How bad was the bloodbath for trucking stocks in 2018 and into 2019?
In the 52 weeks ending January 11—last Friday—Barchart reported that Knight-Swift (NYSE: KNX) was down 36.74%. Schneider (NYSE: SNDR) was down 30.6%. Heartland Express Inc. (NASDAQ: HTLD) declined 18.36%. Werner Enterprises (NASDAQ: WERN) dropped 21.95%. And all of those figures would have been even lower if they were measured on Christmas Eve, since most of them have posted double-digit percentage increases since the market rout of that day.
These declines need to be kept in mind as trucking companies—as well as brokerage and rail companies—begin to report their earnings this week. CSX Corporation (NASDAQ: CSX) will lead the parade for all transport stocks Wednesday, with J.B. Hunt (NASDAQ: JBHT) the first trucking company to report on Thursday.
Has the market priced in a decline in performance compared to the robust fourth quarter of 2017 and the still strong third quarter of this year? There's a strong argument the market already is expecting a weak performance.
The brokerage firm of Stephens said its truckload stock index was down 35.2% for the year. "This marked the second worst performance after 2005 (which was down 35.7%), we have for the index dating back to 2008," Stephens said in a report. "Moreover, this has been in spite of healthy freight levels and continued supply constraints, resulting in a supply/demand equation that is still favorable, albeit more balanced, than the end of 2017 and the first half of 2018."
The decline in prices took the trailing 12-month price/earnings for a number of stocks down to levels considerably less than that of the broader S&P 500. On January 11, the trailing 12-month price/earnings ratio for the S&P 500 was reported as 20.478 by Barchart. But on that date, Knight Swift stood at 13.63; Werner was 15.29; USA Truck, Inc. (NASDAQ: USAK) was 13.33. LTL carrier Old Dominion Freight Lines (NASDAQ: ODFL) was 19.54, recognizing that the market conditions for LTL carriers don't match those for truckload carriers.
Knight-Swift stock, last 12 months. Columns on the bottom are daily volumes. Source: Barchart
The market has priced in a decline; how bad will the lower earnings projected by the drop actually be?
Brad Delco at Stephens told FreightWaves that the current trucking market is "strong, but while fourth quarter fundamentals were good, they weren't great or robust. The market has already realized that and they have priced in the fact that it's not as exuberant as it once was."
That truckload carriers took it on the chin did not surprise David Ross, an analyst at Stifel. "Selling truckload stocks is an early cycle move when you look at the economy slowing," he said. "And then you buy the truckers first when you're coming out. It's been oversold on the truckload side."
Delco expressed a similar sentiment: "Counterintuitively, the best time to own trucking stocks is after a pretty dismal year of stock performance or challenging macroeconomic periods."
After all those red arrows on the performance of trucking stocks, analysts are mostly sanguine about what the market is about to hear when fourth quarter earnings are released. Amit Mehrotra at Deutsche Bank said the fourth quarter "will be just fine, plus or minus."
"I think what we saw from retailers at the end of the year is an acceleration in retail sales, which is good for transportation companies and certainly it is true that the peak season started late," Mehortra told FreightWaves. "But we did have a very robust peak season." He said some of it happened early because of the "pull forward" of some business to get into the U.S. before tariffs hit. "
Still, Mehrotra said Deutsche Bank has pared back its earnings estimates on several firms. Over at Morgan Stanley, the team led by Ravi Shankar said it expects most truckload companies to beat consensus earnings forecasts.
Morgan Stanley's own in-house estimate is above consensus for Heartland Express ("continue to miss on revenue but beat on margin"), Knight Swift ("expect stabilization in overall fleet count and believe management is making continued progress in reefer"), U.S. Xpress Inc. (NYSE: USX) ("expect total OR ex fuel surcharge to improve 200 bps seq in 4Q 2018") and Werner ("expect to reach the upper end of their 9-12% revenue per mile ex-fuel guidance"), while Morgan is in-line with consensus for Schneider ("expect 4Q intermodal OR to improve ~160 bps y/y but TL OR to deteriorate ~20 bps y/y.").
But there have been analysts slashing their EPS forecasts, though not necessarily by a huge amount. For example, Stephens issued reduced EPS estimates for several companies but kept others in place. Covenant Transportation (NASDAQ: CVTI) was reduced to 76 cents per share for the fourth quarter, a cut of 1 cent; Marten Transport, Ltd. (NASDAQ: MRTN) also took a 1 cent haircut, to 28 cents per share; U.S. Express took a more significant reduction, to 34 cents per share from 42 cents per share, with a street consensus of 39 cents per share. Werner and Knight Swift saw their estimates increase. Stephens also reduced its EPS forecast on the truckload carriers' 2019 performance across the board.
Mehortra said he sees a reckoning in 2019. "Either equity values will move up to reflect the strong equity backdrop or me and everyone else will be wrong and there will be a significant slowdown and earnings will have to set lower," he said. "I am optimistic it will be a good year and the industry will get credit for its earnings."
Turning to LTL, Delco said the LTL carriers are facing "pretty challenging comps" from a year ago, when the fourth quarter of 2017 was extremely robust. Lower fuel prices will benefit LTL, he said, because "of how far and fast fuel prices fell." But Delco said weaker fuel prices reflect weaker oil prices in general, "and our view over the long term that lower fuel prices are not good for LTL carriers because they have more exposure to industrial end-markets, and that is going to be driven in part by what is going on in the energy field."
There is a paradox in LTL earning relative to driver turnover. As Mehrotra noted, LTL is a "180 degree different business because it doesn't have nearly the same turnover in the driver count."
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He noted that FedEx Freight (NYSE: FDX), the largest LTL carrier, has a 10% churn in the driver business compared to the 90% to 100% you find in truckload. "That's a big benefit to the LTL sector," he said.
But Ross noted that in a turndown, truckload carriers can respond more quickly. The nature of an LTL network means it's difficult to make cost cuts as the business slows. "LTL carriers run these networks every day," Ross said. "If you're shipping 10 percent less stuff you can't cut your costs by 10 percent. In truckload, they just don't move the trucks. "
With driver turnover and increasing driver pay such a significant part of the companies' performance, the fourth quarter earnings will come for a period in which the American Trucking Associations reported that the driver turnover rate fell 11 percentage points, down to 87 percent, the lowest since the first quarter of 2017.
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