Hey friends! Mayhem and I collaborated on this research to bring you all our thoughts about the trucking industry, and where some short swing trading opportunities may exist within it.
It should come as no surprise that supply chain constraints led to an increase in the demand for trucking in order to cut down on shipment times. There are more trucks in operation and they can reach point-to-point (from the port / factory gate to the warehouse) much faster compared to any other mode of transportation. Railroads for example, generally take one or two days more than trucks to deliver their cargo for the same distance and air freight is much more expensive.
The American transportation sector makes up $900 billion of US GDP, and $600 billion of that is trucking. Railroads offer a 10-15% cost savings vs trucking, with a threshold of about 400-500 miles. After that threshold it makes more sense to use rails because it is more cost efficient.
Trucking is more tied to the consumer economy, because the goods are more finished products, parts, and otherwise smaller items. Trucks move about 11 billion tons of freight per year on average. About 5% of the country’s consumables are trucked to markets. Over 72.5% of domestic tonnage moved by trucks during 2020. However, most raw commodities are moved via rail instead of trucks because of their bulky nature.
This is a fragmented industry, with integrated logistics players like JB Hunt, and others that are solely focused on trucking. Under 300 miles, most companies will rely on local trucking businesses, and only on longer haul operations will more integrated players and railroads play a larger role.
The upside to all of this is that the transportation sector – trucking companies in particular – got a big boost leading to a significant increase in their stock prices.
Over the last few months, however, we have seen enormous pressure on these names and we think that there may still be some downside to this industry based on the following:
As the economy re-opens, we’re seeing less spending on goods and more spending on services. The chart below shows the difference between Goods and Services spending based on the last PCE data. Goods had a negative change last month.
As a result of lower spending on goods, supply chain pressures have begun to ease. Furthermore, many retailers over-ordered and they are now plagued with an inventory glut, due to the reduction in spending. So, we’re obviously not seeing newer orders. This means companies using trucking services can revert to slower modes of transportation such as rail. It also means that these companies now have bargaining power and no longer need to pay the exceptional freight rate that they were paying.
Spot (immediate) rates are dropping, and companies are also seeking longer, lower pricing via contractual commitments. This is also leading to more intense competition that may further undercut pricing on existing contracts.
Diesel accounts for over a quarter of a trucker’s operational expenses. The rising price of diesel in 2022 up until mid-summer put a strain on truckers’ profits, who already run with low margins, encouraging cost-pushing to clients. Regulation has also increased the price of diesel while diminishing the energy source’s density in the form of lowering sulfur content requirements.
Now we are seeing the opposite, where diesel prices are falling along with oil, and trucking companies are attempting to slash rates to be more competitive in a market that is slowing.
While there are a number of companies to look at in the trucking industry, we believe there are a few that could be looked at for potential weakness and downside price movement.
J.B. Hunt Transport Services ranks among the top surface transportation companies in North America by revenue. Its primary operating segments are intermodal delivery, which uses the Class I rail carriers for the underlying line-haul movement of its owned containers (45% of sales in 2021); dedicated trucking services that provide customer-specific fleet needs (21%); for-hire truckload (7%); heavy goods final-mile delivery (6%), and asset-light truck brokerage (21%).
Technical setup - JBHT:
JBHT has fallen below a key supply area as well as the 30-week exponential moving average (EMA) and is likely to see further selling pressure as it is showing relative weakness vs the broader S&P 500.
The stock could see an downside target of about $134.50 and a secondary price target of $127. The last downside target we would look at is $119.70. To manage risk we would be covering the short if we break above the 30-week EMA on a daily closing basis. Similarly, because earnings are set to come out toward the end of October we would exit this trade before earnings to be safe.
Old Dominion Freight Line is the fourth-largest less-than-truckload carrier in the United States, with more than 240 service centers and 9,200-plus tractors. OD is by far one of the most disciplined and efficient providers in the trucking industry, and its profitability and capital returns stand head and shoulders above its peers. Strategic initiatives revolve around increasing network density through market share gains and maintaining industry-leading service via consistent infrastructure investment.
Technical setup - ODFL:
ODFL has closed below its 21-week moving average and a key area of supply overhead. The stock is showing relative weakness vs the broader market and seems to have further to fall.
We could plan for an initial price target at $232, a secondary price target of $203.10, and a tertiary price target of $182.60. We would stop out on a daily close above the 21-week EMA. Similarly, because earnings are set to come out toward the end of October we would exit this trade before earnings to be safe.
Schneider National ranks among the largest U.S. full-truckload carriers, including its for-hire and dedicated operations (50% of total revenue). The firm is also one of the largest intermodal marketing companies (20%) and operates a logistics unit (22%), which offers truck brokerage and supply chain services. Schneider completed its initial public offering in April 2017 but has been in operation for more than 80 years.
Technical setup - SNDR:
SNDR has fallen below a large area of supply and its 8-week EMA. The stock is showing weakness vs the broader S&P 500 as well.
We could look at $19.85 as an initial downside target, with $16.10 as the secondary downside target.
To manage risk we would stop out if price breaks above $21.65 on a daily closing basis. Similarly, because earnings are set to come out toward the end of October we would exit this trade before earnings to be safe.
From a fundamental analysis perspective, there are various industry metrics that are used to compare the efficiency of trucking and transport companies. One such measure is the operating ratio which is the ratio of operating expenses to operating revenue. Historically, a ratio of 88% to 92% has been a good range to be in. We don’t have the operating ratios here but we can use the operating margin as a good proxy and from what we see, ODFL seems to have the best margins to withstand macro economic pressure. But, it also happens to be the most overvalued company in terms of PE and EV-EBITDA.
Looking at analyst ratings, we see that these companies are still being pushed as a “BUY” or at least a “HOLD” and the price targets are still much higher than current levels. We can understand why the analysts might still be bullish but, we believe these estimates need to be adjusted down. Credit Suisse published a recent bullish report with the thesis that transportation touches everything.
The Street keeps pushing the narrative of the consumer being strong but, this is simply not true. With the aggressive levels of Fed tightening, and inflation still at quite high levels, the next few months will erode the consumer demand and spending on goods even further. This will show up in transports and in fact if you look at the charts, they already have to a large extent. We still believe that these companies may have further to fall given that there are still relatively “expensive”. We would wait for another bear market rally and look at shorting them into any strength.