3 Reasons Trucking Stocks May Stall

by Susan J. Aluise | August 16, 2012 12:15 pm

3 Reasons Trucking Stocks May Stall

As the economy has improved, trucking stocks have driven back from the abyss that claimed more than 1,800 companies during the Great Recession. But despite a surge in freight tonnage and very little surplus capacity, trucking companies that remain still face a hard road.

The seasonally adjusted truck tonnage index fell by 0.8% in the second quarter of this year, according to the American Trucking Assn.[1] (ATA) — its first decrease in a year. Strong manufacturing output in June helped offset a 2.1% drop in April and May.

Lower freight volumes are an ominous sign for an industry that’s a barometer of the economy’s overall health. Still, the economic slowdown isn’t the only challenge truckers face right now. Here are three reasons trucking stocks may lose speed over the near term:

Driver Shortage

At a time when unemployment remains high, it almost defies logic that trucking companies are having so much trouble hiring — and keeping — drivers. But they have 200,000 unfilled openings[2] for long-haul truckers nationwide, according to the Truckload Carriers Assn.

Not only that, but the churn rate for truck drivers is around 70%. Chalk that up to a new generation that’s unwilling to accept the lifestyle and sacrifice of being away from family and friends for extended periods. Many companies are trying to sweeten the pot with signing bonuses and additional perks, but the long-haul trucker’s life is still a tough sell.

Stronger Rail Competition for Intermodal Freight

Shippers increasingly are turning to intermodal, or container, shipping[3] because a single container can move by ship, rail or truck. Domestic intermodal container volume rose a whopping 12.9% in the second quarter[4], the Intermodal Association of North America reported on Wednesday.

As a result, freight railroads like CSX (NYSE:CSX[5]), Union Pacific (NYSE:UNP[6]), Norfolk Southern (NYSE:NSC[7]), Kansas City Southern (NYSE:KSU[8]) and Berkshire Hathaway’s (NYSE:BRK.A[9]) BNSF are gaining a bigger piece of the action.

Costly Federal Regulations

In a move aimed at reducing crash-related deaths and injuries, the Federal Motor Carrier Safety Administration (FMCSA) approved new “Hours of Service” rules that cut the maximum hours a driver can work per week to 70, down from the prior 82. Specifically, the rules limit drivers to one 34-hour restart per seven-day period.

Last month the ATA sued[10] to have the rules invalidated, noting that they would add tremendous cost for the industry, while providing minimal safety benefits.

The One Trucking Stock to Drive Now

Trucking sector stocks have been running hot since the economy began its rebound in late 2010. With such high expectations, it’s no surprise that some companies’ “check engine” lights have started flashing.

J.B. Hunt (NYSE:JBHT[11]), a traditional bellwether for the sector, took a hit on recent earnings and looks pretty overvalued now. Swift Transportation (NYSE:SWFT[12]), Knight Transportation (NYSE:KNX[13]) and Werner Enterprises (NASDAQ:WERN[14]) all lost ground this week in InvestorPlace’s Portfolio Grader[15].

The one stock in the sector I do like right now is Old Dominion Freight Line (NASDAQ:ODFL[16]). On Monday, it declared a three-for-two stock split — the fifth such split over the past decade. Aimed at boosting liquidity, the split takes place on Sept. 7 for shareholders of record as of Aug. 24.

ODFL also reported stronger-than-expected second-quarter earnings on Aug. 2, in large part due to greater efficiency in its operations. Earnings rose 21% in the quarter to $47.8 million (83 cents a share) from $39.4 million (69 cents a share) one year earlier. Analysts had estimated 77 cents a share.

Revenue also grew by nearly 13% to $541.5 million, narrowly missing Wall Street expectations. ODFL shares soared more than 10% on the news.

ODFL has several things to like now. Its strong focus on the less-than-truckload (LTL) market is a sweet spot, and tonnage grew by 9% during the quarter. The company also gained market share during the period and is comfortable enough with rising volumes to raise its base rate by nearly 5%.

Currently trading around $45 and with a market cap of $2.6 billion, ODFL has a price-to-earnings growth (PEG) ratio of 0.9, indicating that the stock is slightly undervalued — despite more than 60% growth since its 52-week low last October. It also has a forward P/E of 13, which is in the mid-range for the sector. ODFL has been improving its margins and increasing sales — both strong positives for this tough marketplace.

Bottom Line: Old Dominion is doing a good job of managing its business and putting itself in the position to compete effectively. It also has the potential to be one of those small-cap stocks that will end up outperforming the market in the short term.

Even though it’s one of the few trucking companies that doesn’t pay a dividend, I think ODFL stock is a buy now with a price target of $51.

As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.

Endnotes:
  1. American Trucking Assn.: http://www.truckline.com/pages/article.aspx?id=1027%2F8e1c7279-ed27-4c03-b189-ceeee26bbb12
  2. 200,000 unfilled openings: http://fox8.com/2012/07/24/trucking-industry-has-200000-jobs-that-nobody-wants/
  3. intermodal, or container, shipping: http://investorplace.com/2012/06/3-railroad-stocks-that-keep-rolling/
  4. whopping 12.9% in the second quarter: http://refrigeratedtrans.com/carriers-shippers/international-intermodal-0815/
  5. CSX: http://studio-5.financialcontent.com/investplace/quote?Symbol=CSX
  6. UNP: http://studio-5.financialcontent.com/investplace/quote?Symbol=UNP
  7. NSC: http://studio-5.financialcontent.com/investplace/quote?Symbol=NSC
  8. KSU: http://studio-5.financialcontent.com/investplace/quote?Symbol=KSU
  9. BRK.A: http://studio-5.financialcontent.com/investplace/quote?Symbol=BRK.A
  10. the ATA sued: http://www.truckline.com/pages/article.aspx?id=1026%2F8e1c7279-ed27-4c03-b189-ceeee26bbb12
  11. JBHT: http://studio-5.financialcontent.com/investplace/quote?Symbol=JBHT
  12. SWFT: http://studio-5.financialcontent.com/investplace/quote?Symbol=SWFT
  13. KNX: http://studio-5.financialcontent.com/investplace/quote?Symbol=KNX
  14. WERN: http://studio-5.financialcontent.com/investplace/quote?Symbol=WERN
  15. InvestorPlace’s Portfolio Grader: http://investorplace.com/2012/08/4-road-and-rail-stocks-to-sell-now-csx-wern-swft/
  16. ODFL: http://studio-5.financialcontent.com/investplace/quote?Symbol=ODFL

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