Shares of companies that own and operate their truck fleets are outperforming those that act as brokers for trucking services, driven by stronger U.S. freight activity.
Stocks of so-called asset-heavy carriers -- which include Werner Enterprises Inc. (WERN:US) and Knight Transportation Inc. (KNX:US) -- have until recently been weighed down by an outlook that’s “too pessimistic” for rate increases and freight volumes, said Todd Fowler, director and analyst in Cleveland with KeyBanc Capital Markets Inc., the investment banking arm of KeyCorp. This means there’s a greater potential for a positive surprise from these companies this year compared with the past three, as gains in manufacturing and housing fuel better-than-anticipated earnings growth, he said.
“The freight market right now is relatively balanced from a capacity standpoint,” Fowler said. As the economy expands, trucking capacity probably will tighten and asset-based carriers will have “leverage on pricing, so they’d be most likely to benefit.”
The for-hire truck-tonnage index, a measure of industry volume, rose 4.6 percent in January from a year ago, the biggest gain on a seasonally-adjusted basis since July 2012, according to data from the American Trucking Associations in Arlington, Virginia.
Based on “channel checks” with company contacts and spot rates, “which are a leading indicator for contractual pricing,” Fowler said he is more confident now that freight activity will support low single-digit rate increases this year. One such proxy -- an index of truckload revenue per loaded mile excluding fuel surcharges -- rose 1.6 percent in January from a year ago, following a 0.6 percent increase the prior month, according to data from FTR Associates in Bloomington, Indiana.
That could help bolster the Bloomberg U.S. Truckload Trucking Index (BNUSTLIX) -- made up of Werner, Swift Transportation Co. (SWFT:US), Heartland Express Inc. (HTLD:US) and six other companies -- which has outperformed its so-called asset-light peer index by 13 percentage points since Jan. 14. In the previous three years, the owner-operator companies lagged behind the Bloomberg U.S. Non-Asset Based Trucking Index (BNUSALT) -- which includes C.H. Robinson Worldwide Inc. (CHRW:US) and Landstar System Inc. (LSTR:US) -- by 37 percentage points.
“This is a great place to be fishing if you’re trying to find value in a cyclical industry,” said Martin Leclerc, principal, chief investment officer and portfolio manager at Barrack Yard Advisors in Bryn Mawr, Pennsylvania, which oversees $350 million in assets.
As trucking rebounds along with the U.S. economy, asset- heavy carriers offer investors “more bang for the buck” because their fixed-cost structures provide more earnings leverage compared with companies that lease vehicles to other businesses and have larger variable costs, he said.
Investor preference appears to be changing as the underperformance of the asset-heavy stocks compared with the broader market has “really slowed,” according to Jim Stellakis, founder and director of research at Greenwich, Connecticut-based research company Technical Alpha Inc. and also a chartered market technician.
If the recent outperformance were to continue and this group traded above previous highs set in 2012 relative to trucking brokers -- it would be “another good sign” of a broader sentiment shift, he said.
The industry also is “getting a tailwind from guarded optimism that something good is happening,” said Charles Clowdis, managing director of transportation advisory services at IHS Global Insight in Lexington, Massachusetts. While there haven’t been any “big spikes” in trucking recently, an economy that’s “inching up” suggests that higher volumes would benefit asset-heavy carriers, he said.
Gross domestic product rose 0.1 percent in the fourth quarter and 3.1 percent in the third. U.S. employers added 236,000 workers to payrolls in February after a revised 119,000 increase in January that was smaller than previously estimated, based on figures from the Labor Department. The unemployment rate, at 7.7 percent, was the lowest since December 2008.
Even so, hiring gains in September through February averaged 186,500 a month, behind the 229,500 average of the comparable period a year earlier, Labor Department figures show. Meanwhile, builders broke ground on 613,000 single-family homes at an annualized rate in January, the most in more than four years, though starts still trail the 2007-2008 average of 826,000, according to Commerce Department data.
A Goldilocks-like economy that’s “not too hot or cold” is more likely to benefit asset-heavy companies, Fowler said. Some contacts at brokerage carriers are having difficulty passing costs along to customers because they can’t raise prices quickly, so they’re “getting squeezed from a margin perspective.”
C.H. Robinson, the largest publicly-traded non-asset trucker in the Bloomberg index, echoed this sentiment, as “net revenue margin compression continues to be the core topic that we’re challenged with,” Chief Executive Officer John Wiehoff said on a Feb. 5 conference call. January was “off to a slow start,” and so “it’s very difficult to predict what’s going to happen” with the market and margins, he said, adding that March typically is the busiest month of the current quarter on a daily basis.
Truck owners have “more nimbleness” and provide greater flexibility to customers than brokers can, Clowdis said. If volumes pick-up from “decent” levels, “you need a company that can react,” and asset-heavy companies are better able to provider shippers with trucks quickly, he said.
The industry still faces some headwinds, including higher fuel prices, capacity issues caused by a driver shortage and new regulations, Leclerc said.
“These businesses are pretty volatile, more so than most industries, so you have to focus on companies with good balance sheets that have been through the storms.”
In addition, the brokerage model tends to be “insulated” from high costs related to equipment, driver wages and maintenance because they don’t own the vehicles they lease to their customers, Fowler said.
With trucks accounting for about two-thirds of all freight transportation, this “clearly is a significant industry” for investors to watch, Leclerc said.
Amid a backdrop that probably will benefit the asset-heavy business, company-specific characteristics make Werner appealing, he said. The Omaha, Nebraska-based company paid a special dividend averaging almost $1.40 a year in the past five years, is about 38 percent insider-owned and its stock is down 7 percent in the last 12 months.
“It meets all of our criteria for investment,” he said.
Truck operators also are attractive because they are trading near the low end of historical valuations, said Fowler, who upgraded four companies to buy from hold on Feb. 10. “The risk-reward is positively skewed to owning asset-based companies.”
This year may finally be the time when these carriers realize the pricing leverage that didn’t fully materialize in 2010, 2011 or 2012, Fowler said.
“We think expectations are more realistic this year,” he said. “The entry point is reasonable to own asset-heavy companies in this environment.”
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