3 Trucker Stocks to Benefit from Lower Oil Prices - Analyst Blog

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An improving U.S. economy, substantial surge in manufactured and retail goods, and a sharp rebound in many end markets are expected to fuel the future growth of the Trucking industry. Declining oil prices over last couple of months is a major boon for many truckers.

Fuel cost accounts for a considerable portion of expenses of trucking companies. With a declining trucking cost, business enterprises are increasingly opting for trucks for product shipment instead of railways and other means of transportations.

Double-Edged Weapon

The U.S. trucking industry is currently poised to benefit from two ways. Lower oil prices will reduce their operating expenditure thereby boosting the bottom-line. On the other hand, capacity constraint in the form of driver shortage and new government regulation will drive top-line growth.

The U.S. trucking industry has been witnessing a gradual improvement in 2014. As the U.S. economy continues to grow, demand for carriage also becomes robust and the momentum is expected to sustain in the long-run. Growing demand for carriage coupled with severe shortages of drivers will result into higher freight rates and increased asset utilization rates in near future.

Momentum to Continue

Trucks in the U.S. are responsible for the majority of freight movement over land, and form a vital part of the manufacturing, transportation and warehousing industries. Meanwhile, American Trucking Associations (ATA), the main industry trade group, declared that its advanced seasonally adjusted (SA) For-Hire Truck Tonnage Index increased 0.5% in Oct 2014, following a decline of 0.8% in September. In October, the index equalled 132.1 (2000=100).

The SA index in October was up 4.5% year over year. Year-to-date, tonnage is up 3.2% compared with the same period of the prior year. The not seasonally adjusted index, which represents the change in tonnage actually hauled by trucks before any seasonal adjustment, equalled 140.4 in Oct 2014, up 4.3% sequentially.

Our Picks

While some trucking companies hedge their fuel needs and impose fuel surcharge to customers, this is not the scenario industry-wide. There are many trucking companies which are positioned to gain from the fall in fuel prices. Taking these factors into account, we present three stocks for investors to consider:

Old Dominion Freight Line Inc. ( ODFL ): Being an inter-regional and multi-regional motor carrier, the company primarily provides less-than-truckload shipments of general commodities, including consumer goods, textiles and capital goods to a diversified customer base.

Old Dominion's fuel cost expenditure remains unhedged despite being the largest component of its operating expenses. Although the company levies surcharge on its customers, it does not fully cover its fuel expense. Therefore, there exist ample scopes for Old Dominion to increase its profit margin. Old Dominion holds a Zacks Rank #2 (Buy).

Knight Transportation Inc. ( KNX ): The company is a short to medium-haul, dry van truckload carrier operating in the western part of the U.S. Knight Transportation transports general commodities, including consumer goods, packaged foodstuffs, paper products, beverage containers and imported and exported commodities.

Knight Transportation also maintains an unhedged position for fuel expenditure and the amount of fuel surcharge that the company collects from its customers is lower than its total fuel expenses providing a room for bottom-line expansion. Knight Transportation carries a Zacks Rank #3 (Hold).

Celadon Group Inc. ( CGI ): The company provides transportation services between the U.S., Canada and Mexico. Celadon is the largest cross-border trucking company in North America. Its truckload transportation services include long-haul, regional, dedicated, less-than-truckload, intermodal, and logistics services.

Celadon maintains unhedged position for fuel expenses and its fuel surcharge collection is well below its total fuel expenditures, which will allow the company to increase its profit. Celadon currently carries a Zacks Rank #3 (Hold).

The Bottom Line

Truck transport is a "derived demand" industry -- demand for truckers is tied to the demand for the products that trucks haul. Therefore, trucking serves as a barometer of the U.S. economy, representing 69% -70% of tonnage carried by all modes of domestic freight transportation. Falling fuel costs will bode well for this industry to gain a windfall in the near term.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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