2020 looks to bode well for some truckload carriers with a small market capitalization as rates become positive, but the fourth quarter of 2019 for truckload carriers is not expected to be as strong as it was in the same period in 2018, analysts said.
In a fourth-quarter preview for the truckload and brokerage sectors, analyst Jack Atkins and associate Wade Schaller, both of Little Rock-based Stephens Inc., said carriers in the sectors are expected to miss earnings expectations for the period.
“We believe that 2020 could feel like the mirror opposite of 2019, with the start of the year feeling very challenging, but underlying fundamentals beginning to improve in the spring thanks to easy demand comps and accelerating capacity attrition,” according to Atkins and Schaller. “A muted peak season made (the fourth quarter of 2019) a challenge.”
Some of the factors impacting the peak season were high inventory levels, a tighter holiday calendar, weaker freight demand and low import volumes on the West Coast. A large spike in freight demand didn’t happen as is usually the case in the fourth quarter, and with the excess truckload capacity, shippers were not under pressure to have capacity on standby, said Atkins and Schaller. The continued weakness in the U.S. industrial economy also contributed to weaker fourth-quarter demand.
With Thanksgiving in the last week of November and Christmas and New Year’s Day on Wednesdays, peak season had six fewer days than in 2018. There have only been three years in the past 20 years with a similar calendar. In 2002 and 2013, carriers reported earnings per share increased by about 6.8% in the fourth quarter, from the third quarter. In other years, such as 2012-2016 and 2018, carriers reported the earnings rose 24.4%, from the third quarter.
American Trucking Associations’ advanced seasonally adjusted For-Hire Truck Tonnage Index rose 3.3% in 2019, from 2018. It was the 10th consecutive annual increase in the index. However, growth in the index slowed from 2018, when it rose 6.7%. In December, the index increased 4% to 118.2, from November. The index fell 3.4% to 113.6 in November. Compared to December 2018, the index rose 3% in the same month in 2019.
“Last year was not a terrible year for for-hire truck tonnage, and despite the increase at the end of the year, 2019 was very uneven for the industry,” said ATA Chief Economist Bob Costello. “The overall annual gain masks the very choppy freight environment throughout the year, which made the market feel worse for many fleets. In December, strong housing starts helped advance the index forward.”
Costello noted that ATA tonnage data is mostly comprised of contract freight. With regard to dry-van spot rates, they fell 7% in December, from the same month in 2018, according to DAT Solutions. After rising in the first half of January, the rates started to fall in mid-January as the start of a rate downturn in the winter.
Atkins and Schaller expect spot rates to turn positive in March or April. The truckload carriers with large market capitalization outperformed in 2019 as investors expected a recovery, and this is expected to continue into this year. When the spot rates start to rise, it should lead sentiment to turn positive for the carriers with small market capitalization, such as Van Buren-based USA Truck.
While demand wasn’t strong in the fourth quarter, the decline in spot rates wasn’t as high as it was in the third quarter. This is likely a result of capacity continuing to exit the market, said Atkins and Schaller, noting that the industry had more than 800 carrier bankruptcies in 2019. This led to a nearly 60 basis point reduction in industry capacity from the peak in trucking employment in June to November 2019. On Dec. 9, dry-van carrier Celadon Group announced it would file for Chapter 11 bankruptcy, and this is expected to contribute to another 10-15 basis point reduction in capacity. Overall, capacity was projected to fall about 20-25 basis points in the fourth quarter.
Costs are expected to continue to rise for carriers, especially with regard to insurance, and this will put pressure on small and mid-size carriers, according to Atkins and Schaller. Through the first half of 2020, more carriers are expected to file for bankruptcy as they struggle to insure their trucks.
While the U.S. economy grows slowly, capacity is expected to continue to fall, and this should lead to a recovery in the industry by mid-2020 as a result of the weakening supply. After the industry begins to improve, small market capitalization carriers are expected to see a greater performance in their stock prices because they have more exposure to the spot market and higher amounts of operating leverage, according to Atkins and Schaller.
After the markets close Thursday (Jan. 30), USA Truck, with a market cap of $62.07 million, is expected to report a loss of 9 cents per share, down from an earnings per share of 68 cents in the same quarter in 2018, according to a consensus of three analysts. Revenue is expected to fall 4% to $135.37 million, from $141.08 million. For 2019, earnings per share are expected to fall 96.8%, or by $1.51 per share, to 5 cents per share, from $1.56 per share in 2018. Revenue for 2019 is expected to be flat at $534.07 million.
Atkins and Schaller give USA Truck shares a rating of overweight, or buy, and a 12-month target price of $10. The operational turnaround of the carrier faced some setbacks in 2019 because of challenging market conditions and “missteps in the company’s bid strategy early in the year,” Atkins and Schaller said. They are optimistic that the carrier will perform better in 2020 as the company reduces its exposure to the spot market and puts more capacity under contract. This should lead to improved revenue.
Shares of USA Truck (NASDAQ: USAK) were trading Monday at $7.24, down 7 cents, or 0.96%. In the past 52 weeks, the stock has ranged between $20.93 and $6.98.