Better days ahead for LTL carriers like ABF Freight, but expect ‘bumpy ride’

While investors were buying into less-than-truckload stocks late last year, some analysts were “pointing fingers” at the move, driving up the stocks. Since January, stocks have started to return to “reality,” but the expectation remains that better days are ahead for the carriers.

Transportation analyst David Ross of Stifel compared the rise in the stocks to a slightly-modified version of a Digital Underground song. The analysts were the “punks” pointing fingers at the rise “but still saw everyone ‘doin’ the Trump.’”

Though the enthusiasm over the new administration’s policy changes and freight have cooled, the “prospect of lower taxes, reduced regulation, increased capital spending and the administration’s stated focus on domestic jobs, infrastructure and manufacturing” should boost earnings for carriers. However, “it may take a while,” according to Ross. Expect a “bumpy ride” as expectations might change and results could be inconsistent.

“At the earliest, we could see both expectations and results inflect positive this summer.”

Shares of ArcBest (NASDAQ: ARCB), the parent company of ABF Freight, have fallen more than most LTL carriers, and “the picture doesn’t appear to be getting much better,” according to a Stifel company note. In a recent filing with the U.S. Securities and Exchange Commission, the company noted ABF Freight’s operating ratio typically rises 350 to 400 basis points between the fourth and first quarters. Operating ratio is the company’s expenses as a percentage of revenue.

“We didn’t see a need for them to include this, if it weren’t going to hold again,” according to Stifel analysts.

But the company’s profit margin isn’t expected to decline as much in the first quarter as it has in the same period in previous years because of “cost savings, but we fear there were other factors in the quarter that were problematic, like weather, accidents, labor costs and/or purchased transportation.”

For the quarter ending March 31, ArcBest is expected to report a $900,000 loss, a 4-cents-per-share loss, according to Stifel estimates. Wall Street expects a 12-cents-per-share loss, based on consensus of 10 analysts. In the same quarter in 2016, the company reported a loss of 23 cents per share.

Revenue should rise 6% to $662 million, from $621.46 million in the same quarter last year, according to a consensus of six analysts. On May 5, ArcBest plans to release first-quarter 2017 earnings.

Shares of ArcBest closed at $26.85, up $1.20 cents, on Monday (April 24). In the past 52 weeks, the stock has traded between $33.95 and $14.85.

BROADER TRENDS
Freight demand has started to rise for LTL carriers. Tonnage and shipments are up less than 1% and were positive for the first time since the fourth quarter of 2014. For the first quarter of 2017, volume should rise between 1% and 3% and is projected to increase in the low single digits throughout 2017, according to Ross.

“If 2018 growth is to be any better, we’ll need some combination of an improving manufacturing sector and reduced truckload supply sufficient enough to cause lighter-weight (truckload) shipments to flow back into (less-than-truckload) networks.”

The seasonally-adjusted truck tonnage index of trade organization American Trucking Associations rose 0.7% in March, from the same month in 2016. Between February and March, the index fell 1%.

“The freight market remains OK. It’s not strong, but it’s certainly not bad,” ATA chief economist Bob Costello said, adding that late winter storms likely impacted tonnage in March.

While he doesn’t expect are large rise in tonnage anytime soon, Costello said “signs remain mostly positive for freight, including lower inventory levels, better manufacturing activity, solid housing starts and good consumer spending.” On average, he expects “moderate growth going forward.”

Transportation analyst Brad Delco of Stephens was encouraged by the recent ISM reports showing six consecutive months of expansion in the manufacturing industry. Manufacturing continued to expand in March, marking the seventh consecutive month of growth.

“We believe that the demand environment remained stable, with an expected tonnage acceleration that has yet to occur,” Delco noted. “On the pricing side, we believe the rate environment remained rational, supported further by a large player who demonstrated more discipline in recent results.”

LTL pricing is expected to rise about 3% this year as a result of an increase in the average shipment sizes and shorter haul lengths, according to Ross.

“Our outlook is for continued rate increases excluding fuel surcharges. That has been tested through the freight recession of 2015-2016, and we have heard little in the way of irrational pricing from competitors recently.”

Unlike the truckload sector, which recently experienced some consolidation with the merger of Knight and Swift, LTL isn’t expected to see mergers like this.

“The public LTL carriers already have their networks largely built out, and there aren’t any benefits, in our opinion, of large overlapping LTL mergers,” according to Ross.