Truckload market showing signs of stability in third quarter

The truckload market has started to show signs of stability in the third quarter after nine difficult months, analysts said.

In a third-quarter earnings preview, analysts Jack Atkins and Scott Schoenhaus, both of Little Rock-based Stephens Inc., explained that freight trends returned to normal seasonal patterns in August and September following softer demand in July as a result of inventory destocking and the timing of Independence Day on the calendar.

“While the market remains muted relative to 2018, we are encouraged to see demand and rates in the spot market stabilize,” Atkins and Schoenhaus said. “Although we anticipate a challenging bid season early next year, with capacity beginning to exit the market and [year-over-year] comparisons easing materially in the months ahead, we believe the stage is set for improving sentiment towards this group as investors begin to anticipate a recovery in the freight cycle in mid-2020.”

Import volumes on the West Coast returned to normal seasonal levels in the third quarter, and this can be attributed to shipper inventories becoming stable, according to Atkins and Schoenhaus.

The existing market for small and mid-sized carriers is challenging, and capacity is starting to leave the industry. In August, employment in the industry declined by 4,500 people, from July, according to the Bureau of Labor Statistics. The attrition is expected to continue as a result of low rates, rising costs such as insurance and more regulations, including the National Drug and Alcohol Clearinghouse, according to Atkins and Schoenhaus. Large carriers can expect insurance premiums to rise between 20% and 40% over the next 12 months, and smaller carriers could see premiums increase nearly 100% as a result of “mega verdicts” against carriers and fewer underwriters, Atkins and Schoenhaus said.

Dry-van truckload rates fell 15.2% in August, from the same month in 2018, according to DAT Solutions. Through Sept. 22, the rates were higher in September, compared to August. Spot rates are expected to start rising again in year-over-year comparisons in March 2020, if seasonal trends remain in place, according to Atkins and Schoenhaus. Some contract rates are being renewed at prices that are flat or down in the low-single digits from the rates in 2018, and shippers have pulled bids forward to make the most of the softer freight market.

Bob Costello, the chief economist for trade group American Trucking Associations (ATA), recently explained the decline in the spot market, which is down 50% compared to the past two years, according to a Transport Topics article. “This is where the freight recession resides, on the truckload side,” he said.

ATA’s advanced seasonally adjusted For-Hire Truck Tonnage Index fell 3.2% to 118.3 in August, from July. The index rose 4.1% in August, from the same month in 2018. Since the start of 2019, the index has risen 4.3%, from the same period in 2018.

“While there is concern over economic growth, truck tonnage shows that it is unlikely that the economy is slipping into a recession,” Costello said. “It is important to note that ATA’s tonnage data is dominated by contract freight, which is performing significantly better than the plunge in spot market freight this year.”

Trucking brokers are expected to be challenged as a result of rising competition from technology-enabled startups and the pull forward in bids for next year. Atkins and Schoenhaus see the recently improved performance and trends as a positive for the industry leading into peak season. The industry expects a “normal” peak season for 2019, but Atkins and Schoenhaus noted that is difficult to determine as peak seasons aren’t the same. The majority expect a surge in demand similar to 2016, but rates are expected to be down from 2018. One uncertainty is the calendar, with six fewer days between Thanksgiving and Christmas, compared to 2018. A shorter peak season could lead to an earlier start, a longer season or a greater rise in rates as shippers look for capacity. However, it might lead to softer demand if the shorter calendar changes consumer behavior and hurts retail sales.

“Either way, we believe that peak season this year is critically important as a setup for the broader market entering into contract renewals in early 2020,” said Atkins and Schoenhaus. “A weak peak would give shippers more leverage for rate concessions from carriers, and a strong peak could swing the pendulum in favor of the carriers.”

Van Buren-based carrier USA Truck is expected to see third-quarter earnings fall 72% to 25 cents per share, based on a consensus of four analysts. Revenue is projected to rise by 0.6% to $133.4 million. Atkins and Schoenhaus give USA Truck a buy rating and a 12-month target of $12. The analysts decreased projections for the third quarter because the carrier possibly had slower demand in July and August than previously expected as a result of the work to re-bid some of its business. The company expects to release Oct. 8 when it will announce its third-quarter financial results.

Tontitown-based carrier P.A.M. Transportation Services is expected to report its results for the period Oct. 10, according to Thomson Reuters.

Shares of USA Truck (NASDAQ: USAK) closed Monday (Sept. 30) at $8.03, down 46 cents or 5.42%. In the past 52 weeks, the stock has ranged between $22.64 and $7.31.

Shares of P.A.M. (NASDAQ: PTSI) closed Monday at $59.11, up $1.50, or 2.6%. In the past 52 weeks, the stock has ranged between $67.79 and $34.31.