Analyst Urges Caution For Trucking Investors

Although the trucking industry remains healthy and many trucking companies had strong second-quarter earnings, analysts are urging investors to be cautious for the rest of the year.

“Overall, we remain cautious toward the less-than-truckload and integrated airfreight industries where operating leverage can turn small volume decreases into large earnings swings,” says Tim Quillin, an analyst with Stephens Inc. of Little Rock. “We also recommend near-term caution with regard to the truckload group though we remain generally bullish on industry fundamentals.”

Quillin cites three reasons for recommending caution.

First, the trucking industry still is hampered by a severe shortage of drivers. Lack of drivers is limiting the ability of trucking companies to expand their fleets for the fall shipping season.

Second, analysts fear a reduced demand for trucking as manufacturing levels decrease.

“We are concerned that the manufacturing slowdown could shake consumer confidence if high-paying factory jobs are lost even if unemployment remains low,” Quillin says. “We are also convinced that the current bull market is ripe for correction and believe this could further erode consumer confidence.”

The third factor is the difficulty of comparing the first quarter of this year with the first quarter of last year. Earnings in the first quarter of last year were boosted by low fuel prices, problems with railroad service, mild winter conditions and a strong economy. An unfavorable comparison can further reduce investor confidence.

Investors have been selling large amounts of trucking company stocks during the past month in response to fears of the slowing economy, reduced manufacturing production and weak corporate earnings.

Despite the warnings, Quillin says he remains bullish on the trucking industry.

“Our earnings outlook remains positive, but we will closely monitor any potential slowdown in business,” he says.

Quillin still recommends several trucking company stocks to long-term investors:

J.B. Hunt Transport Services Inc. of Lowell, the nation’s largest publicly held truckload carrier, will deliver above-average returns during the next two or three years.

M.S. Carriers Inc. of Memphis will increase its earnings per share more than most of its competitors.

Swift Transportation Inc. of Phoenix, the fourth-largest publicly held truckload carrier, will continue to increase earnings by aggressively acquiring other trucking companies. Swift has acquired eight companies in the past 10 years and analysts expect another acquisition within the next several months.

CNF Transportation Inc. of Palo Alto, Calif., is competing for a contract with the U.S. Postal Service to carry all the government’s priority mail. If the company gets the contract, it could add as much as $1 billion annually to the company’s revenue.

Ryder Systems Inc. of Miami could reach earnings next year of $2.75 per share and the stock price could increase into the high 40s.