And the good times should continue to roll. S&P analyst Jim Corridore has a positive fundamental outlook for the group. While industry conditions remain difficult, he sees investors rotating into trucking shares in anticipation of an economic and earnings recovery -- consistent with the historical pattern the group usually follows. However, rising diesel-fuel prices should provide a note of caution. And here's another caveat: Investors generally rotate out of this sector in search of faster-growing segments once an economic recovery starts to pick up steam.
DRIVER SHORTAGE. Corridore notes that one problem that has plagued the industry -- a chronic shortage of qualified drivers -- has been alleviated by numerous business failures among trucking concerns in the past couple of years. However, he notes, this is just a temporary reprieve. The number of candidates graduating from truck-driving schools hasn't been enough to offset those choosing to retire.
In the less-than-truckload (LTL) segment of the industry -- haulers that handle shipments weighing 10,000 pounds or less -- carriers are less affected. Capacity in the LTL segment is tighter, allowing companies to raise rates and implement fuel surcharges. In addition, since drivers earn more on the LTL side -- and get to return to their families frequently -- there's no driver shortage here.
The truckload (TL) segment -- shipments exceeding 10,000 pounds -- underwent major consolidation in the past few years, notes Corridore. And mergers and bankruptcies may accelerate if economic improvement does not materialize in 2002. However, since driver shortages have eased, so have starting and average salaries in the TL segment, providing some much needed room to cut costs. Corridore expects cargo rates to rise modestly in 2002.
LOWER INVENTORIES. The LTL segment, which includes a few dozen major players, is one-third the size of the TL group. Corridore says the outlook for LTL has improved, as carriers now have the upper hand in pricing. Capacity has shrunk as weak players, such as NationsWay and Preston Trucking, have been pushed out of business. Corridore expects total shipment volumes to rise slightly in 2002, following a decline in 2001 related to the slow economy. He anticipates that rates will increase in 2002 on strengthening demand.
He points to one factor that will drive growth: Inventories of manufactured goods have been worked down, clearing the way for a recovery in demand. This should lead to increased stocking of all types of goods, which should drive shipping volumes higher. And any signs of an upturn would be welcomed by LTL outfits, which saw their profits drop about 49% in 2001. Corridore thinks they should see a strong recovery in 2002.
His top picks in the trucking group right now are Landstar System (LSTR
) and Yellow Corp. (YELL
), both of which are ranked 4 STARS (accumulate).
S&P Relative Strength RankingsThese industries carry 12-month relative strength rankings of "5" as of June 14, 2002 -- meaning that they're in the top 10% of the 114 industries in the S&P Super 1500 (the combined S&P 500, S&P MidCap 400, and S&P SmallCap 600) based on prior 12-month price performance.
Largest Company (Market Cap.)
S&P STARS* Rank
Air Freight & Logistics/Industrials
Catalog Retailers/Consumer Discretionary
Lands' End (LE)
Consumer Electronics/Consumer Discretionary
Harman International (HAR)
Home Furnishings/Consumer Discretionary
Leggett & Platt (LEG)
Clayton Homes (CMH)
Housewares & Specialties/Consumer Discretionary
Fortune Brands (FO)
Managed Health Care/Health Care
Metal & Glass Containers/Materials
Specialty Stores/Consumer Discretionary
Barnes & Noble (BKS)
Landstar System (LSTR)
American Water Works (AWK)
*S&P's ranking system for the appreciation potential of stocks over a 6- to 12-month period: 5 STARS (buy), 4 STARS
(accumulate), 3 STARS (hold), 2 STARS (avoid), 1 STAR (sell). Stovall is chief sector strategist for Standard & Poor's