Truckers' Valuations Overheating
Even with pricing power in high gear, we'd hit the brakes.
Following almost two years of anemic pricing, the truckload, or TL, shipping landscape saw a remarkable recovery in the second half of 2017. Capacity has rapidly tightened on accelerating freight demand, carriers’ fleet reductions, and weather disruptions. Highly constrained supply is driving a resurgence in TL carriers’ pricing power; spot rates have rebounded to record levels and contract pricing won’t be far behind. We expect TL capacity to stay firm this year on the back of widespread adoption of electronic logging devices, or ELDs, and the limited driver pool, enabling top-tier TL carriers to capitalize on an unusually strong pricing backdrop. Less-than-truckload, or LTL, carriers should also see healthy rate gains with help from spillover freight from the supply-constrained TL sector.
That said, throughout 2017, stock prices across the trucking space surged as spot rates spiked and optimism grew regarding U.S. tax reform. TL and LTL valuations have become quite lofty and remain so despite the pullback in March. We think the market is extrapolating carriers’ strong operating performance too far into the future. We’ve seen this before--trucking valuations spiked during the 2014 capacity crunch but spent 2015 falling back down to earth as demand and pricing softened and reality set in. We would sell or avoid overvalued asset-based TL and LTL stocks despite the prospect of robust pricing conditions throughout 2018.
Matthew Young does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.