Trucking stocks are leveraged to an improving economy in 2010 and will continue to wrestle with investor paranoia over uncertain economic growth, and still weak fundamentals, joining many other sectors in a similar situation.

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Fundamentals
The American Trucking Association publishes a monthly Truck Tonnage Index, and the latest report for October 2009 shows that the index decreased 0.2% from September 2009, and 5.2% year over year. The index started to decline in early 2008 and has recently stabilized.
Heartland Express (Nasdaq: HTLD) reported in its third quarter 2009 earnings that traffic was still weak. Its press release sounding pessimistic about future trends: "The current recession and extended economic downturn continues to impact our nation. Excess capacity in our industry continues to exist, resulting in downward pressure on freight rates and reduced demand for freight services from shippers. The company still has not seen any strong indicators of improvements in the demand for freight services that would increase our levels of business in the near future."

The industry has also cut capacity over the last year, either voluntarily by the large public companies, or involuntarily through bankruptcies of small trucking chains. One industry group put the amount of extra capacity at 300,000 units.

Costs
Fuel costs for the truckers have fallen sharply since peaking in Q2 and Q3 2008. Although intuitively it might seem this helps the industry, public companies were often able to pass on the higher price of fuel to customers during the commodity bubble. In 2010, fuel costs should move modestly higher based on the strength of an economic recovery.

Green Initiatives
The industry will also have to deal with a perception that it is a major contributor to carbon emissions due to its use of diesel as fuel. The railroads have used this argument to gain ground over the truckers in transport market share. Some truckers have started to fight back. Werner Enterprises (Nasdaq: WERN) has instituted recycling and fuel efficiency initiatives and boasts that it has reduced its carbon footprint by 49,000 tons year over year.

The trucking industry is trying to cut capacity and costs as much as possible to deal with the downturn. JB Hunt Transport Services (Nasdaq: JBHT) cut $18 million in costs over the last two years by closing service centers. The company plans capital expenditures of $200 million in 2010, down 50% from 2009.

Old Dominion Freight Line (Nasdaq: ODFL) reported that through the end of September 2009, it had cut operating expenses by 19% compared to the same period in 2008.

Bottom Line
The trucking industry will be plagued in 2010 by too much capacity, weak pricing and sluggish demand, and it will be difficult to get excited about the sector without a strong pickup in economic growth. Many industries are waiting for a lift like this. (For more, see Early Monopolies: Conquest And Corruption.)

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Tickers in this Article: JBHT, WERN, HTLD, ODFL

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