Biz Buzz: Wall Street weathermen staying out of trucking storm
The trucking industry has been so gloomy for so long that one top investment firm put out a report explaining why, after years of being called “a cheerleader” for the truckload segment, they could not at the end of summer recommend a stock to buy.
By KEVIN JONES
The Trucker Staff
10/13/2009
A lot of the information that comes across the perpetually cluttered business desk here at The Trucker comes from investment analysts who keep an eye on the publicly-traded carriers and the truck makers. Their job is to figure out which companies’ stocks are either priced too high or too low, and to guide their investor clients accordingly. Think of them as the weathermen of Wall Street.
They visit the companies they follow. They talk to executives and to customers and to competitors. They look for factors that differentiate one company from another, and then decide which companies have a competitive edge.
Much of the data they provide is technical analysis of financial data. (And, for those of you wanting to keep score at home or in your cabs, I plan to discuss the basics of reading a 10-Q filing with our next coverage of the quarterly financial reports, coming up in November.) But that financial data, however obscure it may seem, is for the most part derived from the company’s real-world performance — that is, a good, well-run carrier should be financially sound.
Operating ratio is one of the fundamental measures. An OR of 90 means it costs 90 cents to make a buck, and that’s not bad in trucking. An OR of 102 means a company is spending more than it’s earning — and that’s not good, but not uncommon in trucking these days.
In fact, the trucking industry has been so gloomy for so long that one top investment firm put out a report explaining why, after years of being called “a cheerleader” for the truckload segment, they could not at the end of summer recommend a stock to buy.
The report by the transportation and logistics research team at Stifel, Nicolaus & Co. is called, plainly enough, “The Story Behind Our General Lack of Love for the Truckload and Intermodal Stocks.” The premise: if truckload carriers traditionally lead the way in an economic recovery, why aren’t the big brains at Stifel Nicolaus recommending them now?
I’m not a financial advisor, so don’t try any investing at your home computer based on what I say, kids. But I found the “Lack of Love” report an interesting look at how truckload has evolved since the 1980s — and why what’s happened in the past may not matter so much in the future.
Truckload growth, the report explains, has been sustained for almost 30 years by the willingness of Americans to buy, buy, buy — on easy credit — leading to the proliferation of McMansions and big box retailers.
The high-volume, discount retail model, in particular, drove truckload and intermodal growth with the need for just-in-time inventory delivery.
But we all know what’s different now: consumers, whose spending accounts for two-thirds of the U.S. economy, aren’t buying. Pay cuts and falling property values, along with rising government deficits, do not encourage folks to spend like there’s no tomorrow. Tomorrow’s finally gotten here and it’s no fun being broke.
“While we aren’t exactly sure where the ‘new normal’ level of consumption will settle, we are reasonably certain that it will not return to the levels experienced during the days when credit markets, housing markets, and the automobile market were all hitting on all cylinders (as was the case in the 2004 to 2005 timeframe),” the report says.
And not only will the recovery be slow, there are still too many trucks for that diminished amount of freight — and creditors aren’t cracking down on struggling carriers, because there’s not even any money in being the truck repo man these days.
As for the big box retailers, the market is saturated. And, as the head of the largest TL carrier recently pointed out by pulling out an iPod, the goods those stores sell have gotten a lot smaller in the last 30 years.
Also different this time around: none of the big, public carriers have been able to grow in the tough times — which some had done in the past. In short, truckload stocks are becoming ‘pure cyclicals’; that is, they rise and fall with the economic tide. And that means little upside in earning potential for the next year or so.
On the bright side, it’s possible this analysis is wrong. So economists and analysts typically provide an optimistic scenario, even if the chances are small.
After all, everything could come together much more quickly: everybody spends (except the government — and taxes won’t rise to pay off the current debt); the credit markets recover; unemployment drops and productivity “skyrockets;” a whole lot of carriers go out of business or shrink their fleets to get capacity back in line; the government takes it easy on costly trucking regs; and, crucially, shippers are willing to accept massive freight rate hikes because they realize the importance of getting the goods on time.
This would lead to “the mother of all bull freight markets,” according to Stifel Nicolaus.
Well, we can hope for the best.
And it will come with a big red bow, delivered by a jolly fat man.
Until then, however, all we can do is keep it between the ditches — and try not pay too much attention to the economists. We won’t need an expert with a spreadsheet to tell us when trucking gets good, again.
Kevin Jones of The Trucker staff can be reached for comment at kevinj@thetrucker.com.
Follow The Trucker on Twitter at www.twitter.com/truckertalk.