Looking For Deals On Stocks? Go Trucking, Analysts Say

Trucking Companies Remain Strong Stocks, Currently Among Best Bargains On Wall Street

Trucking company stocks are among the best bargains on Wall Street right now.

“These stock prices are unbelievable,” says Doug Rockel, an analyst with Furman-Selz LLC of New York. “Things aren’t that bad.”

“This is definitely the opportunity to purchase some of these stocks, regardless of what the economy does,” says Tim Quillin, an analyst with Stephens Inc. of Little Rock.

Rockel, who follows the performance of about 20 trucking companies and makes recommendations to institutional investors, is advising his clients to buy the stocks immediately.

Furman-Selz upgraded its rating on the stock of J.B. Hunt Transport Services Inc. of Lowell from a hold to a buy recommendation the first week of September. On Sept. 8, the investment firm upgraded its recommendation on the stock of Ryder Systems Inc. of Miami from neutral to a strong buy. Both companies had seen their stock values plummet in the past few months.

“Our sales force is calling people right now, telling them to buy,” Rockel says. “I think the price has gone about as low as it is going to go.”

The price of trucking company stocks has dropped at more than twice the rate of the market average during the past six months. Some of the stocks are trading at half the price they were selling for just three months ago.

“That’s what compels us to take advantage of this,” Rockel says. “The price has come down so much that we are willing to assume the risk.”

The price of a share of stock in J.B. Hunt Transport has dropped from almost $39 a share in July to about $20 in early September. The price of USA Truck Inc. of Van Buren declined from more than $17 a share in July to about $11 in the same time period. Other Arkansas-based trucking companies have experienced similar declines.

The stock prices aren’t a fair reflection of the value of the companies, Rockel says. The revenues, earnings and operating margins for the trucking companies remain strong.

“The market got a little too negative,” he says. “Investors focused on the future instead of what is happening now.”

Traditionally, trucking companies are among the first stocks to lose value when investors become concerned about the economy. Although the stocks prices often fluctuate immediately before and after quarterly earning reports, analysts often interpret sustained selling as investors losing confidence in the economy.

Trucking companies depend on an ever-increasing consumer demand and domestic production to support continued increases in earnings. Even minor fluctuations in demand or production can have a dramatic effect on the earnings of the trucking companies. When investors detect, or even suspect, a decrease in either, they sell their stocks.

Rockel sees their panic as his opportunity.

“We are sticking our neck out,” Rockel says. “But, we thought we should take advantage of these prices.”

Rockel and other analysts don’t think the bargains will get much better.

“It feels like the stocks have bottomed,” says Anthony Gallo, a vice president and equity analyst with BT Alex. Brown of Baltimore. “At some point, investor sentiment will change.”

The scorn investors have shown toward trucking company stocks isn’t justified by the financial performance of the companies, Gallo says.

“It’s frustrating,” he says. “I’m sure its really frustrating for CEOs to know their companies are sound and still see their stock prices falling like this.”

Earnings will remain strong for the remainder of the year, although they won’t be as high as the last part of 1997, which was a record year for the industry, he says.

“Investors obviously don’t believe analysts’ forecasts,” Gallo says. “The investors are struggling with the concern that the turmoil around the world will have an adverse effect on the economy here. That concern has overshadowed the performance of these companies.”

Economic troubles in Asia and Russia effect the trucking industry by reducing demand for the nation’s exports which, in turn, creates a decrease in domestic production. Domestic production uses trucks in all aspects, from hauling the raw materials to factories to carrying the finished products to warehouses and stores. Investors are anticipating these factors when they decide to sell their trucking company stocks.

Gallo has placed a strong buy recommendation on a number of trucking company stocks, including Hunt. He expects the price of Hunt’s stock to return to more than $30 a share, but not soon.

Quillin agrees the stocks are a bargain right now but says that regaining the value the stocks have lost in recent months will take awhile.

“We are close to a bottom but I don’t see a catalyst for the prices going up,” Quillin says.

Worldwide economic turmoil is scaring investors, he says.

“People are afraid,” he says. “The market tells us that we are going to have a recession.”

However, Quillin and other analysts disagree with the signals from the stock market.

“It all comes down to consumer confidence,” he says. “As long as consumer demand remains strong, the economy will remain strong.”

Quillin places a buy recommendation on the stocks of several Arkansas trucking companies including Hunt, PAM Transport Inc. of Tontitown and USA Truck. The recent turmoil in the stock market hasn’t changed his recommendations, he says.

Quillin recommends some caution to investors who are interested in the stocks of less-than-truckload carriers, such as ABF Freight System Inc. of Fort Smith and American Freightways Corp. of Harrison. Because the LTL companies have higher operating costs than truckload carriers, they are among the first in the industry to suffer from a economic slowdown.

A sustained selling of LTL stocks began months before the frenzied selling that took the rest of the stock market down more than 500 points in a day.

The price of American Freightways stock has dropped from $20 a share in October to about $8 last week, a decline of more than 60 percent. ABF’s stock has dropped from a high of more than $12 a share to about $7 during the same time period.

Trucking companies started the year at a near-record pace and analysts were predicting great things from the companies after first-quarter earnings were released.

“The first quarter looked as good, in a lot of ways, as the first quarter of 1994, which was one of the best years in the history of the industry,” Quillin says.

Hunt led all the state’s trucking companies in the improvements over last year. The company’s net income jumped from $600,000 in the first quarter of 1997 to $9.5 million in the first quarter of this year, an increase of 1,500 percent.

American Freightways’ net income increased 118 percent from $1.5 million in the first quarter of 1997 to $3.2 million in the first quarter of this year. USA Truck increased its net income 82 percent from $1.3 million to $2.3 million. Arkansas Best Corp. of Fort Smith, the parent company of ABF, brought its net income from a loss of $1.4 million to a profit of $2.5 million during the same time period.

Earnings remained strong in the second quarter. Hunt was up 740 percent from the second quarter of 1997. USA Truck was up 45 percent, Arkansas Best was up 33 percent, American Freightways was up 27 percent and PAM Transport Inc. of Tontitown was up 16 percent over the second quarter of 1997 earnings.

Quillin says he expects the third-quarter earnings to remain strong and continue to show double-digit growth.

The biggest challenges for the trucking industry for the rest of the year are the never-ending shortage of drivers and a decreasing consumer demand. Quillin expects consumer demand to decrease throughout the rest of the year. He already has detected some “barely discernible deceleration” in the volume being shipped by the less-than-truckload carriers, he says.