Outlook improves for truck equipment manufacturers as class 8 truck orders jump 21%

The outlook is improving for trucking transportation equipment manufacturers as a result of an expected rise in the freight economy, which should mean more orders by late 2017 and increased production in 2018, analysts said.

The expected improvements in the freight economy should lead to a rise in freight volumes, according to transportation analysts Michael Baudendistel and Brady Cox, both of Stifel Nicolaus. The improvements include a combination of lower tax rates, fewer regulations, improved domestic manufacturing and a pro-energy policy. The improved outlook led analysts to change stock ratings for two truck equipment manufacturers: Meritor, to buy from hold, and Wabash National, to hold from sell.

“Our favorite in in the space remains WABCO Holdings as we believe the company is well positioned through broad geographic exposure to global truck and bus markets and will continue to outperform the markets it serves by increasing its content per vehicle, especially for safety, fuel-efficiency and automation-related components.”

Stifel analysts didn’t change North American production estimates for class 8 trucks in 2017 — which is projected to be 200,000 — a 12% decline from 228,000 units in 2016, but they expected U.S. trailer production to be 250,000, instead of 235,000, in 2017. One of the tailwinds for production in 2018 is the ELD (electronic logs for drivers) mandate, which “could potentially take 3%-5% of capacity out of the industry, mainly from small fleets and owner-operators, which has the potential to improve large fleets’ profitability levels, and in turn, translate to equipment investment.”

FUEL-SAVING PUSH
For 2018, analysts revised their production estimate of class 8 trucks to 230,000, from 210,000, and changed the U.S. trailer production estimate to 240,000, from 225,000. “We see the largest upside relative to our prior numbers to 2018 Class 8 production,” the analysts said, while “2017 trailer production increases the most in the near term.”

Wabash, which manufactures semitrailer trailers, might see orders rise this year ahead of the 2018 greenhouse gas regulations.

“Many, if not most, large over-the-road fleets have already adopted the fuel-saving measures that are required by the 2018 greenhouse gas standards,” which include “low rolling-resistance tires, aerodynamic side skirts and trailer tails.” But some small and mid-sized fleets could “pre-buy” before the regulations go into effect, bringing “demand from 2018 and later forward in 2017.” The estimate is a 10,000 unit pre-buy in 2017, pulling from what would otherwise be 2018 orders. In fiscal 2016, Wabash’s profits rose 14% to $119.43 million, while revenue fell 8% to $1.84 billion. The company sold 60,950 trailers in 2016, and expected to sell 51,000 to 55,000 in 2017.

Meritor, which produces axles, undercarriages, drivelines, brakes and braking systems for truck manufacturers, “estimates that a 5,000 unit change in class 8 production volume impacts revenue by $20 million,” according to Stifel. The 2018 estimate revision for class 8 trucks “translates to $100 million in revenue or $15 million in EBITDA (earnings before interest, tax, depreciation and amortization.)” On Feb. 1, the company saw first-quarter earnings for fiscal 2017 fall 42% to $15 million, from $26 million in the same quarter the previous year. Earnings fell as a result of lower revenue, which declined because of lower production in the North America class 8 truck market. Revenue for the quarter fell 14% to $699 million. The company projected its fiscal 2017 earnings will be between $80 million and $85 million, while revenue would be between $3 billion and $3.1 billion.

As for vehicle technology supplier WABCO, it should “benefit from European heavy duty truck registrations, which also exceeded expectations” in the fourth quarter. The company plans to present its fourth-quarter and fiscal 2016 earnings Feb. 17. Analysts were also positive on Cummins, which makes engines, generators and exhaust systems, and they expect it to “benefit from strength in Chinese heavy commercial vehicle production in the fourth quarter, which surged” 73%, from the same quarter in the previous year. Its fourth-quarter conference call is set for Feb. 9.

JANUARY ORDERS RISE
Orders of North American class 8 trucks rose 21% to 22,200, in January, compared to the same month in 2016, and “hit a 14-month high,” according to Kenny Vieth, president and senior analyst for ACT Research.

“This is the time of year when big fleets are in the market scheduling replacement orders for the coming year,” he said.

The rise marked the second positive year-over-year increase in 23 months.

“Orders aren’t surging by any means, but signs continue to look incrementally better,” according to an industry update by Baudendistel and Cox. Since the ordering season started in October, class 8 truck orders have declined 14% to 76,933 units, compared to the level in the season the year before. But the decline means “significantly less demand will need to be made up for in the back half of the order season” as the orders had been down 23% through December.

“We believe that indicates potential upside to our 2017 outlook given the lower incentive to book orders early for 2017 production, with backlogs low reducing the incentive to secure a production slot early, inventory representing less of a headwind this year though still somewhat elevated and freight markets having been relatively weak in summer/fall months and optimism improving.”