Truckload carriers coming off strong first quarter, driver shortage continues

The truckload industry looks to have experienced one of the strongest first quarters in a period that is typically weak while a driver shortage continues to show no signs of slowing.

However, as Lowell-based carrier J.B. Hunt Transport Services reported earlier this month, a harsh winter, especially in the Northeast, could negatively impact some carriers, according to a truckload preview by transportation analyst Brad Delco and associate Scott Schoenhaus, both of Little Rock-based Stephens Inc.

Analysts have increased first-quarter earnings estimates for truckload carriers despite soft performance in their stocks, especially in February, according to Delco and Schoenhaus. They maintain a buy rating on the majority of the truckload stocks they follow as a result of positive freight demand and improved inventory, supply constraints related to the driver shortage and electronic logging device (ELD) mandate. Hard enforcement of the mandate started April 1 after roadside inspectors said they wouldn’t start placing trucks out of service until then, even though the mandate went into effect Dec. 18.

Delco and Schoenhaus expect earnings estimates to be 2.5% less than consensus expectations for the first quarter. More premium freight opportunities will be offset by the winter storm and driver pay hikes. Their long-term outlook remains unchanged and was largely in line with consensus estimates for 2018 but 2% higher than 2019 estimates.

In the first quarter, spot rates were up about 29%, from the same period in 2017, and Delco and Schoenhaus expect supply and demand remained favorable for the truckload carriers.

“We believe the biggest positive data point will be in the form of reported rates as carriers continued to benefit from more premium freight opportunities (similar to [fourth quarter of 2017] prints), with certain carriers benefitting even further from exposure to the spot market (albeit we believe spot market volumes decelerated from last quarter as is seasonally normal).”

The expectations for rate increases might be high as one carrier projected revenue per total miles to rise 9.2% through February.

Van Buren-based carrier USA Truck was expected to see a 14% or higher rate increase (revenue per load mile), according to Delco and Schoenhaus. In some early bids, carriers have reported contract rate increases in the high single digits and low double digits, outpacing projected wage increases.

“Even if we assume a scenario where wage increases 11% and contractual rates only increase 7%, truckers should still see a 37% incremental margin to cover other inflationary cost pressures or drop to the bottom line,” they said. “Again, our sense is contractual rates are running closer to 9-11%, with a corresponding similar range for driver wage increases.”

USA TRUCK
USA Truck is expected on Thursday to report first-quarter earnings per share of 10 cents, based on a consensus of three analysts. This compares to a 61 cents per share loss in the same period in 2017. Revenue is projected to rise 12.2% to $114.1 million.

Delco and Schoenhaus expect USA Truck to post positive first-quarter earnings for the third time in the past 11 years. This reflects the positive truckload market and the progress made by the new management team. The carrier has potential to beat estimates, with its operating leverage of $80,000 equivalent to 1 cent of earnings per share. Put another way, a little improvement in operating income should have a big impact on earnings. The company is expected to continue to improve.

No major negative surprises are projected for the quarter, but Delco and Schoenhaus believe investors have some concerns about weaker-than-expected results, and this might already be reflected in stock prices. If the carriers’ financial reports are better than expected, share prices should rise as a result.

Shares of USA Truck (NASDAQ: USAK) were trading at $27.67, down 21 cents or 0.75% by midday Monday (April 23). In the past 52 weeks, the stock has ranged between $29.15 and $5.73.

TOP INDUSTRY CONCERNS
Three of the biggest concerns for truckload carriers include network disruptions related to the winter weather and how they will impact productivity and operating expenses, increased purchased transportation costs as companies outsource freight capacity in a tight truckload market and driver wage increases. The driver wage hikes should be more than offset by contract rate increases, but most truckload bids go into effect in the second or third quarters. Carriers might face margin pressures because of the timing between the wage increases and contract rates going into effect, said Delco and Schoenhaus.

In a recent supply chain conference at the hosted by the Sam M. Walton College of Business at the University of Arkansas, Shelley Simpson, executive vice president, chief commercial officer, and president of highway services for J.B. Hunt, explained how the driver shortage was leading to pay increases and more hikes are expected.

Drivers are in demand as they have more choices in other industries such as construction. In another segment of the conference, Avery Vise, vice president of trucking research for FTR, explained how drivers who choose to work in construction might earn about $50 less per week, but the tradeoff is they can be home nightly.

With unemployment rates at 17-year lows, how carriers recruit drivers must change.

“Pay is an immediate thought that people start to have, but it really does come down to home time, predictability and treatment overall,” Simpson said.

The company continues to have unseated trucks and open positions for drivers even with pay increases over the past two years. Average wages for the 3.5 million drivers increased about $1,000 in one year, she said, and the industry hasn’t kept up with pay increases compared to other industries. Over the past decade, driver wages have risen 6% as the Consumer Price Index (CPI) rose 18%, minimum wage increased 53% and employee wages for fast-food chain McDonald’s is up more than 90%.

Meanwhile, the trucking industry has lost a segment of drivers, and 12 years ago, the percentage of drivers ages 21 and 35 was 31%, she said. Now, it’s 19%.

Another concern was driver productivity, and how four hours of productivity are wasted daily in the United States.

“We believe that visibility can give at least one hour back by eliminating the waste inside the supply chain,” Simpson said. “When you think about the driver shortage that we have, certainly pay is an issue.”

The use of trucks is another, but the number of hours a driver has per day could be used more effectively. Increasing efficiency by one hour would lead to a 12% pay increase for drivers and a 12% increase in capacity, she said.

By this summer, all the carrier’s trailers should be equipped with satellite tracking, Simpson said. In March 2017, the carrier announced it would install GPS tracking devices and load sensors into its more than 90,000-unit intermodal and over-the-road trailer fleets.