If the market truly is in recovery mode now, someone better explain that to the trucking stocks. Why? If the projected numbers for the industry are even remotely close to being right then these companies may mostly miss out on the bulk of any rebound. As such, perhaps investors should look elsewhere for growth.
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Facts Are Facts
Despite the way most market participants think and argue, there are no absolutes when it comes to investing. Take the 'green shoot' discussion as an example. Some would argue that green shoots are sprouting everywhere, while others would argue that the only thing green we see growing are a few weeds. The reality is somewhere in between - there are a few green shoots, just not enough to suit everyone.
One of the gardens that have conspicuously been devoid of any decent green shoots has been trucking.
The core indicator for the industry demand is the American Trucking Association or (ATA) 'For Hire' Truck Tonnage Index. The higher the index is, the greater the demand (and presumably the greater the industry's earnings) and vice versa. Though May's ATA Index reading was up 3.2% from April's activity (on a seasonally adjusted basis), the index is still in the hole from major declines in March and April.
On a year over year basis, May's 11% decline in reserved tonnage was actually the best (i.e. least bad) dip in trucking demand over the previous three months. (Although the DJIA only includes 30 stocks, it can tell you a lot about the market as a whole, see Why The Dow Matters.)
The challenge has indeed materialized for these companies too. Landstar System's (Nasdaq:LSTR) second-quarter earnings fell 40%, while USA Truck Inc. (Nasdaq:USAK) swung to a loss during the second quarter of 11 cents per share versus the 2 cent loss analysts were expecting. Forward Air Corp. (Nasdaq:FWRD) saw a 76% dip in its Q2 income, and then announced lowered guidance for Q3. Werner Enterprises Inc. (Nasdaq:WERN) earnings fell by 31%.
If just one or two companies had troubled numbers, it could be chalked up to a failure to compete. When the majority of the companies are saying the same thing though, the epidemic may truly be out of their control.
Yes, eventually trucking stocks will recover because the underlying companies will put up better numbers. Very few people expect that to happen in 2009 though, including me, and including industry analysts.
Helane Becker, a Jesup & Lamont Securities analyst for logistics and expediter stocks, isn't looking for year-over-year improvements in trucking stock numbers until 2010. Wall Street Strategies analyst David Urani also foresees low revenue on weak demand.
Analysts aren't always right, but even the management teams at these companies are facing up to the ugly reality. And what reality is that? See if you spot the common thread in these statements from a handful of trucking companies.
- "Management believes that excess capacity is being supported by lender leniency that is not ultimately sustainable" - From the Werner press release
- "Freight availability remains at historically low levels and pricing competition has been fierce as excess tractor capacity, buoyed by lenient lenders and lower fuel prices, continues to exist in the marketplace." - Clifton R. Beckham, President and CEO of USA Truck, from earnings press release.
- "There continues to be excess capacity in our industry combined with the continued decline in available freight resulting in extreme pressure on freight rates." - From the Heartland Express (Nasdaq:HTLD) earnings press releases, despite the fact that Heartland slightly increased its second-quarter income.
- "The freight markets continued to suffer from excess capacity and intense price competition," - Douglas Stotlar, president and CEO of logistics firm Con-way (NYSE:CNW).
And here's the really amazing part of the story. In 2008, 3000 trucking companies went bankrupt, chipping away about 7% of the industry's capacity. Another 480 trucking companies folded in Q1 of 2009, wiping out another 1% of the industry's capacity. Yet, we just heard from the remaining companies that capacity is still too high for current - and probably foreseeable - demand. (Learn which stocks to watch and which to avoid when the Dow starts to sink, see Survival Tips For A Stormy Market.)
So how much more capacity needs to be axed before prices stabilize and give these companies a shot at better results? Avondale Partners' Donald Broughton says another 5% capacity reduction should do the trick. Certainly a full-blown economic recovery would help on that front, but the 'excess capacity' horse seems to have a lot more speed than the 'economic recovery' horse does at this point in time. As such, trucking stocks are simply more of a liability than an asset right now.
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