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Headwinds Easing For Truckers, Road Ahead Looks Good

05.27.14 | Marilyn Alva, Investor's Business Daily


Read the full article by Marilyn Alva, at Investor's Business Daily > 

Excerpts:

As the economy goes, so goes the $682 billion trucking industry, and then some.

Trucks move roughly 70% of all freight tonnage in the U.S. -- everything from consumable goods and housing materials to business equipment and chemicals.

"Trucking at its core is a classic case of supply and demand," said Deutsche Bank analyst Robert Salmon.

Economic and freight growth typically move at the same pace. But freight growth has outpaced the economy in the current recovery, says economist Noel Perry of freight transportation research firm FTR.

The growth is largely due to a "strong recovery" in manufacturing, growing exports and inventory buildups.

But it has been a long, bumpy road from the start of the downturn. Truckers began to see business tail off in the second half of 2006 as the housing market soured. Things went downhill from there, with many top fleets seeing earnings and revenue slow or decline over the next three to four years.

Freight volumes rebounded in late 2012 as the economy improved. But demand growth hasn't tracked higher on a steady curve.

Demand flattened in mid-2013 as rising interest rates nicked the housing market's recovery. Fewer home sales and refinanced mortgages mean less demand for lumber, appliances and countless other building and remodeling goods. Gross domestic product growth slowed in 2013 to 1.9%, down from 2.8% in 2012.

But freight volume grew more than the economy did. Demand improved again later in 2013 as the overall economy picked up, but it took a hit when fierce winter storms slowed shoppers and truck traffic.

"It's been a fit-and-start recovery," said Eric Starks, FTR's president. "Some parts of the economy were heating up and other parts slowing down. Everybody was not in lock step."

With a particularly harsh winter now gone, the trucking recovery seems on a smoother course.

"We've seen a significant rebound in overall trucking freight volumes," Salmon said. "After the weather started to clear, there was a lot of pent-up demand for movement of freight by retailers and manufacturers."
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Hard-Won Profits

Freight trucking is generally a low-margin business. Many well-managed, publicly traded companies can squeeze out profit margins above the 5% industry average.

One critical factor is capacity, which fleets have judiciously trimmed to keep supply and demand in balance.

"We've done the exact same thing airlines did," said Bob Costello, chief economist with the American Trucking Associations (ATA), a federation of multiple trucking trade groups. "We're operating about 8% fewer trucks than at the end of 2007, prior to the recession."

In the face of improving business fundamentals, truckers are starting to add capacity again.

"(Trucking companies) will purchase trucks roughly a half year before they need them in anticipation of what volume will be," Salmon said.

The North American trucking industry peaked at 360,000 newly purchased large trucks in 2006, Perry says. FTR expects 290,000 new truck buys this year, up from 265,000 last year. Truckers are "buying up a little bit of growth. They would be buying more if they could find drivers," he said, pointing out the industry's perennial lack of skilled labor.

Old Dominion recently increased its 2014 capital budget by an extra $25 million for tractors and trailers to $1.88 million, which also includes some related equipment.

Contract rates being negotiated now are up 5% over last year, says Perry. Spot rates were up 15% in April, though down a bit from March.
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Things That They Carry

Of all the many things that trucks carry, food is the biggest piece of the pie. Dry foods comprise 21% of the total for tractor-trailers and refrigerated foods 8%, FTR says.

Food volumes don't change much from year to year, averaging 1.5% annual volume growth, says Starks.

"It is less cyclical than some other commodities, such as housing-related crushed stone, lumber, roofing and wallboard," he said.

Housing and automotive are two of the biggest drivers of overall truck volume, Salmon says. Both need trucks to carry heavy freight.

Every new home going up creates 10 to 20 truckloads of freight, according to industry dictum. Housing data has bumped up and down throughout the winter and spring, with new home starts slowing. But forecasts expect increases throughout the year.
In the auto market, it's not just about finished cars. Truckers also haul a large share of the parts and materials, such as steel, rubber and motors, that go into making them.

Demand in "the automotive sector has been relatively healthy," Starks said.
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Down The Road

The economy is seen as growing faster this year than last, at about a 2.5% clip. ATA expects truck freight volumes to gain steam through 2014, buoyed by an improving housing market and upticks in manufacturing and energy production. It sees more robust gains in 2015.

FTR forecasts trucking loads to increase 3.9% this year, driving a 9.8% jump in revenue. The trend compares with last year's 4.8% load gain and 3.9% revenue bump.

Stephens expects truckload rates to rise more than 3% this year. For LTLs, it expects yield, which in that sector is determined by pricing, weight and fuel, to go up 3% to 3.5%.

Trucking companies "are all very economically sensitive, and right now the economy feels a little better," said analyst Delco. "So they're all feeling some strength right now." 

Read more...Read the full article by Marilyn Alva, at Investor's Business Daily >