Truckload companies operated in a favorable environment in the fourth quarter, but it wasn’t as strong as previous quarters in 2018. And capacity wasn’t as tight as it was in the peak season in 2017, analysts said.
In a fourth-quarter earnings preview, trucking/transportation analyst Brad Delco and associate Scott Schoenhaus, both of Little Rock-based Stephens Inc., said October and November were “choppy” and didn’t meet expectations while peak season didn’t start until later in the quarter despite an earlier Thanksgiving. For 2019, Delco and Schoenhaus are optimistic about truckload company stocks, and a strong case for investment is in the works, showing signs similar to 2016.
Truckload carriers are expected to release mixed financial reports for the fourth quarter, amid tougher comparisons from the fourth quarter of 2017.
For the period, Van Buren-based carrier USA Truck is expected to report earnings rose 62.9% to 57 cents per share, from 35 cents per share in the same period in 2017, according to a consensus of four analysts. Revenue is expected to increase by 22.6% to $151.13 million. For 2018, earnings are expected to rise to $1.43 per share, from a loss of 56 cents per share in 2017. Revenue for the year is projected to increase by 21.8% to $543.93 million.
Shares of USA Truck (NASDAQ: USAK) closed Monday (Jan. 7) at $15.38, down 15 cents or 0.97%. In the past 52 weeks, the stock has ranged between $29.15 and $14.41. Delco and Schoenhaus give the stock a buy rating and reduced the 12-month target price by $7 to $23. The analysts reduced the target prices for other truckload carriers, too.
“Our reduced estimates reflect more muted rate increases (revenue/loaded mile), lower asset productivity (miles/truck/week) and steady-state inflationary cost pressures, partially offset by lower fuel assumptions,” said Delco and Schoenhaus. “Said another way, our rate assumptions are now in the 1-4% range for 2019, which we believe supports flattish margin performance depending on the carrier.”
After a strong 2017, truckload carriers’ performance in the second half of 2018 reversed all of the gains related to stock performance from the previous year, according to Delco and Schoenhaus. It was the second-worst performance for the carriers after 2005 since Stephens started tracking the group in 1998. This happened as freight levels were healthy and capacity was constrained, leading to supply and demand metrics that remain favorable. However, the numbers are more balanced than they were at the end of 2017 and in the first half of 2018. Spot rates have since moderated and declined in the third quarter, from the same period in 2017, and the result has been weaker investor sentiment.
Dry van spot rates declined 2.4% in December, from the same month in 2017, according to DAT Solutions. Truckload capacity was tight at the end of the holiday season, leading the rates to increase 3 cents in the week ending Jan. 5. But this could reverse as fuel surcharges fall and rates decline on higher-traffic lanes.
While contract rates are expected to rise in the low to mid-single-digits in 2019, shippers are looking to establish longer-term partnerships with carriers, according to Delco and Schoenhaus.
The analysts also see a strong case for investment into truckload stocks for 2019 based on their value, company business models that provide for a variable cost structure and ability to perform in recessions or weaker economic times and future regulations, such as the Drug and Alcohol Clearinghouse set to go into effect in January 2020 and the potential for drug testing using hair follicles that would likely constrain capacity.
Estimates for the stocks are likely to decline in the near term, but Delco and Schoenhaus believe that investors are waiting for estimates to reset before being constructive on the stocks. “As a result, we believe the opportunity for investors is sooner rather than later to start building positions, in what is typically viewed as a less ‘liquid’ industry. Additionally, if the U.S. were to go into a recession, we believe (truckload) stocks could prove to be an effective hedge for more short-term oriented investors as the stocks already appear to be pricing in a recession.”
The driver shortage remained a challenge in the fourth quarter, but hiring is typically more favorable over the period as construction and outdoor labor slows down in colder weather areas, according to Delco and Schoenhaus. In the third quarter, driver turnover fell 11 percentage points to 87% at large truckload carriers, according to trade organization American Trucking Associations.