Why Trucking Stocks Are So Hot Right Now

On Sep 30, the American Trucking Associations’ (ATA) chief economist Bob Costello had some interesting things to tell the McLeod Software User Conference on the condition of the economy.

He said that the National Bureau of Economic Research, which relies on industrial production, business sales, personal income, and nonfarm payrolls to call a recession, hadn’t officially declared one. That’s despite the two straight quarters of negative GDP growth and the sharp fall in all four indicators this spring.

However, “the recession is likely over” is what he said. Those were his exact words.

He also doesn’t expect another dip, but for growth to flat-line after a bounce back in Q3.

After the 32% GDP decline in the spring quarter, GDP is now expected to jump 30% in the third quarter. Note that he’s saying this after the conclusion of the quarter, so likely after considering some of the actual data. The fourth quarter of 2020 and first quarter of 2021 will see growth of 2.5% and 3.3%, which is relatively normal. A full recovery he predicts won’t happen until 2022 and will be dependent on a solution/cure for the pandemic.

And why should the trucking sector do better than many others?

First, because goods consumption didn’t fall as much as services (5% versus 15% for services) during the pandemic and has risen to above pre-pandemic levels of late. Consumers normally spend about a third of their money on goods and the rest on services. But the pandemic pushed them to spend less on services, and because they were changing their way of doing things, it also pushed them to buy more goods.

Second, a lot of demand has moved online as people try to maintain social distancing, which has created opportunities on the consumer side. This is expected to be the first year that traditional retail actually declines (about 5%) while ecommerce grows (about 20%) The shift to ecommerce is likely a lasting trend.

Third, stimulus money has been pushing the cart. We don’t know if more money is coming but it certainly looks likely, as both presidential candidates have made some promises. So if that comes through, it will a great thing. As it is, the first one saved some truckers from shutting down fleets and laying off drivers (a scarce resource as it is). The second one would keep consumption up and make sure truckers remain in business.

Fourth, since the recovery is uneven across sectors and companies, there’s significant disruption in the supply chain. As a result, demand for spot contracts is higher. This is pushing up spot pricing and driving overall growth in the industry. Retail and consumer packaged goods (CPG) for example are seeing 10% higher volumes with some DIY retailers seeing as much as 50% higher volumes.

At the same time, other sectors like industrial and energy are notably weaker with overall volumes down 3% in September. So we are seeing uneven volumes and rising prices leading to a net positive for many players.

This optimism is also reflected in the numbers.

The strength of the industry is to a large extent evident from the prevailing freight spot rates. So as truckloads increase and fewer trucks become available, it pushes more customers to the spot market, where rising demand pushes up prices. Also since contract prices are not binding in the trucking industry, rising demand also leads to rising contract prices.

According to DAT Freight & Analytics, the shrinking of available capacity drove up load-to-truck ratios across dry van, reefer (refrigerated container) and flatbeds in September.

Dry van: The load-to-truck ratio was up for the fifth straight month to 5.5 (meaning 5.5X the loads per available truck), up 3.8% month-over-month and more double the ratio in September 2019. The national average spot van rate was $2.37 per mile, up 15 cents month-over-month and 53 cents higher than Sep 2019.

Reefer: While falling for three straight months, the national average reefer load-to-truck ratio was still 9.7 in September. The national average spot reefer rate was $2.57 per mile, up 13 cents month-over-month and up 41 cents from Sep 2019.

Flatbed: The load-to-truck ratio of 40.3 was the highest it has been since June 2018, despite volumes being 8% lower than Sep 2019. This seems to be the area where more companies have gone out of business or shut down fleets. The national average spot flatbed rate was $2.41 per mile, up 11 cents month over month and 22 cents higher than Sep 2019.

The DAT Truckload Volume Index (volume moved by truckers) was 6.1% above August levels and 13.1% above Sep 2019 levels.

Longer-term Opportunity

The industry also looks good for the longer term. According to ATA forecasts, total freight volumes will decline 10.6% this year, rising 4.9% in 2021 and 3.2% on average thereafter until 2026.

Take Your Pick

Given this backdrop, it isn’t surprising that the industry has a Zacks Rank of #5, which is in the top 2% of Zacks-ranked industries. Moreover, there is a boatload of Zacks #1 Rank (Strong Buy) and Zacks #2 Rank (Buy) to choose from. So jump in-

Marten Transport, Ltd. MRTN: Zacks Rank #1, Value Score B, Growth Score B

Universal Logistics Holdings, Inc. ULH: Zacks Rank #1, Value Score A, Growth Score B

Werner Enterprises, Inc. WERN: Zacks Rank #1, Value Score A, Growth Score B

J.B. Hunt Transport Services, Inc. JBHT: Zacks Rank #2, Value Score A, Growth Score A

Saia, Inc. SAIA: Zacks Rank #2, Value Score B, Growth Score A

I like these stocks because of their industry, rank and style scores. But there are also a whole bunch of others to choose from.


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