Sharp Curve Ahead – Cowen’s Trucking Survey

Our proprietary trucking survey, in which 95% of carriers indicated they won’t have to cancel orders, market update from Noël Perry, and rate views from Chainalytics, causes us to believe pricing should come under pressure in ’19. While the market anticipates this directionally, it fails to realize the magnitude of the move. As a result, we have cut our pricing expectations, estimates, and PTs.

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Survey Results – Carriers are Confident that Capacity is Likely Rising Following a record number of Class 8 truck orders in 2018, including the three highest net order months in the last ~20 years, we surveyed public and private trucking companies on their Class 8 truck fleet size, orders, and order cancelations, and on their interactions with the OEMs. Among the most significant takeaways from the survey is that ~95% of carriers who ordered Class 8s in 2018 believe they will not have to cancel any of their order. Even among the carriers who believe that they will have to cancel any of their order, ~50% of carriers believe they will only have to cancel 0-10% and the other ~50% believes they will have to cancel only 11-25%, which shows that even among the “less confident” carriers who believe they’ll have to cancel orders, they are confident they won’t have to cancel much. Key Takeaways from Leading Transportation Economist Noël Perry The peak for contract price increases should occur sometime in late 2019. The outlook is for prices to remain above the long-run trend through 2020, although spot prices will have regressed to near-trend by early 2020. Contract prices will make that approach in 2021. This is a reasonable base case forecast, derived from a careful study of historical precedent. It is clearly more likely than the more optimistic assumptions that most of the industry is still making, buoyed by the good feelings (for carriers) of the last eighteen months. Chainalytics Market Update We provide a market update from Chainalytics, a global supply chain consulting, analytics, and market intelligence firm, including spot and contract rate data. Relative to their mid-2018 highs, contract rates are only down 2% nationally for Dry Van, whereas the spot rate has fallen 37% nationally for Dry Van. Second, December 2018’s spot rate premium, or the difference between spot and contract rates, was only 6%, which represents available supply in the market. Chainalytics suggests that with rates falling as we approach bid season, shippers will once again have the upper hand in contract negotiations with carriers Stock Thoughts – Lowering PTs and Estimates for TLs, LTL, and More Given the aforementioned pricing concerns, we are cautious on the trucking group over the near term. Early January data should remain fairly strong, particularly with an earlier Chinese New Year comparison. However, we believe demand in February may weaken and begin showing the full effect of the 2018 tariff pull forward, at an inopportune time for trucking companies, as it will likely be occurring in contract rate negotiation (this typically runs from January-May). Rates for the year are not likely to go negative, though they are likely to be lower than we had previously forecasted. As a result, we have reduced our outlook for the trucking stocks that we follow for 2019, moving notably below consensus for most companies. In addition, we are lowering our price targets, the result of our aforementioned new estimates as well as multiples reduced by roughly 1 full turn, which still leaves the stocks well above the 5-year low multiple but notably below the midpoint of the range. Please see the figure on page 5 for full details. What is the Data Telling Us? Looking at Prior Periods of Elevated Net Orders Lastly, in addition to looking at elevated net orders effect on pricing, we looked at prior periods of elevated net orders to see what TL stocks did, performance-wise, in periods following peaks net orders. In the period from January 1998 until the present, we highlighted nine distinct peak periods (in addition to this current peak). Relative to the end of the peak, stocks were only up 3% after one month, 4% after three months, and then were down 3% after five months. This comparison highlights how whatever gains stocks recorded over the course of the peak, they couldn’t sustain in the longer term, or even 5 months later.

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