Truckload Stocks Looking Past Upcoming Tariffs

Truckload (TL) carrier stocks have held up through the last six trading sessions, walking through a couple of potential body blows. The first came in the form of a tweet from President Trump announcing his intention to impose new and escalating rounds of tariffs on goods imported from Mexico. The stocks reacted last week on the news, but managed to largely shrug it off.

Then several companies at two different investor conferences (Deutsche Bank and UBS) confirmed what the data has shown for a few weeks now – the normal seasonal lift in freight volumes hasn't occurred thus far and TL spot market rates are off more than 20 percent.

Either of these announcements would usually warrant at least a modest and sustained selloff. That has not occurred to date. For the last few sessions, the broader market appears intent in moving higher regardless of the news (S&P 500 is up 3 percent while the TL stocks are largely flat). Market pundits suggest that stock markets are pricing in a couple of interest rate cuts by the Federal Reserve this year and that the tariffs on Mexico may not materialize fully.

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That said, new 5 percent tariffs are expected to go into effect on Monday, June 10, 2019. Manufacturers and suppliers (shippers) will attempt to pass the cost increases along to consumers initially, while also attempting to sustain demand. Once consumers won't absorb these price increases anymore, that leaves the shipper and the carrier to foot the bill. In this environment, the shipper appears to have the upper hand in transport cost negotiations given the imbalance seen in the spot market.

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How the increased costs would be distributed remains to be seen, but the carrier will likely take some of the tariff burden, which at first blush, suggests potential margin contraction. Tariffs ranging from 5 percent to 25 percent on a roughly 10 percent margined industry would be impactful. That said, Mexico isn't a large revenue generator for most carriers and in some instances, this revenue may not be as profitable as revenue produced from domestic operations.

Most TL carriers likely have some exposure to cross-border truckload movements across the U.S.-Mexico border. Whether its door-to-door through-trailer service or drop-and-hook operations, most carriers are likely to be impacted somewhat by tariffs on Mexican imports. As such, FreightWaves read 10-ks and investor presentations to determine the carriers with the most exposure to Mexico.

Werner Enterprises WERN appears to have the most exposure to Mexico. The carrier provides cross-border routes and through-trailer service into and out of Mexico and reported 9.5 percent of 2018 revenue was related to Mexico (8.9 percent of revenue in the first quarter of 2019).

On June 6, 2019 at an investor conference, Landstar System LSTR said that it generates roughly $400 million in revenue from Mexico (full-year 2018 revenue was $4.62 billion). The freight broker sees 60 percent of this revenue moving northbound from Mexico with the other 40 percent moving southbound into Mexico.

Marten Transport MRTN reported that 7.9 percent of its first quarter 2019 revenue was related to Mexico. The temperature-controlled carrier's MRTN de Mexico division provides door-to-door service between the U.S. and Mexico with Mexican carrier partners. MRTN reports Mexico-related revenue in both its TL and brokerage divisions.

USA Truck USAK reported that 8 percent of its revenue is from Mexico and Canada, "to a lesser extent." USAK closed its Mexican logistics division, USAT Logistics de Mexico, in the first quarter of 2018.

U.S. Xpress USX reported that 3 percent of total revenue in 2018 came from Mexico, but only 0.6 percent in the first quarter of 2019. In January 2019, the carrier sold its 95 percent interest in Xpress Internacional, opting out of a fixed cost structure instead relying on a variable cost model using third-party carriers in Mexico.

Covenant Transportation Group CVTI reported less than 2 percent in revenue contribution from both Mexico and Canada.

The largest truckload transportation company in North America, Knight-Swift Transportation KNX doesn't break out its revenue from Mexico. At the end of 2018, the carrier had approximately 800 drivers in its wholly owned subsidiary, Trans-Mex, along with five facilities in Mexico.

Other TL carriers don't provide any material detail on revenue tied to Mexico, but likely have some modest exposure.

On May 30, 2019, President Trump threatened to implement increasing rounds of tariffs on all Mexican imports beginning with a 5 percent tariff on June 10 unless Mexico (and U.S. lawmakers) take immediate steps to stop the flow of illegal immigration into the United States. The tariffs will stairstep higher in 5 percent increments each month, topping out at 25 percent on October 1.

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