USA Truck, P.A.M., other carriers to see best peak season in years, multi-year upcycle expected

Truckload company earnings reports for the fourth quarter are expected to show the best peak season in years, and should set up 2018 nicely as the industry looks to ride into a multi-year upcycle similar to 2004-2005, said Brad Delco, trucking/transportation analyst for Stephens Inc.

The strength in the truckload sector of the trucking industry is a result of increased demand, broad-based and peak season related, along with a capacity shortage because of the driver shortage, according to a trucking and transportation industry update by Delco. This has led to a nearly 20% increase in spot rates, from a year ago, and an improved outlook for contract rates to increase as shippers and carriers are expecting mid-to high-single-digit rate hikes in the upcoming bid season.

Ratings were updated as the truckload carriers improved truck use in the tight market and had greater premium freight opportunities in the fourth quarter.

“We also raised our longer-term outlook and are now (about) 19% above consensus for both 2018 and 2019 on average for the group,” Delco said, adding that the estimates include the tax reform, “likely not fully baked into Street (estimates) yet.”

Stocks in the truckload group Stephens follows, including Van Buren-based carrier USA Truck, have mostly buy or hold ratings, and the companies can expect positive demand with continued GDP growth, tight capacity as a result of the driver shortage and the positive impacts of tax reform. All of these factors are positive for the truckload companies, which are operating in a “multi-year upcycle,” Delco said.

Stephens updated its earnings and 12-month stock estimates for the companies, including USA Truck, which has a hold rating. In the fourth quarter, the carrier is expected to report earnings of 8 cents per share, according to a consensus of two analysts. Stephens increased its estimate by 5 cents, to 10 cents per share. For 2018 and 2019, the carrier was projected to report 95 cents per share and $1.35 per share, respectively, according to Delco.

The carrier’s stock price is expected to rise to $21 over the next 12 months, according to Delco. The previous target was $17.

As a result of tax reform, USA Truck’s tax rate is expected to be 28% in 2018 and 2019, a decrease of 19.7% and 17.7%, respectively, without the reform in place.

In the fourth quarter, USA Truck is expected to see revenue increase 13.2% to $116.7 million. Net income is projected to be $800,000, according to Delco. For 2017, the carrier is expected to report a loss of $4.8 million after reporting a $2.1 million loss in 2016. On Wednesday (Jan. 10), shares of USA Truck (NASDAQ: USAK) hit a 52-week high of $21.89 and closed at $21.46, up 77 cents or 3.72% on Wednesday (Jan. 10). In the past 52 weeks, the stock has traded between $21.89 and $5.73.

USA Truck is expected to report fourth-quarter results after the market closes Feb. 1. A conference call to discuss the results is set for 8:30 a.m. Feb. 2.

HURRICANE IMPACT, DRIVER PAY
In the third quarter, several carriers reported truck use, or average miles per tractor, declined as a result of the hurricanes.

“We believe the subsequent rebuilding/replenishment efforts that followed these events earlier in the quarter combined with strong peak season demand that developed later in the quarter, should both have positive impacts on utilization levels across the (truckload) group,” Delco said. “From a rate (revenue per loaded mile) perspective, we believe the carriers were able to procure more premium freight opportunities this peak season and be more selective with freight in their networks, which should bode positively on reported rates in the quarter. Combined with anticipated driver wage increases that have yet to be announced/go in effect from the public (truckload) carriers, we expect to see margin expansion generally across the group (both sequentially and year-over-year).”

Two of the negatives in the fourth quarter are expected to be the increased amount of purchased transportation carriers needed to meet demand in a tight market and the possible announcements for driver pay increases, Delco said. These negatives are expected to impede margin growth in an otherwise strong market. Also, the driver shortage is a significant issue as demand rises and the economy reaches full employment, putting pressure on attracting drivers to “more lucrative and better lifestyle jobs.”

On Monday (Jan. 8), P.A.M. Transportation Services announced it would increase driver pay rates up to 40% in a move to attract drivers to the Tontitown-based carrier. The pay raise would impact most of the company and owner-operator drivers within the carrier’s fleet. The increase would vary based on driver experience and route, and drivers could see up to a 40% mileage rate increase in the first three months, compared to the previous pay structure.

MULTI-YEAR UPCYCLE
The existing freight cycle is expected to be similar to the 2004-2005 cycle than the shorter 2014 cycle, Delco said. In 2014, GDP increased 2.4% and was slightly negative in the first quarter that year. The 2014 cycle was brought on as a result of capacity constraints, related to the Polar Vortex, reduced train speeds and hours of service regulations.

In the 2004-2005 cycle, GDP rose more than 2.5% for several consecutive years, and “with economists calling for GDP growth to be between 2% and 3% for the next two years, we believe the demand side of the equations is setting up for the multi-year upcycle as we saw nearly 15 years ago.”

“Additionally, we believe supply constraints in the forms of continued driver recruitment/retention challenges in a full labor market, ELD enforcement on April 1, 2018, and used equipment values that are (about) 33% below where they were in 2014 and likely to remain pressured post-ELD mandate, in our view, and understanding that used equipment values typically support the purchase of new equipment, all should set the stage for (truckload) fundamentals to remain strong given the healthy economic backdrop.”

The 2014 cycle was supported by gains from used truck sales, and earnings in this cycle are expected to increase as a result of operations and “not artificially supported,” Delco said. The cycle is expected to support multiple years of contract rate increases and the stocks, like in the 2004 cycle.