Trucks account for nearly 70% of freight transportation in the United States. Per American Trucking Associations (ATA), freight hauled by trucks is expected to grow approximately 3.4% this year and the uptrend is likely to continue through 2023.
Even though freight volumes may increase, it remains to be seen whether truck capacity grows sufficiently to accommodate the additional freight. The industry is currently undergoing an acute shortage of drivers, resulting in a restraint on the truck count. Rising fuel prices is another challenge facing the industry.
Barring these few negative aspects, the industry is thriving on the back of robust freight demand. With shipping demand high, truckers are able to charge high for their services. Notably, freight rates have been rising since 2017 and are soaring of late, with ELD (Electronic Logging Devices) mandates in place since last December.
The mandate aims to promote road safety by cutting down the number of accidents involving large trucks. ELDs restrict truckers to work for only 11 hours within a 14-hour work-day, in accordance with the U.S. law. Thus, truckers are often unable to travel sufficient miles to earn a decent pay. Consequently, they demand higher wages, pushing up freight rates in turn.
The chart below shows the skyrocketing truckload spot rates for various types of trucks (van, reefer and flatbed).
Industry Outperformance vs. Sector & S&P
The surge in freight demand and the resultant steep rates are enabling trucking companies to generate high revenues. This buoyant scenario has boosted investor confidence in the space. Consequently, the Zacks Transportation –Truck industry, which is a 17-stock group within the broader Zacks Transportation Sector, has outperformed both the S&P 500 and its own sector over the past year.
While the stocks in this industry have collectively surged 27.6%, the Zacks S&P 500 Composite and Zacks Transportation Sector have gained 17.6% and 9.9%, respectively.
One-Year Price Performance
Trucking Stocks Pretty Expensive
Owing to the outperformance of the industry in a year, the valuation looks quite expensive. Given the capital-intensive nature of the industry, one might get a good sense of its relative valuation by looking at its EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation and amortization) ratio, as the players have significantly high levels of debt.
This ratio is essentially utilized by buyers to come to a conclusion regarding the reasonability of a target's valuation.
The industry currently has a trailing 12-month EV/EBITDA ratio of 16.18, above its lowest level of 8.68 and near the median level of 17.03 in a year’s time.
The space also looks quite pricey when compared to the market at large as the trailing 12-month EV/EBITDA ratio for the S&P 500 is 11.66 and the median level is 11.45.
Enterprise Value/EBITDA (TTM)
However, given the varied components of the S&P 500 index, a comparison with the group’s own sector makes better sense. A comparison with the group’s broader sector also shows that the industry is currently trading at a premium. The transportation sector’s trailing 12-month EV/EBITDA ratio of 10.42 and the median level of 9.79 for the same period are significantly lower than the truck industry’s respective ratios.
Enterprise Value/EBITDA (TTM)
Outperformance May Continue on Solid Earnings Outlook
The Trucking industry is clearly witnessing a period of boom. The already high freight rates are being heightened by capacity restraints, as demand is increasingly high vis-a-vis capacity. In fact, even shippers are willing to pay more for their goods, lest they do not find a truck when needed.
But what really matters to investors is whether this group has the potential to perform better than the broader market in the quarters ahead. The earlier valuation discussion shows that market participants have been willing to pay up for these stocks, potentially limiting further upside from the current levels.
One reliable measure that can help investors understand the industry’s price performance prospects is its earnings outlook. Empirical research shows that earnings outlook for the industry, a reflection of the earnings revisions trend for the constituent companies, has a direct bearing on its stock market performance.
The Price & Consensus chart for the industry shows the market's evolving bottom-up earnings expectations for it and the industry's aggregate stock market performance. The red line in the chart represents the Zacks measure of consensus earnings expectations for 2019, while the light blue line represents the same for 2018.
Price and Consensus: Zacks Transportation Truck industry
This becomes even clearer by focusing on the aggregate EPS revisions trend. The chart below shows the evolution of aggregate consensus expectations for 2018.
Please note that the industry’s $3.27 EPS estimate for 2018 is not the actual bottom-up EPS estimate for every company in the Zacks Trucking industry, but rather an illustrative aggregate number created by our proprietary analytics model. The key factor to keep in mind is not the earnings per share of the industry for 2018, but how this estimate has evolved recently.
Current Fiscal Year EPS Estimate Revisions
As you can see here, the EPS estimate for 2018 is up from $2.85 at the end of January and has been rising ever since. In other words, the sell-side analysts covering the companies in the Zacks Trucking industry have been steadily raising their estimates.
Zacks Industry Rank Indicates Bright Prospects
The group’s Zacks Industry Rank is basically the average of the Zacks Rank of all the member stocks.
The Zacks Trucking industry currently carries a Zacks Industry Rank #10, which places it at the top 4% of more than 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
Trucking Stocks Promise Long-Term Growth
When compared with the broader Zacks S&P 500 composite, the long-term (3-5 years) EPS growth estimate for the Zacks Transportation –Truck industry appears alluring. The group’s mean estimate of long-term EPS growth rate has been increasing since February 2018 to reach the current level of 16.5%. This compares to 9.8% for the Zacks S&P 500 composite.
Mean Estimate of Long-Term EPS Growth Rate
In fact, the basis of this long-term EPS growth could be a steady increase in top line that the Zacks Transportation –Truck industry has shown since the beginning of 2017.
High freight demand on the back of a strong U.S. economy is expected to drive growth in the industry. According to ATA’s U.S. Freight Transportation forecast, the trucking industry will continue to gain momentum. ATA expects 20.73 billion tons of freight to be transported by all modes in 2028, representing a significant increase from15.18 billion tons in 2017. With trucks being the most widely used mode of freight transportation, this enormous projection is hugely beneficial for the industry.
Despite the ongoing headwinds such as low truck count and dearth of drivers, the industry stands to gain from escalating freight rates, thus boosting revenues.
With the bullish trend expected to continue in the near future, it seems the time is ripe for investors to add some of the top-ranked stocks in their portfolio.
Each of the stocks mentioned below sport a Zacks Rank #1 (Strong Buy) or 2 (Buy) and have witnessed positive estimate revisions for current-year earnings. You can see the complete list of today’s Zacks #1 Rank stocks here.
ArcBest Corporation (ARCB - Free Report) headquartered in Fort Smith, AR, provides freight transportation services and solutions. The company sports a Zacks Rank of 1 and the Zacks Consensus Estimate for current-year earnings has been revised 8.4% upward in the last 60 days. The stock has soared 85.9% in a year’s time frame.
Price and Consensus: ARCB
Covenant Transportation Group, Inc. (CVTI - Free Report) is a Chattanooga, TN based truckload carrier offering just-in-time and other premium transportation service for customers throughout the United States and Mexico. The Zacks Consensus Estimate for current-year earnings has been revised 10.9% northward over the past 60 days. This Zacks Rank #2 stock has rallied 40.7% in a year.
Price and Consensus: CVTI
Universal Logistics Holdings, Inc. (ULH - Free Report) is an asset-light provider of customized transportation and logistics solutions across the United States, Mexico, Canada and Colombia. The company flaunts a Zacks Rank #1 and the consensus mark for full-year earnings has moved up 41.4% over the past 60 days. The stock has surged more than 100% in a year.
Price and Consensus: ULH
Werner Enterprises, Inc. (WERN - Free Report) is a premier transportation and logistics company based in Omaha, NE. The company holds a Zacks Rank #1 and the consensus mark for current-year earnings has been revised 10.4% upward in the last 60 days. Shares of the company have gained 18.3% in a year.
Price and Consensus: WERN
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