Rising Diesel Could Slow Trucking’s Rebound

by Susan J. Aluise | April 16, 2012 6:30 am

Most trucking stocks got a bounce on Thursday as Wall Street extended its rally for a second day — and that was before J.B. Hunt (NASDAQ:JBHT[1]) reported blockbuster first-quarter earnings after the market closed. But before you decide to join this convoy, be prepared for a speed trap ahead: rising diesel-fuel prices.

Granted, that contrarian advice seems strange given JBHT’s eye-popping quarterly report. Earnings per share (EPS) jumped by 42% year-over-year, to 57 cents ($67.7 million), and revenue rose more than 16%, to nearly $1.2 billion. The company’s results beat Wall Street estimates for both the top and bottom lines.

The biggest star was J.B. Hunt’s intermodal segment — freight in containers that can move by truck, ship or rail. It contributed heavily to the trucking company’s earnings, rising 20% in the quarter. JBHT’s third-party-logistics segment, Integrated Capacity Solutions, grew by 30% in the quarter.

Despite the positive news, there may be potholes ahead for J.B. Hunt and its peers.

In the company’s truck segment, revenue rose by 8%, but profit fell by 16%. While JBHT was able to reduce maintenance costs and boost fuel efficiency, pricier diesel fuel — as well as higher costs for labor and safety compliance — offset those gains.

J.B. Hunt’s earnings are particularly important because it acts as a bellwether for other companies in a sector that will report earnings in the coming weeks.

JBHT’s market cap is two to three times that of other major truckers, including Landstar (NASDAQ:LSTR[2]), Con-Way (NYSE:CNW[3]), Heartland Express (NASDAQ:HTLD[4]), Old Dominion Freight Line (NASDAQ:ODFL[5]), Werner Enterprises (NASDAQ:WERN[6]) and Knight Transportation (NYSE:KNX[7]).

It’s no secret that expensive diesel fuel is the bane of truckers’ existence. Because global diesel-fuel demand is putting pressure on refining capacity and the U.S. is switching to low-sulfur diesel, prices have risen rapidly. It doesn’t help that federal excise taxes are six cents higher per gallon than gasoline.

While truckers can and do pass on fuel costs to shippers in the form of surcharges, there are limits to what pressured shippers will bear. It doesn’t help that the trucking industry’s biggest competitor — railroads — can carry a ton of freight 423 miles on a single gallon of diesel.

Although the average price for a gallon of gas in the U.S. decreased 0.2 cent for the week beginning April 9, the average price for a gallon of diesel fuel rose 0.6 cent, to $4.15 per gallon. That’s 7 cents higher than this time last year, according to weekly data from the U.S. Energy Information Administration[8].

At a recent industry conference, Bob Costello, chief economist for the American Trucking Assn., said “$4 per gallon is the price when fuel passes labor as the No. 1 cost for trucking companies.”

Since diesel-fuel prices already are at historic highs for this time of year, they could rise to as much as $7 a gallon by peak summer-driving season[9], trucking consultant Robbie Watlington of HLC Government Services said at the conference.

Anything close to that would be an unmitigated disaster for the trucking industry — and for investors in the sector’s stocks.

The bottom line: Trucking is a tough business — high capital expenses, expensive regulations and a fate inextricably linked to the economy’s well-being. But diesel-fuel prices are eating the sector’s lunch. In addition to rising fuel costs, trucking companies are struggling to retain drivers — the driver turnover rate at large fleets now stands at 88%[10].

Trucking stocks have risen an average of 45% since last fall. If you’re already in some of the stronger names like JBHT, ODFL or LSTR, I’d hold, but in my opinion, there are too many wild cards to establish a new long position.

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

  1. JBHT: http://studio-5.financialcontent.com/investplace/quote?Symbol=JBHT
  2. LSTR: http://studio-5.financialcontent.com/investplace/quote?Symbol=LSTR
  3. CNW: http://studio-5.financialcontent.com/investplace/quote?Symbol=CNW
  4. HTLD: http://studio-5.financialcontent.com/investplace/quote?Symbol=HTLD
  5. ODFL: http://studio-5.financialcontent.com/investplace/quote?Symbol=ODFL
  6. WERN: http://studio-5.financialcontent.com/investplace/quote?Symbol=WERN
  7. KNX: http://studio-5.financialcontent.com/investplace/quote?Symbol=KNX
  8. according to weekly data from the U.S. Energy Information Administration: http://www.eia.gov/petroleum/gasdiesel/
  9. they could rise to as much as $7 a gallon by peak summer-driving season: http://www.palletenterprise.com/articledatabase/view.asp?articleID=3630
  10. the driver turnover rate at large fleets now stands at 88%: http://www.truckinginfo.com/news/news-detail.asp?news_id=76627&news_category_id=29

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