EUR 850.00 For Business Accounts Only

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.