Sep 21 P

Bullish commentary from the trucking industry and positive intra quarter updates from carriers have confirmed what the data has been showing for several weeks now: Third-quarter earnings for trucking companies will be strong and that strength may continue for a while.

While second-quarter results came in ahead of lowered expectations, COVID-19’s impact on demand was evident in most financial reports. After a brief inventory restocking rally in March, trucking demand fell as manufacturing lockouts and municipal shutdown ordinances spread. A bottom formed in April with conditions improving throughout the quarter. The “less bad” trend throughout the second quarter has turned into year-over-year growth in the third quarter as carriers are seeing peak-type loads ahead of peak season.

What the data was saying all along has been confirmed as management teams from the publicly traded carriers have begun to vocalize the improvement and analysts have raced to up their earnings estimates for the current quarter and beyond.

Truck demand materially higher

Outbound tender volumes (SONAR: OTVI.USA) inflected positively year-over-year in mid-May as manufacturing, notably in the auto sector, came back online. The year-over-year growth in volumes accelerated throughout the bulk of the third quarter, cooling only for the Labor Day holiday, which occurred five days later this year than last.

At a recent investor conference, representatives from various carrier management teams provided anecdotes on the relative demand outperformance. Management from J.B. Hunt Transport Services (NASDAQ: JBHT) said they have seen incremental demand increases in each of the past six weeks. Schneider National’s (NYSE: SNDR) team indicated that a 10% to 15% drop in daily tendered loads would still leave the carrier with more freight than it could haul.

A change in consumer buying habits from experiences and services too hard goods that require shipping has driven the spike in truck demand. Retail sales, excluding motor vehicles, reached record levels in August at $428 billion, according to the U.S. Census Bureau. While only 2% higher year-over-year, it’s an important mark as it was the first month without the help of enhanced unemployment benefits afforded under the coronavirus-aid package.

E-commerce sales increased 45% year-over-year during the second quarter. The increase in at-home shopping has pressured supply chains and left many retailers in a struggle to replenish significantly depleted inventories.

Census Bureau data shows the retailers’ inventories-to-sales ratio remained near all-time lows in July at 1.23x, relatively flat with June’s record-low reading of 1.22x. The reading was also significantly lower than 1.35x in May and 1.68x in April, a month that was marred by the height of broad economic shutdowns. Many transportation equity analysts have pointed to the need for continued inventory restocking as a primary catalyst for raising carrier estimates moving forward.

Estimates moving higher

UBS (NYSE: UBS) freight transportation analyst Tom Wadewitz recently raised his truckload (TL) earnings-per-share (EPS) estimates by mid-single to mid-teen percentages for the back half of the year. “We note that inventory replenishment is a key driver of truckload and intermodal demand and low inventories point to strength in demand in 2H20 and likely into 2021,” Wadewitz said.

Deutsche Bank (NYSE: DB) analyst Amit Mehrotra advanced his forecasts for the rest of 2020 and all of 2021 on the carriers he follows. He increased his third-quarter earnings estimates for TL and less-than-truckload (LTL) companies by approximately 18%, resulting in his expectations being 12% to 32% higher than consensus estimates at the time. His full-year 2020 and 2021 estimates were increased by 9% and 10%, respectively. “The bottom line is we expect Transportation results to be very strong across the board, with likely more to come over the course of the next several quarters,” Mehrotra proclaimed.