Trucking industry stocks get reality review after post-election bump

Much of the trucking industry has been riding a wave of Donald Trump euphoria since the Nov. 8 election, but that’s starting to hit reality as analysts downgrade stock ratings for three trucking companies, including P.A.M. Transportation Services.

Stifel transportation analyst John Larkin recently shifted the stock rating for Tontitown-based carrier P.A.M. Transport to “hold” from “buy.” Since before the election, “the average stock under our coverage universe has seen a stock price increase of nearly 13%. While our coverage universe has moved (again, 13%) (P.A.M.) has moved a full 39%, as the market is fully pricing in many expected benefits from future growth.”

According to a report on Universal Logistics Holdings, in which the stock was also downgraded to hold, “the company’s equity is already pricing in a lot of benefits that have yet to materialize.”

One of the cited benefits was an infrastructure bill that has yet to be approved.

Another concern for P.A.M. regards the amount of business it does with the automotive industry and its cross-border business with Mexico. About 45% of the company’s revenue can be attributed to the automotive industry and nearly 40% of the business is “cross-border Mexico,” according to Stifel. The automotive industry “appears to be peaking” and uncertainty remains “surrounding cross-border trade thanks to the president elect.” Also, Ford recently announced plans to cancel a plant in Mexico and expand in Michigan. Analysts foresee this “headwind” as a short-term concern, but if the company’s core markets “play our in a scenario that appears favorable,” analysts expect the company “to capitalize on those dynamics.”

P.A.M.’s fourth-quarter earnings are expected to fall 65% to $1.1 million, or 17 cents per share, down from $3.2 million, or 45 cents per share, in the same quarter in 2015, according to Stifel analysts. Revenue will increase 3.2% to $105.7 million, up from $102.4 million in the same quarter in 2015. In fiscal 2017, the carrier should see revenue, including fuel charges, rise 5.5% to $454 million, up from $430.2 million in fiscal 2016. Truckload volume will rise 4.3% in 2017, down from an 8.5% jump in 2016. The brokerage segment will see revenue increase 5% in 2017, up from a 1.5% rise in 2016. The 12-month target for the stock price was lowered to $26, from $29.

Shares of P.A.M. (NASDAQ: PTSI) closed Tuesday at $26.19, down 24 cents or 0.91%. In the past 52 weeks, the price has ranged between $32.23 and $14.75.

PROMISES AND POLICY
Asset-based transportation companies are the most at-risk if Trump’s policy disappoints, according to analysts with Baird Industrial Research. Transportation and logistics analyst Benjamin Hartford of Robert W. Baird & Co. expressed caution for the first half of 2017 following the post-election rally.

“While we believe much of the rally is more based on expectations of troughing fundamentals, investors have clearly concluded that Trump’s administration implications to transports will be positive,” Hartford wrote. “Our views on the implications of the Trump administration’s planned changes for transports are more balanced.”

Positives include tax and regulatory reform and infrastructure projects but trade concerns remain.

“As the post-election honeymoon ends, focus shifts from campaign promises to actual policy implementation, and the difference between the two can be large,” according to the Baird report.

Transportation and logistics analysts for Stifel remain cautiously optimistic on the industry and don’t expect positive results until the middle of the year.

“And, it is entirely possible, in our view, that the turnaround won’t become evident until the second quarter of 2018,” according Larkin’s report.

INDUSTRY ANALYSIS
In the last week of December, freight demand increased 1.7% from the previous week, and compared to 2015, it rose 39.8%, according to a Stifel report.“Pricing is far ‘less negative’ than it was” in the first half of 2016. Dry-van spot rate rose 1% to $1.73 per mile.

In the first half of 2016, dry-van contract rates were as much as 3% higher than spot rates, but by late November, spot rates were 4.5% higher than contract rates, marking the biggest gap of the year, according to Transport Topics, a publication of trade organization American Trucking Associations. The change might be related to “peak shipping season;” however, the change didn’t happen in 2015.

“We maintain that we have seen the bottom of the trucking market and think dry-van carriers are far better off heading into this bid season [2017] than they were [a year ago],” according to the Cowen-Chainalytics Freight Indices report.

While the truck driver shortage doesn’t show signs of stopping, trucking executives, in a recent conference call with investment bank Cowen and Co., expect driver pay will increase 5% in the first quarter because of the “anticipated rebound and growth opportunities ahead.” Trucking transportation gained 1,400 jobs in December, according to the U.S. Bureau of Labor Statistics. Between December 2015 and December 2016, the industry gained 11,700 jobs.

Class 8 truck orders ended the year “slightly above expectations,” according to Stifel. In December, the number of orders fell 24% to 21,400 trucks, from the same month in 2015, but the analysts had expected between 19,000 and 20,000 trucks to be sold.