It’s been a good few months for the trucking industry — increased volumes improved revenue and low fuel prices helped profitability. But whether publicly traded trucking stocks can continue their winning ways is an entirely other matter.
Among the winners as of late have been Werner Enterprises (ticker: WERN), which is up 18 percent since the start of the year; J.B. Hunt Transport Services (JBHT), up 11 percent; and Swift Transportation Co. (SWFT), which has surged 27 percent.
Volumes increased by about 3 percent in 2015, says Noel Perry, a partner at transportation research firm FTR. West Texas Intermediate crude oil futures — the U.S. benchmark — dropped about 70 percent in the 18 months before the start of 2016.
“Conditions in trucking are considerably better” than they were in the past several years, Perry says. “It’s been a good upturn for the trucking industry as a whole.”
About 69 percent of all cargo tonnage across the U.S., including manufactured and retail goods, is transported by trucks, according to the American Trucking Association. Motor carriers in 2014 hauled 10 billion tons of freight and collected $700 billion in revenue.
Analysts also are taking notice of the uptick in stock prices. Morgan Stanley upgraded Werner to overweight from underweight, raising its price target from $22 to $33, as emerging technologies such as so-called intelligent trucks will improve profitability in the sector.
Stifel Nicolaus, a New York-based financial services company, raised its rating for Werner from “hold” to “buy,” giving the company a $30 price target, a 10 percent increase over the current stock price. BlackRock Advisors recently raised its position in JBHT stock by 37 percent in the fourth quarter last year, according to a Securities and Exchange Commission filing.
But there are looming headwinds that may keep trucking stocks from being a long-term winner.
Capacity and regulations. One indicator of capacity is truck orders, which have been weak in the past year, says Thomas Albrecht, the managing director and senior equity research analyst for BB&T’s transportation group.
“Truck orders are weak, which means future capacity will be constrained and there are a variety of government regulations that will hurt carrier productivity, which is essentially a capacity cut,” he says. “Capacity may not feel a whole lot different for six to nine months, but the narrative has begun.”
A slew of regulations are coming down the pipe for the trucking industry, and many have to do with the number of hours a driver can be on the road. One such mandate by the Federal Motor Carrier Safety Administration requires companies install electronic logging devices that track drivers’ hours.
Driver hours has been a hot topic within the industry. A rule that would effectively cut the number of hours a driver must rest — slashing the amount of time they could be on the road each week — went into effect on July 1, 2013.
That rule, however, was suspended in December 2014 pending further research into the ideal number of hours drivers should be on the road. Once that’s re-implemented, whether it’s changed or not, will again limit how long truckers can be on the road, Perry says.
It also means that trucking companies may have to hire more drivers if the hours current employees can drive are cut while volumes increase.
A driver shortage. Companies already face a labor issue — not enough people want to be over-the-road truck drivers, says Bob Costello, the chief economist for the American Trucking Associations in Arlington, Virginia.
The industry is already short by about 50,000 drivers, and due to a high turnover rate, tens or even hundreds of thousands of drivers will need to be hired to keep up with demand, Perry says.
It’s becoming increasingly difficult to find drivers who are willing to be away from home for a week or two at a time, but a lack of drivers could have a positive effect on the industry as higher wages may attract new drivers, Costello says.
“We still struggle with drivers,” he says. “When you’re short drivers, pay goes up, and it should go up. We’ve seen this year some of the fleets have had to increase pay. Ultimately, that’s a good thing to help retain and attract divers.”
Global concerns. The future is still uncertain for the industry. While companies in the industry have done well, stock indexes in general have taken a beating since the start of the year thanks to a downturn in the global economy. China, the world’s second-biggest economy, had its slowest rate of gross domestic product growth in 25 years in 2015.
Europe is also having its fair share of economic woes, as is Japan, leading central banks for both to lower interest rates and boost stimulus in recent weeks.
That, in turn, has hurt manufacturing in the U.S. as its trading partners aren’t in a buying mood. The Institute for Supply Management says there’s a good chance growth this year will be slower than 2015, and that 2017 will be “disappointing.”
That may be enough reason to take a wait-and-see approach before investing in trucking companies, at least in the short-term. FTR projected volume growth of 3 to 4 percent this year, but has since tempered its outlook to 2.8 percent.
JPMorgan recently initiated coverage on the North American truckload sector with a cautious outlook due to “tepid” freight demand and a lack of consumer spending from low gas prices. The bank initiated Werner at overweight, gave Swift a neutral rating and handed Heartland Express (HTLD) an underweight rating.
“From an economic standpoint we’re on a shaky ground,” Perry says.
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Trucking Stocks Face an Uncertain Future originally appeared on usnews.com