Trucking Sector Signals Tepid Economic Growth

The trucking and transport sector, often seen as a barometer for the broader economy, is expected to report mixed financial results over the next few weeks, according to industry analysts.

The second quarter, which ended June 30 for most of the transports, was nothing to rave about as a key metric – the New Order/Inventories Index – stayed below average in late May and June.

Analysts with Baird Equity Research said second quarter freight trends were mixed and industrial and retail growth rates continue to decelerate.

“After a solid May, our contacts have generally characterized June trends as soft. Weakness was cited in dry van truckload in the Northeast and Pacific Northwest U.S.; and brokers commented that June spot volumes were challenged given the lack of capacity tightness. Soft retail end-market demand appears to be the culprit for June’s weakness,” noted Ben Hartford, analyst with Baird Equity Research.

INTERMODAL SEGMENT
Intermodal volumes were also mixed in the second quarter, with larger players doing better than smaller companies.

Hartford notes several retail shippers describe demand as “flat.” Lower commodity prices have led to marginal de-stocking among industrial distributors along with less demand from oil & gas and wind energy markets.

That said, the Association of American Railroads reported strong intermodal volume in June. Traffic totaled 1.009 million containers and trailers, up 1.3% from June 2012. The weekly average of 252,347 units was the highest for any month on record, according the AAR.

John Gray, AAR’s senior vice president of policy and economics said the fall is generally the peak period for intermodal and he expects to see that again this year.

Lowell-based J.B. Hunt Transport is one of the larger intermodal carriers as it was a first-mover in the sector in 1989 – long before it was deemed “prudent” by mainstream truckers.

J.B. Hunt will report earnings July 15 and Wall Street expects 74 cents a share, a 5.9% bump from the year-ago period. The top line estimate is $1.4 billion in revenue, up 11% from the same period in 2012.

Wall Street will be watching closely. J.B. Hunt missed estimates last quarter, the company’s first misstep in three years. The company posted net income of $73.3 million during the first quarter, up from $67.7 million during the 2012 quarter. Bottom line profits rose 8.29% from a year ago.

The per share earnings of 61 cents, missed the consensus estimate of 64 cents as predicted by industry analysts. Earnings were dinged because of higher-than-anticipated operating costs in two of the company’s four segments.

Total revenue for the quarter was $1.29 billion, ahead of the $1.165 billion posted in the 2012 period and this number did line up with Wall Street predictions.

Intermodal accounted for 62% of J.B. Hunt’s revenue in the last quarter and a whopping 77% of the company’s total operating income. J.B. Hunt intermodal commands substantial market share in the sector – roughly one-third of all domestic intermodal revenue, according to industry analysts.

To remain dominant, J.B. Hunt added more containers this past year than any of its competitors. Analysts say J.B. Hunt intermodal remains in a strong position to grow amid tighter capacity in trucking, already scarfing up 19% gains in the Eastern network and 10% growth in transcontinental routes during the first quarter.

BETTER PRICING
The trucking sector continues to shed jobs amid shrinking capacity and more driver restrictions which took effect on July 1.

Trucking lost 3,500 jobs in June, while U.S. employers added 195,000 workers to payrolls, according to the Labor Department. The trucking sector shed 2,400 jobs in May, 700 more than originally reported.

One silver lining to shrinking capacity is an increase in pricing power per load, which hasn’t been possible since 2007. Hartford said LTL carriers have seen a 3.4% growth in pricing power this year. FedEx Ground and UPS Freight announced rate hikes of 5.9% this year.

Core truckload pricing growth remains positive with expectations of 1.5% to 2% rate increases year over year, according to Baird analysts.

Hartford said the implementation of new federal hours-of-service regulation will negatively impact fleet productivity between 1% and 4%. He expects the new regulations to be a slight drag on what is normally a profitable quarter. He said the severity of the drag will depend on how quickly demand picks up after a fairly flat summer.

Hartford said truckload volumes in the Midwest and Southeast U.S. as well as loads coming in and out of Mexico were described as “solid” in June, while less-than-truckload volumes also held their own.

Fort Smith-based Arkansas Best Corp., parent of ABF Freight System, will report earnings on July 26. Analysts expect the LTL company to report 20 cents a share, slightly better than the 18 cents garnered a year ago.

Revenue is expected to top $570.99 million, up 11% from the same quarter in 2012.

ABF recently ratified a five-year collective bargaining agreement which is poised to help the company regain profitability, according to analysts. The deal will ensure the company has adequate drivers and give it some pricing power amid tighter overall capacity.

The deal is expected to save the company roughly $30 million in annual expense, equating to 70 cents per share, according to Christian Wetherbee, analyst with Citi Investment Research.

TRADITIONAL TRUCKLOAD
The traditional truckload sector continues to face challenges with driver shortages of roughly 200,000 workers.

Analysts say the results among a host of smaller carriers like Van Buren-based USA Truck and Tontitown-based P.A.M. Transportation will depend on niche markets they serve and their abilities to gain better pricing amid a host of competition from non-asset brokers.

P.A.M. has traditionally catered to the auto industry, which is having a banner year in terms of ramped up production and record sales through the first six months of 2013.

Analysts expect P.A.M. to earn 10 cents per share in the second quarter, up slightly from 8 cents posted a year ago. Total revenue is expected to remain flat at the $103 million range. P.AM. is scheduled to report earnings on July 22.

USA Truck, under new management since February, is working to reverse losses that have plagued the carrier for several years. Analysts expect losses of 7 cents per share in the second quarter, better than 34-cent loss recorded a year ago. Revenue is expected to improve to $143 million, up 10% from the same period in 2012.

USA Truck is expected to report financial results the first week of August.