As the trucking industry continues to rebound from the recession, there is good news to crow about: cargo tonnage is up, and overall excess capacity is down — a factor that makes it easier for companies to raise rates on shippers.
With the strengthening economy, several companies, among them JB Hunt (Nasdaq:JBHT), Old Dominion Freight Line (Nasdaq:ODFL), Werner Enterprises (Nasdaq:WERN), Heartland Express (Nasdaq:HTLD) and Landstar System (NASDAQ:LSTR), have grown stronger (as have their shares), and are well-positioned to seize the opportunities afforded by decreased competition, increased demand, and potential new markets.
And don’t count out the positive impact of President Obama’s new agreement between the US and Mexico to repeal the predatory tariffs on U.S. goods in exchange for lifting the ban on Mexican trucks crossing the U.S. border. The deal, which has yet to be approved by the U.S. Senate, has the potential to open up new freight markets for U.S. trucking companies in Mexico. This could mean higher volumes and profits for US carriers.
Despite the good news, however, the industry still faces headwinds that could hit earnings — and share prices — throughout the balance of this year. Here are five factors that have the potential to stall the sector’s growth:
1. With ongoing crises in the Middle East, oil prices show no sign of retreating under $100/barrel anytime soon. While trucking companies faced with higher diesel prices are passing those costs on to shippers in the form of fuel surcharges, sooner or later there will be a breaking point.
2. Trucking companies are terrified of inflation — which they already are beginning to see in fuel, trucks, tires, etc. That means additional rate increases for shippers — above and beyond those discussed above.
3. Driver shortages have placed pressure on trucking companies in recent months. Those challenges are being exacerbated by the federal Comprehensive Safety Analysis regulations that took effect last fall. Those rules effectively make many veteran drivers ineligible for employment. And even in a job market with near 10% unemployment, there are not a lot of potential replacements beating down the doors.
4. New federal Hours of Service rules that shorten a driver’s workday will further raise trucking company costs and potentially delay shipments.
5. Any of several combinations of macro-economic and geopolitical factors (such as sustained turmoil in the Middle East, inflation and Japan-fueled disruption of supply chains in automotive or consumer electronics) could derail the fragile recovery or even pitch us back into a full-blown recession.
Although tight capacity, increased cargo volume and the promise of new opportunities south of the border are giving trucking company executives a reason to be optimistic, they’re still in a thin-margin business that’s getting thinner with every new regulation or penny increase in fuel prices.
While the fundamentals of many of these companies’ shares are solid, the headwinds could be significant this year. While truckers can hike prices on shippers to recoup costs, rail (which can carry more freight farther on a single gallon of fuel) could displace some volume. And supply chain disruptions may translate into fewer TVs, iPads and cars being shipped for the second half of the year.
The strong growth in share prices since last November already reflects much of the optimism over the recovery-fueled demand for greater trucking capacity. While the fundamentals are solid for most of these companies, don’t bet the farm on significant price appreciation in trucking shares this year.
As of this writing, Susan J. Aluise did not hold a position in any of the stocks mentioned here.
