Trucking Companies Face Headwinds as Rates Decline and Fleets Grow

Trucking companies will find themselves driving into economic headwinds for the remainder of this year as freight growth slows and an oversupply of shipping capacity develops.

Conditions in the trucking industry in the first half of the year remained “poor or continued to deteriorate,” Michael Baudendistel, an analyst who follows the transportation, logistics and equipment industries for Stifel Nicolaus, said in a report to investors.

That’s showing up in fewer sales of big-rigs. June orders for Class 8 trucks declined 35 percent year-over-year, according to data from ACT Research.

Declining freight demand combined with expansion in the industry in the past year have hurt profitability for several trucking companies, analysts said.

JB Hunt Transport Services on Monday reported mixed second-quarter results and cut its outlook for revenue and income for 2016 due to declining rates it could charge customers.

The company said its second-quarter operating income fell 9 percent versus the same timeframe a year earlier as rate-per-loaded-mile revenue declined 5 percent. The company said it increased the size of its fleet, but that was offset by lower rates, increased driver costs, higher independent contractor expenses and increased maintenance.

The Lowell, Arkansas-based carrier said revenue rose 5 percent to $1.62 billion. The company’s shares fell 4.7 percent to close at $81.27 Monday.

“Right now, capacity is somewhat loose because of lackluster freight demand and industry fleet expansion over the past year,” said Matthew Young, an analyst at Morningstar in Chicago. “Implied growth rates for some trucking stocks still seem to be hovering on the optimistic side.”

Shipping volumes fell about 6 percent year-over-year in May, according to Cass Freight Index Report. Tonnage was down for all modes of transportation including trucking and rail, the report said.

“This year we have failed to see the robust growth in shipments that we expect to see this time of year,” Cass said. “Truck tonnage continues to slide for both linehaul and spot markets.

However, it’s not all bad news for the trucking industry as some carriers are optimistic about tighter truckload capacity in coming months due to regulations involving electronic logging devices, which must be installed by the end of next year, Young said.

“Tighter capacity usually translates into better pricing power for asset-based truckers, especially large, capable operators,” he said. “ELDs more-accurately enforce government hours-of-service rules, and thus tend to reduce carriers’ productivity when initially installed. The reason many expect tighter capacity is a large portion of the small carrier base has yet to install them.”

Larger fleets and decreased freight demand are also hurting truck manufacturers.

Orders for trucks in the biggest Class 8 weight segment fell to 14,300 in June, the lowest since the third quarter of 2010, Baudendistel said. Stifel Nicolaus pegged 2016 production at 230,000 units, down 29 percent year-over-year. It expects 2017 output of 205,000 trucks.

ACT Research was a bit more optimistic, projecting 2016 production at 236,000 and 2017 output at 214,000.

“We are leaving our Class 8 production estimates unchanged, though we believe recent data continue to indicate there is more risk to the downside than the upside for production estimates in 2016 and beyond,” Baudendistel said. “Orders have gotten progressively worse as the year has gone on.”

Navistar, which last month reported its first quarterly profit three years, is Stifel’s least-favorite truck builder, Baudendistel said.

“I am skeptical of the company’s ability to gain market share in an environment where fewer equipment orders means that there is excess capacity for production all the competing OEMs,” he said.

Orders for medium duty, or Class 5 to 7 weight segment trucks dropped 15 percent month-over-month and 1 percent year-over-year, ACT said. Combined with the sharp decline in Class 8 vehicles, an investment in trucking companies look iffy at best, Baudendistel said.

“We believe the Class 8 data was as bad as expected, and should not be a significant surprise to the market,” he said. “We continue to believe there is more risk to the downside than upside in the next few years, especially for those names that are most exposed to the North American heavy duty cycle, and that consensus industry production estimates are likely optimistic.”