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Trucking

INDUSTRY INSIGHT

Date May 2018

Gordon Brothers by the Numbers

Synopsis

Current Trends

  • Strongest freight market in the last 50 years continues with rising freight rates due to increasing demand for freight hauling; demand is currently exceeding the supply of trucks extending the existing capacity shortage
  • U.S. net trailer orders for March 2018 increased 36% compared to the same period in 2017 as demand increased, while manufacturers dealt with increasing raw materials costs
  • Class 8 truck sales increased 37% year-over-year for the first quarter of 2018

 

Projected Values

 

truck-tonnage

 

Truck tonnage index higher year-over-year: The American Trucking Association (ATA) reports that the Truck Tonnage Index jumped 6.3 percent in March 2018 on a year-over-year basis.  Current levels remain near all-time highs for the index, although there has been a slight decrease from the official peak in recent months.  With a benchmark of 110 for March 2018, tonnage is up 7.4 percent compared to the first quarter of 2017.  The ATA believes truck tonnage will remain solid, as exhibited in the year-over-year increases, as will the growth of freight demand.  With freight levels expected to remain strong going forward, 70.6 percent of tonnage carried by all modes of domestic freight transportation should remain dedicated to trucking.  Motor carriers collected $676.2 billion, or 79.8 percent of total revenue earned by all transport modes for 2016.  The Bureau of Labor Statistics report for the Truck Transportation industry confirms that while employment in the trucking industry continues to climb to all-time highs, the industry continues to fight driver and support role worker shortages.

 

Trucking and transport stocks cautious: Having ascended through 2017, stocks in the trucking sector have stalled or dropped dramatically since the start of February 2018.  This decline is counterintuitive as it hit at the point when orders had increased and the industry was forecasting strong growth.  Major trucking companies reported strong quarters in their most recent earnings reports, and Navistar, Paccar, and Meritor raised their outlook on North American heavy-duty truck production/sales in 2018.  Similarly, Navistar, Meritor, and Dana raised their revenue guidance for 2018.  From a bottom-up perspective, the trucking industry is set for a strong year, particularly in North America.  In addition, companies have raised guidance for the largest class of heavy truck, Class 8.  The positive outlook is confirmed when looking at what leading commentators are saying about the market.  For example, North American heavy-duty Class 8 orders were up 76 percent on a year-over-year basis, and there is a “capacity crisis” with freight companies “scrambling to add trucks as fast as they can,”  according to industry tracker Freight Transportation Research Associates.

However, despite the positive outlook for major companies, the thought of a looming trade or tariff war has made an impact on the industry.  Tariff announcements have led to cautious optimism, and many investors have shown concern that the tariffs could hamper growth and raise consumer prices in the United States, while dampening trade relationships the country has with foreign entities.  Investors are presumably concerned that the trucking industry could be among the hardest hit should trade policy enter even murkier waters. The sector will have a smaller volume of shipments should prices get higher for consumers or imports slow for businesses.

Rising fuel costs have yet to sustain for a longer period, but industry giants are watching the price of oil closely.  If fuel costs were to continue rising and the price per barrel of oil were to spike, a battle with increasing raw material costs for manufacturers would certainly affect transportation companies downstream, and operators would need to work out ways to spread the cost increases to remain competitive and profitable.

Medium- and heavy-duty truck sales hit high: Class 8 truck orders in the first quarter of 2018 hit the second highest mark in history and marked the best period for orders since 2006, according to Americas Commercial Transportation (ACT) research.  Class 8 truck orders have averaged 45,400 units per month, a mark that was eclipsed previously only in the first quarter of 2006 when the trucking industry experienced an ordering rush ahead of the rollout of the 2007 Environmental Protection Agency emissions regulations.  For the month of March 2018, Class 8 truck orders were more than double the rate for March 2017, peaking at 46,780 orders.  The current year is shaping up to have economic and freight components similar to 2006, including a rising carrier profitability component and a regulatory component that impacts the broader market.  One evolving differentiator remains the driver shortage, which is moving from a conditional to more of a structural component of the market.  Medium-Duty class 5-7 truck orders also had another exceptional month in March, hitting 29,287 units, which is the best level since mid-2006.  The equipment purchasing boom has presented many benefits for fleets and operators and has improved used equipment values as some trucking companies are not willing to wait for the lead time on new vehicles.

Trailer market showing momentum: Trailer sales orders in the United States were up 36 percent in March 2018 according to reporting by ACT research.  Orders totaled 29,500 units per month compared to 21,663 in March 2017.  Although rising aluminum and steel prices have jumped as high as 10 percent in less than a 10-day period recently, some trailer manufacturers (e.g. Strick Trailers) are 97 percent North America-sourced, which may help reduce future tariff impacts should changes remain on the horizon.  According to industry executives, concerns exist for trailer manufacturers due to the eroding margins and manufacturing efficiencies being compromised as a result. The trailer market is continuing at a strong pace, and order boards for new van trailers are full through 2018 for the most part, while lead times for flatbed and tank trailers are roughly seven to eight months out.  Cost increases are being implemented slowly by many manufacturers at this point to help spur industry growth, but the uncertain future is preventing many from being able to predict and quote orders into 2019 as some customers are requesting.  This is due to high demand and sourcing of parts, coupled with the difficulty of knowing to what extent tariffs could impact the trailer market for the balance of 2018.