Shares of trucking companies are on a roll, but that doesn’t mean they might not encounter a few potholes down the road.
Cheaper fuel, rosier unemployment data and continued growth in freight tonnage are among the reasons stocks in the sector have been going strong of late. The American Trucking Association’s seasonally adjusted truck tonnage index, for one, increased slightly in four of the past five months, with February’s 0.7% dip as the only exception.
Many companies are also boosting margins by diversifying revenue streams with brokerage and logistics services. Plus, cross-border freight between the U.S. and Mexico is another growth opportunity.
Then again, the recent bull market has given most transportation stocks a bounce lately. The Dow Jones Transportation Average (DJT), which includes major airlines, railroads and package delivery companies like FedEx (FDX), has gained almost 10% so far this month. The transport sector is often viewed as a bellwether for the broader economy and these gains reflect investors’ recent optimism.
Despite these opportunities, there are still a few reason to be cautious. Let’s take a look at three:
Driver Shortages. While a lower unemployment rate is a great sign for the economy — and for the prospects of freight tonnage to rise — trucking companies continue to have trouble attracting and keeping new drivers. Trucking companies have some 200,000 unfilled openings for long-haul truckers nationwide, according to the Truckload Carriers Association. To replace retirees, the industry will need nearly 100,000 new drivers a year for the next decade.
It doesn’t help that the churn rate for truck drivers is around 70%, which you can chalk 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. Then again, some companies believe immigration reform could provide another solution because immigrants could obtain the necessary commercial drivers licenses.
Intermodal Freight Growth. With the rise of so-called intermodal (containerized freight that can travel via ship, rail or truck), motor carriers increasingly will compete head-to-head with railroads like Union Pacific (UNP) and CSX (CSX) that are staking a claim in the space to offset declining coal volumes. It doesn’t help that trains can move a ton of freight more than 460 miles on a single gallon of diesel fuel, according to the Association of American Railroads.
High Operating Costs. The trucking business is expensive and profit margins are slim. Government regulations and driver restrictions like the Hours of Service (HOS) rules aimed at reducing crash-related deaths and injuries by trimming truckers’ maximum daily driving time may impact earnings adversely. Equipment and labor costs also are high. According to a new survey by TMW Systems, 71% of truckload carriers responding said their operating ratios were at least 94%, while the industry’s best performers have OR’s below 90%.
All in all, while trucking stocks have been going strong, these three headwinds definitely warrant caution.
If you decide to play the sector, you’re best off trying to snatch up a solid company that’s relatively cheap, like Swift Transportation or Con-Way. Swift, for one, has a PEG ratio of only 0.8 and a forward P/E of 13, which compares favorably with its peers. Con-Way also isn’t far behind, sporting a PEG ratio of 0.98 and a forward P/E of 14.
Still, even with these names, don’t hit the gas too quickly. Things could shift gears before you know it.
As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.