Forecasts Lowered On Weak Truckload Fundamentals

Eroding fundamentals in the truckload (TL) carrier market have led analysts to lower their earnings estimates for the TL carriers they cover.  
A variety of different spot market datasets have highlighted the overall weakness and demand malaise in the market. Additionally, many analysts have confirmed softness in market fundamentals through their channel checks and surveys. Most analysts are citing deceleration in macroeconomic trends, lower volumes/demand, excess capacity and spot market rate weakness as reasons to lower their numbers. Further, the bulk of the earnings revisions are to the back-half of 2019 and all of 2020, suggesting that the trucking downturn has legs.

On June 18, 2019 UBS analyst Tom Wadewitz said, "freight downturns typically last for 12 to 19 months…and we are in the seventh month," in a note out to clients lowering earnings estimates for the TL and intermodal companies he follows. He used the Cass Shipments Index as the benchmark when analyzing the length of the last three freight downturns.

Source: Cass Information Systems and SONAR

Source: Cass Information Systems

Cass shipments data was negative again in May, posting a 6 percent year-over-year decline. The shipments index turned negative in December 2018 and has seen year-over-year declines accelerate thus far in 2019. Additionally, the expenditures index (the total amount spent on freight) declined for the first time in 2019, down 1 percent year-over-year.

Wadewitz continued, "if history is any indication, freight could remain soft until the middle of 2020."

In a June 19, 2019 note, Stifel analyst David Ross answered the freight recession question by saying, "Well, volumes are weak (weather hurt utilization in first quarter 2019, too), and for many companies, first quarter 2019 and second quarter 2019 volumes are lower than they were a year ago. Is it just a comp[arison] issue vs a strong first-half 2019, or is there more to it? We'll find out in the back half of this year, but we expect it's more than just "tough comps" and would find a resumption of growth in third quarter 2019-fourth quarter 2019 to be a surprise."

As such, he lowered his 2019 volume estimates further. He believes that lower demand will result in a volume decline of -3 percent to flat (prior estimate was -2 percent to 2 percent).  

Trade concerns, weather and a general lack of demand was talked about at recent investor conferences in early June as being the culprits of a weak freight environment. Largely, most management teams from the public TL carriers said that they are not seeing normal seasonality and pointed to June as a make or break month. June is always the biggest month of the second quarter and while FreightWaves' Outbound Tender Reject Index (USA) is seeing some life in June, it's still indicative of a shipper's market.

Outbound Tender Reject Index (USA) – SONAR

Pricing remains depressed in the spot market given significant truck additions in 2018. Most large TL carriers work off of negotiated one-year contracts, which typically represent 90 percent of their revenue book. While these contracts may be renewing higher currently as they are being renewed off of second quarter 2018 spot rates that were just beginning to accelerate, the year-over-year comparisons become increasingly more difficult as 2019 progresses.

DAT Van Freight Rate Index (National U.S. Van) – SONAR

Ross' thoughts on pricing, "Spot market attracted the capacity but saw demand run to the contract market, leading to a crater in pricing. And while we believe year-over-year contract pricing continues to be up year-over-year (although that may change by year-end), freight mix issues and lower spot rates will drive reported yields lower, in our view, as we move into the back-half of this year."

Ross modestly lowered his official 2019 pricing estimate to up 2 to 4 percent (prior was up 3 to 5 percent).

In a June 18, 2019 note, KeyBanc analyst Todd Fowler said that his channel checks conducted during a recent survey were indicating further moderation in contractual rates. This resulted in Fowler pulling down his weighted average pricing expectation to flat (prior estimate called for approximately 3 percent growth). The note went on to describe sentiment from those surveyed.

Survey respondents acknowledged increased bid activity (meaning shippers have placed increased scrutiny on contracts with carriers and are shopping freight rates more aggressively) with approximately 75 percent of those surveyed describing capacity as "loose" or "very loose." Further, approximately two-thirds described second quarter 2019-to-date demand as "below" or "significantly below" expectations.

Wadewitz explained his rationale for lowering pricing expectations. "Given the large one year increase in pricing and current supply/demand fundamentals in the truckload market, we believe the TL carriers could give back some pricing in the 2020 bid season."

He is now calling for truckload pricing to decline 3 percent year-over-year in 2020.

The reduction in analysts' estimates is confirming what the data has portrayed for a few weeks now. Lack of seasonal demand and excess truck capacity which is pressuring rates will weigh on carrier margins and earnings results which likely won't abate until the industry sees meaningful capacity absorption.

On average, KeyBanc and Stifel lowered 2020 estimates by 7 percent with UBS taking down 2020 forecasts by 17 percent.

Morgan Stanley analyst Ravi Shanker may have summed it up best in his TL sentiment survey, "current supply, demand and rate sentiment are now on par with 2016 levels."

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