Morningstar | Unprecedented Rate Gains Drove Trucking Stocks to Fast Lane, but Valuations Becoming Reasonable
Following a mini freight recession in 2016, the truckload, or TL, shipping landscape enjoyed a remarkable recovery in the latter half of 2017 and operating conditions proved exceptionally robust over the past year. TL capacity entered an unprecedented tightening phase on the back of strong shipment demand, widespread ELD adoption (the foremost driver of disruption), and constrained driver availability, translating into a massive uptick in carriers' pricing power. Extremely tight supply pushed spot rates to historically high levels this year, and contract rate gains weren't far behind thanks to a robust bidding season. Less than truckload (LTL) capacity isn't nearly as tight, but carriers are benefiting from healthy economic growth (freight demand) and spillover shipments from the supply-constrained TL sector.We think the trucking industry supply/demand balance will still favor carriers in 2019, but pricing will normalize in the years ahead as carriers continue calibrating to ELDs and drivers gradually enter the TL market. We've long baked that dynamic into the midcycle assumptions supporting our TL and LTL fair value estimates. Importantly, investor expectations have been in the process of resetting in recent quarters as it's become more obvious that most truckers have little chance of matching the unparalleled rate gains (and related margin and EPS growth) achieved in 2018. Thus, market valuations are correcting, following a long stretch of our rating these stocks as highly overvalued.
In our view, most trucking names we cover now reflect more realistic long-term growth assumptions, and we think this sets the stage for buying opportunities should investor sentiment swing the other way and turn overly negative. Along those lines, TL leaders Knight Swift and Schneider National are starting to look attractive, trading in modestly undervalued territory.
Landstar System is an asset-light provider of integrated transportation management solutions. The company provides services to its customers across transportation modes, throughout the U.S. and to a lesser extent in Canada and Mexico, and between the U.S. and Canada, Mexico and other countries around the world. The company has two segments: transportation logistics, which provides truck services, rail intermodal services, as well as air and ocean services; and insurance, which is comprised of Signature Insurance Company, an offshore insurance subsidiary, and Risk Management Claim Services, Inc. The company's insurance segment provides risk and claim management services to certain of its operating subsidiaries.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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