BofAML Shipper Survey: Capacity Will Stay Loose, Rates Will Stay Flat

Bank of America – Merrill Lynch (BofAML) released the 181st edition of its Truckload Diffusion Indicator, a survey that aggregates and analyzes shipper sentiment toward truckload markets.

Shippers believe that trucking rates are nearing their bottom. In the current survey, 33 percent of shippers said they expect rates to continue falling, down from 53 percent two weeks ago. Now the majority, 55 percent, say that they expect rates to stay flat, up from 42 percent two weeks ago.

Having made it through May and most of June without major disruptions to capacity, a growing number of shippers reported their belief that capacity will loosen even further in the near future. A full 63 percent of shippers expect capacity to increase, up from 50 percent in the last survey.

"A shipper from the Southeast noted that Florida produce season always has an effect on his company's Southeastern capacity, so it's just a matter of how tight it will be," wrote Ken Hoexter, research analyst and managing director at BofAML. "He noted that so far this year, it has not affected his company's ability to get trucks. He highlighted that this is the quietest he has seen it in his 20 years in Florida through May and June."

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.

(Charts: Bank of America Merrill Lynch)

"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 Worldwide Inc. 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 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 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 SNDR mixture of intermodal and brokerage, is optimistic but waiting for an operational turnaround from U.S. Xpress USX, and thinks Werner Enterprises WERN can continue to grow earnings.

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