Transport stocks have long been considered an economic bellwether — trends in cyclical sectors like trucking often herald the rising (or falling) fortunes of the broader economy.
But while a rising tide may lift all ships, an individual motor carrier’s business model can be equally critical to predicting whether it’s ready to hit the gas — or easing off onto the breakdown lane.
The good news: Most transportation stocks have gained ground of late. The Dow Jones Transportation Average — which includes truckers, major airlines, railroads and package delivery companies like FedEx (FDX) — has gained about 2.5% during the past month and is up 24% for the year-to-date.
The American Trucking Association reports that its Truck Tonnage Index — an indicator of the industry’s strength — surged 2.3% in May to a record high. ATA’s most recent forecast projects a 20% increase in freight volumes by 2024; truckers are expected to grow their share of tonnage to 70.8%, up from 68.5% today.
But despite the good news, the industry faces a few potholes.
A stronger economy has made it more difficult for motor carriers to hire and retain drivers. In the first quarter of this year, the turnover rate at both large and small truckload carriers rose substantially. At truckload fleets with more than $30 million in annual sales, driver turnover rose from 90% to 97% in the first quarter; smaller carriers fared better with turnover rates rising to 82%, up from 76% in the fourth quarter of 2012. Tougher regulations like the Hours of Service driver restrictions, which cut back truckers’ maximum daily driving time, also are likely to raise costs and reduce profitability.
Although all motor carriers are facing a combination of headwinds and tailwinds, some stocks are better positioned than others — and naturally, these are the stocks you want to put in your garage. So, here are two trucking stocks to consider buying right now, and two to leave parked.
Old Dominion Freight Line (ODFL): Old Dominion, which reports earnings July 29, has gained ground in its less-than-truckload (LTL) segment so far this year, largely because of attractive pricing and on-time performance. Short-haul trucking operations should continue to play a solid role in ODFL’s revenue mix. I think Old Dominion’s edge lies in its service and on-time performance guarantees, and that the company has a good shot at further growing revenues for the balance of this year. Despite a nearly 60% run in the past 52 weeks, ODFL sports reasonable valuations, including a price/earnings-to-growth ratio of 1.1 and a forward P/E of just under 17, so you won’t be stretching much to buy here.
Swift Transportation (SWFT): Swift, whose earnings conference call falls on July 25, has one of the trucking sector’s best PEG ratios at only 0.9, indicating that the stock is slightly undervalued. Swift also has a forward P/E of 12.7, which compares favorably with its peers. That’s despite the fact that SWFT shares have more than doubled in the past year and are trading at their highest point since the company’s 2010 IPO. Intermodal — transport of containerized freight that can travel by rail, truck or ship — is a significant opportunity for Swift, which witnessed 12% growth in that business in the first quarter. It also has delivered strong performance in its truckload segment — a trend I expect will be reiterated in its second-quarter earnings call next week.
JB Hunt (JBHT): JB Hunt’s earnings miss caused shares to slip Tuesday and again Wednesday. On the surface, that seems odd since the company missed Wall Street estimates by just a penny and grew the top and bottom lines by 10% and 9%, respectively. The bigger problem: JB Hunt’s truckload revenue dropped by 20%. However, one very bright spot for JBHT is its intermodal business, which accounts for more than half of the carrier’s revenue and has grown by 13% so far this year. JBHT is one of the largest players in the trucking sector with a market cap of $8.8 billion … but its valuation numbers are also pretty hefty, trading at 21 times next year’s earnings and a PEG of 1.5, which suggest the stock is significantly overvalued. I’m optimistic about JB Hunt long-term, but I think the sluggish fundamentals and truckload revenue headwinds could push back on JBHT in the short-term.
Marten Transport (MRTN): MRTN reported a penny miss of its own Tuesday, and like JB Hunt, investors soured on Marten’s stock — MRTN shed nearly 6% Wednesday. Marten focuses on temperature-controlled shipments — a niche that is likely to suffer more than its peers if Hours of Service regulations (which took effect July 1) delay the arrival of those shipments. After all, if drivers are restricted to lower total hours — and there is a driver shortage to begin with — it will take longer for certain shipments to reach their destinations. MRTN’s forward P/E of 16 doesn’t sound off alarm bells, but its PEG ratio of 1.8 does, indicating Marten is just a bit too pricey right now.
As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.