BofAML shipper survey: capacity will stay loose, rates will stay flat

This survey, the Truckload Diffusion Indicator normalized following an exceptional peak — the largest sequential increase in the survey’s history — two weeks ago. Hoexter attributed last survey’s abrupt spike from 52.5 to 61.1 to a full week of favorable weather, pull-forward from China and (threatened) Mexico tariffs, a large movement upward in the stock market, and International Road Check week.

BofAML remains pessimistic on the near- and medium-term outlook for trucking companies, which tracks with the narrative emerging from a number of freight data sources. Just as tight capacity colluded with strong economic growth in 2017-8 to send trucking rates soaring, now loose capacity combined with slowing economic growth is pulling the industry into a bear cycle.

“We do not anticipate a sharp recovery for carriers, and thus, favor companies with proven skill at navigating cycles, such as Knight-Swift,” Hoexter wrote.

The charts in BofAML’s report demonstrate the severity of the current downturn by stacking this year’s data on top of historical data beginning in 2015. This year, 2019, is shaping up to be just as negative as 2018 was positive. Shippers’ view of available capacity is now at a five-year high; the outlook for freight demand is at a five-year low; inventory is more balanced than it has been in any of the past five years.

“Another shipper from the Southeast noted that asset based companies are lowering prices to compete with the spot market, and expects this situation to level out in the next month or so,” Hoexter wrote. “A shipper from the Manufacturing industry noted that dry van and flatbed carriers are lowering rates, even after his company’s 1Q/2Q bids.”

BofAML’s survey is distributed to more than 1,000 shipping managers across a variety of industry verticals. Consumer goods & services represented 28 percent of respondents, the largest category, followed by Retail (25 percent) and Manufacturing (23 percent).

At the end of the report, Hoexter listed his price targets for some of the transportation and logistics companies he covers. He believes that shares of C.H. Robinson (NASDAQ: CHRW) should stabilize at 17 times his estimate for the company’s estimated 2019 earnings-per share at $84; the stock closed at $83.03 on Friday.

Hoexter was a bit more optimistic toward J.B. Hunt (NASDAQ: JBHT), largely due to its ramping brokerage profits, expected to grow as its Integrated Capacity Solutions division is able to feed more freight through the J.B. Hunt 360 app.

The impressive operating ratio posted by Swift Trucking continues to have a positive influence on Wall Street’s view of Knight-Swift (NYSE: KNX). Although shares of Knight-Swift closed at $31.89 on Friday afternoon, Hoexter’s price target is $43, an implied 34% upside.

“This multiple [15.5x] is just below the low end of its blended KNX-SWFT one-standard-deviation 22 year historical trading range of 16x-25x, which we view as appropriate given integration gains offset cycle concerns,” Hoexter wrote.
Hoexter likes Schneider National’s (NYSE: SNDR) mixture of intermodal and brokerage, is optimistic but waiting for an operational turnaround from U.S. Xpress (NYSE: USX), and thinks Werner Enterprises (NASDAQ: WERN) can continue to grow earnings.