA. The company provides truckload transportation service to virtually all markets in the east of the Rocky Mountains at any length of haul. This company’s consensus estimate for current-year EPS has inched up 1.1% over the last 90 days. The company surpassed estimates in three of the preceding four quarters, the average beat being 7.5%.
Price and Consensus: HTLD
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Knight-Swift Transportation Holdings Inc. (KNX) : Free Stock Analysis Report
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