Class 8 truck production not expected to peak in 2018, analyst says

The outlook looks great for truck manufacturers and component suppliers as order season jumped to a quick start, large fleets returned to equipment markets and contract rates have increased, said Michael Baudendistel, transportation equipment analyst for Stifel.

In an industry update, “Too much of a good thing is a good thing,” Baudendistel explained some investors are concerned the positive trend might mean 2018 will be a peak year for truck production, but he believes 2019-2020 might be stronger than 2018.

As a result, he increased earnings estimates for truck equipment manufacturers and changed the stock rating to buy for Navistar, upgraded to the same ratings as Meritor and WABCO. The news is good for the country’s struggling manufacturing sector.

As long as the economy remains stable, the outlook for 2019 should be even better than 2018, and production should continue to rise into 2020.

“Plus there should be increased demand driven by replacement needs as historically high production in 2014 and 2015 means there will be a large supply of four- and five-year-old trucks hitting the market for their first trade-in over that period,” Baudendistel said.

In 2014 and 2015, 297,000 and 323,000, respectively, of class 8 trucks, or the largest class of trucks on the road, were built, and most trucks are replaced for the first time after five years than at any other age. After five years, the trucks have between 450,000 and 500,000 miles.

Large fleets usually purchase their equipment early in the order season with negotiations taking place in September and orders in October. Smaller fleets and vocational customers are less seasonal. North American orders of class 8 trucks, the largest class of trucks on the road, increased 159% to 36,200 units in October, according to ACT Research. November orders rose 69% to 32,900 units.

Investors have avoided investing into trucking equipment in the following year when industry analysts forecast a Class 8 production of more than 300,000 units for a year. In 2018, ACT Research expects production to reach 322,000 units. In 1999 and 2006, when production rose above 300,000 in a year, it was followed by a year in which production declined by about 200,000 units.

“We believe it is important to understand that those troughs were associated with severe recessions that followed a period of economic excess and pre-buying ahead of emissions standards that promised to increase the cost, complexity and downtime of equipment in future years,” according to Baudendistel.

So far this year, the rise in orders has been attributed to an improving freight market. In 2019, production is expected to reach 315,000 units. Without a recession, production is expected to decline in 2021-2022 to low 200,000 levels.

Earnings are expected to rise the most for transportation equipment companies that are more involved with class 8 production, and especially those whose clients are large trucking fleets. In an earnings analysis on Navistar, new products are expected to drive the company’s growth. This included the International 12.4-liter A26 engine, which opened half of the class 8 market to Navistar. In October, Navistar received a vote of confidence from carrier U.S. Xpress when it purchased 1,655 LT tractors in a multi-year deal worth more than $200 million.

“This was a conquest business for Navistar given U.S. Xpress has been primarily a buyer of Freightliner trucks historically,” according to Baudendistel’s analysis.

Truckload contract rates look to rise between 5% and 10% in 2018; however, most existing rates won’t change until mid-2018.

“So truckers’ profitability may not reach its potential until late next year setting up a strong fall 2018 order season for 2019 delivery,” Baudendistel said. “Our outlook for the remainder of the decade reminds us of the old saying, ‘When truckers make money, they buy trucks.’”

For the week ending Dec. 9, dry-van spot rates rose 1 cent to $2.10 per mile — a three-year high, according to DAT Solutions. Kenny Vieth, president and senior analyst for ACT Research, sees the continued strength in freight rates as a positive and expects carriers will have the “upper hand in negotiations with shippers” in 2018. Contract rates are expected to rise between 5% and 10%, and spot market rates could increase even more.