Carriers' rate expectations have fallen considerably, potentially to levels for which margins will be down year-over-year
in 2012, according to a Trucking Trends survey, in which Jefferies & Co. partnered with Fleet Owner magazine to survey trucking industry expectations.
This survey explores trucking-focused questions regarding carrier operations and regulations, including expectations around rates and driver pay, attitudes toward recent regulatory changes, and plans for revenue capex in 2012.
Roughly 70% of survey respondents expect rate increases of 2% or less in 2012. This is markedly lower than expectations at mid-year, at which point the majority of carriers expected rate increases of 2% to 5%.
“Our sense is that the onslaught of economic worries following the S&P downgrade of U.S. sovereign debt dragged down industry expectations,”said Peter Nesvold of Jefferies & Co.
Margin pressures are expected to mount. More than 80% of fleets expect margins to be flat or down year-over-year in 2012 if rate increases are only 2% or less. Pressures on driver pay abated during the second half of 2011. (While 77% of respondents at mid-year expected to raise driver pay, this dipped to less than half later in the year.) Even still, other rising costs (particularly tires and batteries) continue to ratchet higher.
Fears over regulatory costs have eased. Continuing a decade-long trend, regulatory hurdles continue to rise for the trucking industry, further draining carrier productivity. However, respondents are adjusting to heightened regulatory barriers, as the expected efficiency headwinds from both the Compliance Safety Accountability (CSA) and then-proposed Hours of Service (HOS) rules were lower at year-end than at mid-year.
Plans for tractor purchases generally unchanged. Our survey revealed that the macroeconomic softness of the second half of 2011 had only a modest impact on revenue capex plans. Bucking the consensus view, a surprising 78% of respondents expanded their fleets in 2011; this same percentage expect to grow their fleets in 2012, as well. Our carriers grew their tractor fleet by 7.8% on average in 2011, and currently anticipate growing by another 5.1% on average during 2012.
In terms of investment strategy, we argued this time a year ago for rails and parcel over truckload carrier shares. “Our call this time a year ago was that transports were about as close to ‘consensus buys’ as we had ever seen, yet we were anticipating a potential inflection point to the downside in earnings expectations around mid-year, led by the short-cycle truckload carriers (TLs),”Nesvold said. “As such, we shunned cyclicals and instead focused on names with structural pricing stories — primarily the rail and parcel stocks. This strategy worked in 2011, as the TL stocks underperformed the rails by 16.6%, the parcel names by 1.4% and the S&P at 0.6% through December 23. This divergence would be wider if we included dividends and looked at the stocks on a total return basis.”
We favor equipment-related stocks over TL shares. “For 2012, we continue to like the rail and parcel names, but would now add to that list truck equipment names such as R, DAN, and NAV,”Nesvold said. “We do believe that TL volumes will continue to be better than feared and that rate expectations appear to be quite low (a material contrast to a year ago). However, we see continued margin pressures for the TLs and a need to reinvest into revenue equipment for the next four years. At the same time, relative valuations favor equipment stocks over truckload names. Our work suggests that relative value is a good predictor of relative performance between these two groups.”
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