This Economy IS Stronger Than Many Realize

By Mark Bern, CFA

I make this statement based upon a multitude of indicators but I want to focus on one that is irrefutable.  The trucking industry is running at full capacity and adding capacity at a record clip!  Once service I read is ACT Research, a research company that specializes on the trucking industry.  The company reports on the demand and build trends for trucking equipment.  The most recent few reports (excerpted below) show incredible strength.

“After a steady June, fleets came roaring back into the market in July. OEMs had their strongest July net order volume in history, breaking a record that was set in 1994. Net orders were 102% better than last July and 45% above June volume. Considering July is, historically, the industry’s weakest order month, this performance is truly exceptional. Year-to-date, net orders of just over 200k trailers are up 30% from 2017,” said Frank Maly, ACT’s Director of CV Transportation Analysis and Research.

He added, “When seasonally adjusted, July came in above 44k units, the second strongest monthly reading in industry history. That converts to a stunning 528k SAAR. Both dry vans and reefers paced overall performance, closing the month with backlogs that now stretch into March of next year. While strength was evident across all industry segments, it is noteworthy that cancellations remain low, indicating strong fleet confidence as we move through the rest of this year and into next.”

“Fleets continued to invest at a torrid pace in August, following a robust July. Industry net orders of 38,200 trailers were up more than 30% from July and over 140% better than this time last year. The summer has shown amazing strength, reflecting commercial fleets’ positive outlook in response to solid freight rates, volumes, and capacity challenges. After seeing the strongest July volume in industry history, August followed suit, surpassing the previous record of August 1994 by more than 11,000 orders,” said Frank Maly, ACT’s Director of CV Transportation Analysis and Research.

The crazy thing is that 2017 was a strong year for truck equipment manufacturers and orders are up over 100% this year.  Then there was a quote from The Kiplinger Letter that supports the same logic.

“Trucking companies are racing to keep up with soaring shipping demand caused by a strong economy and growing e-commerce sales. Nearly 100% of the existing truck fleet is in use, as shipping volumes have risen 5% versus 2017. Shippers are redoubling efforts to increase efficiency and eliminate any wasted time.”

This just solidifies my convictions that the transportation logistics industry is going to enjoy strong growth in the remainder of 2018 and throughout 2019.  My favorite company in that space is Landstar Systems (LSTR).  Earnings for the company grew by 29% from 2016 to 2017 and it appears likely that it will post earnings in 2018 of about 32% higher than in 2017. 

Driver shortages are around 250,000 and equipment capacity is also strained so it is imperative that companies and drivers become as efficient as possible.  That is Landstar’s forte.  It identifies the best routes and matches drivers and equipment to loads in all directions to optimize utilization.  Shippers love them because the company facilitates getting their products to where they need to be in a timely manner.  Drivers love them because Landstar helps them eliminate (or at least minimize) deadhead miles (driving empty).  Trucking fleet operators love them because the company helps to increase load factor, optimize capacity utilization and increase revenue. 

And when the economy begins to falter and rates fall those same customers will want to maintain maximum efficiency leading to strengthened relationships with Landstar.  When revenue falls the focus shifts to reducing expenses and Landstar gives its customers an advantage there as well.

The company recently reported its quarterly earnings and the stock jumped from $115.80 (August 31^st) to a high of $128.70 on September 11th.  It has since begun to settle back down offering investors a better entry point closer to $120. 

And our Friedrich algorithm likes it as well because its consistency.  The company is asset light and generates superior FROIC (free cash flow return on invested capital) as shown below.

You can find a legend to help interpret the ratios shown above here.  For those of you who would like an explanation of the ratios and how each is calculated please follow this link.

The Friedrich system concentrates its analysis on free cash flow (FCF) because cash does not lie.  Earnings can be manipulated and are by many companies but FCF cannot.  I use Friedrich heavily in my assessment of companies before making investment decisions.  The system is relatively new having originated in 2015, but our 60-year back test of the foundational ratio, the Price to Berhard/Buffett Ratio, provides sufficient support for the system’s validity.  How can one argue with a compound annual return over 60 years in excess of 21%?