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Trucking Stock Outlook: Near Term Dim on Low Freight Demand

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The Zacks Transportation - Truck industry consists of truck operators transporting freight to a diverse group of customers, primarily across North America. These companies provide full-truckload or less-than-truckload (LTL) services over the short, medium or long haul. In addition, most of these companies offer logistics and intermodal services. A few also offer asset-light services to other third-party logistics companies in the transportation sector.

Prominent industry players include J.B. Hunt Transport Services, Inc. (JBHT - Free Report) , provider of a broad range of transportation services to customers throughout the United States, Canada and Mexico, and Knight-Swift Transportation Holdings Inc. (KNX - Free Report) , a truckload carrier based in Phoenix, AZ.

Let’s take a look at the industry’s three major themes:

  • The trucking industry is witnessing a period of slowdown, thanks to weak freight demand and soft freight rates as trucking capacity has loosened from its 2018 levels, when there was a severe capacity crunch. Given last year’s healthy freight scenario, a large number of new truck orders were received to meet the surge in demand. The increased number of trucks in the market coupled with low freight demand has led to excess capacity in 2019. Amid escalating US-China trade tensions, the Cass Freight Index, measuring North American freight volumes and expenditures, has declined for nine consecutive months. Given this dramatic setback in freight volumes, market watchers predict a persistence of the situation at least through 2019.

  • On the operational front, the industry continues to battle driver shortage. As old drivers are retiring, recruitment of new ones is becoming a challenge, especially in the face of low unemployment rates. According to an analysis by American Trucking Associations, the industry could be short of more than 100,000 truck drivers in the next five years.

  • To combat the sluggish freight scenario, trucking companies are taking substantial measures to cut down costs and boost earnings. For instance, Old Dominion Freight Line’s (ODFL - Free Report) bottom line increased 23.3% and 8.5% year over year in the first and second quarters, respectively, on the back of its prudent cost management. Also, Landstar System’s (LSTR - Free Report) earnings climbed 15.3% and 1.3% in the first and second quarters, respectively, with operating expenses declining 2.1% and 12.2%. Additionally, Werner Enterprises (WERN - Free Report) realized cost savings of $10 million as of Jul 25, 2019.

Zacks Industry Rank Indicates Gloomy Prospects

The Zacks trucking industry, housed within the broader Zacks Transportation sector, currently carries a Zacks Industry Rank #184. This rank places it at the bottom 28% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bleak near-term prospects. 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.

The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. The group's current-year EPS estimate has decreased 14.3% since last September.

Despite the industry’s drab near-term prospects, we will present a few stocks that you may want to consider for your portfolio. But, before that, it’s worth taking a look at the industry’s stock market performance and current valuation.

Industry Outperforms Sector but Lags S&P 500

The Zacks Truck industry has outperformed the broader Transportation sector but lagged the Zacks S&P 500 composite over the past year.

Over this period, the industry has declined 6.9% compared with the broader sector’s depreciation of 11.3% and the S&P 500 Index’s 0.6% increase.

One-Year Price Performance



 

Industry’s Current Valuation

On the basis of trailing 12-month EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation and amortization), which is a commonly used multiple for valuing transportation stocks, the industry is currently trading at 8.56X compared with the S&P 500’s 11.15X. However, it is above the sector’s EV/EBITDA of 7.64X.

Over the past five years, the industry has traded as high as 23.44X, as low as 5.75X and at the median of 8.44X as the chart below shows.

Enterprise Value/EBITDA (TTM)

Enterprise Value/EBITDA (TTM)



Bottom Line

While cost cuts should keep the industry afloat, with pointers indicating to a continued softness in freight demand surrounded by trade war woes, the trucking industry is likely to remain under pressure in the near term as it tries to cope with driver crisis.

Below we present three stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) that are poised to grow amid challenges. You can see the complete list of today’s Zacks #1 Rank stocks here.

Heartland Express, Inc. (HTLD - Free Report) provides collaborative truckload transportation service and is based in North Liberty, IA. The company, sporting a Zacks Rank #1, has outperformed the Zacks Consensus Estimate in each of the preceding four quarters with an average beat of 8.9%. The Zacks Consensus Estimate for the company’s current-year EPS has moved northward by a penny in the last 60 days.

Price and Consensus: HTLD



 

Saia, Inc. (SAIA - Free Report) is a leading multi-regional LTL carrier based in Johns Creek, GA. This Zacks Rank #2 company has outperformed the Zacks Consensus Estimate in three of the trailing four quarters with an average beat of 3.1%. The Zacks Consensus Estimate for the company’s current-year EPS has moved upward by 2.4% in the last 60 days. Shares of the company have surged 72.4% year-to-date against the industry’s 21.6% rise.

Price and Consensus: SAIA



 

Knight-Swift is a #2 ranked company, which has surpassed the Zacks Consensus Estimate in each of the preceding four quarters with an average of 5.2%. Shares of the company have rallied more than 43% so far this year.

Price and Consensus: KNX



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