Larkin Says: |
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| Through November, the ATA Revenue/Mile Index showed a 5.0% y/y increase for truckload carriers in 4Q14 - the 6.0% increase in November was well above the 3.6% y/y increase seen in the first ten months of 2014 |
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New Expert Insight Column on SCDigest: We have partnered with Stifel Financial Corp. to publish its weekly recap of the week in transportation, written by well-known analyst John Larkin. Check the SCDigest home page each Monday morning for the latest edition.
4Q14 Recap: Key Takeaways from Industry Data
(1) Rail volumes remained strong:
For the majority of the railroads, actual reported volumes exceeded our originally modeled assumptions. We increased
estimates for most of the railroads under our coverage after week 49 to incorporate the impact of strong volume and
falling fuel prices. See our note, Updating 4Q14 Estimates for Volume and Fuel: Mostly Positive Trends for All But
NSC, for more detail around those updates.
As well, trends in the final three weeks of the quarter have improved, as
weather late in 2013 provided easy comps in 2014. As of the close of the quarter, Canadian National (CNI; Hold;
$68.20) has shown the strongest volume growth (+10.1%), while Canadian Pacific (CP; Hold; $188.61) has shown the
weakest (+0.4%). Compared to our modeled assumptions at the start of the quarter, CNI has shown the most
outperformance (volume growth of 10.1% was 5.6% higher than our original assumption), while Norfolk Southern (NSC;
Hold; $109.15) has been the most disappointing (volume growth of 3.7% was 2.0% below our original assumption).
In
general, we believe 4Q14 EPS reports should be positive for the majority of the railroads, and better-than-expected for
many. Norfolk Southern could show the weakest 4Q14 results, in our view, as the unique nature of their fuel surcharge
program should provide a headwind in 4Q14 (while it is at least a slight tailwind for all others), as volume has been
weaker than expected, and as significant congestion-related expenses will be realized in the quarter.
Previous Columns by
John Larkin |
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(2) Truckload contract pricing accelerated:
Through November, the ATA Revenue/Mile Index showed a 5.0% y/y increase for truckload carriers in 4Q14 - the 6.0%
increase in November was well above the 3.6% y/y increase seen in the first ten months of 2014 (note: the ATA pricing
data tends to be more contract-based, whereas pricing data reported weekly in this report from ITS and DAT is
reflective of spot pricing). Truckload carriers appear to be commanding the rate increases needed to offset the rising
cost of driver compensation - as a result of the broad-based driver shortage.
Combined with moderate volume growth,
this strong pricing environment should provide a generally positive backdrop for carriers in 4Q14 (slightly offset,
however, by a possible headwind from fuel; see our note, How Will Falling Oil Prices Impact Transportation & Logistics
Companies?, for more detail). Within our coverage, Celadon Group (CGI; $22.77) and Swift Transportation (SWFT;
$28.63) are the two Buy-rated names which should benefit the most from these factors.
(3) Spot demand in trucking continued to normalize:
As expected, networks continued to stabilize in 4Q14 and spot demand continued to trend back towards 2013 levels.
For the 4Q14 as a whole, the ITS Market Demand Index was up 25.1% y/y, nicely improved over 2013 levels, but
nothing compared to the 70.9% and 50.7% y/y increases seen in 2Q14 and 3Q14, respectively. This should provide a
still-positive backdrop for truck brokers (which generally benefit from network disarray), but we would expect 4Q14
results may not be as scintillating as those seen in 2Q14 and 3Q14. Of the companies under our coverage which are
wholly (or primarily) truck brokers, we currently have Sell ratings on both C.H. Robinson (CHRW; $73.84) and Echo
Global Logistics (ECHO; $28.45).
Key Insights From the Analysis of Industry Data Feeds
Trucking:
• Spot demand was flat for the second week in a row in W52. The ITS Market Demand Index (MDI) measured 15.59
(-1.0% sequentially). As well, the MDI was up only 7.9% y/y, compared to an average y/y increase of 56.8% YTD
through W49 - the prior three weeks have seen spot demand return to much more normalized levels. For the 4Q14
as a whole, the MDI was up 25.1% y/y, nicely improved over 2013 levels, but nothing compared to the 70.9% and
50.7% y/y increases seen in 2Q14 and 3Q14, respectively. On a sequential basis, the MDI for 4Q14 was down
28.7% from the average level seen during 2Q14 and 3Q14.
• Load-to-truck ratios on DAT, another measure of relative spot demand, were also flat sequentially in dry van - which,
as the largest segment, is the most representative of the broader market and the conditions seen for the majority of
market participants. Both refrigerated equipment and flatbed equipment, however, saw sequential upticks in W52. Dry van was down 2.9% sequentially, while refrigerated was up 6.3% and flatbed was up 33.1% (note: flatbed has
exhibited significantly higher volatility on a week-to-week basis than other equipment types in 2014). DAT’s load
board has shown slightly more stable spot demand indications than MDI, but trends have been the same
directionally. For 4Q14 as a whole, dry van load-to-truck was up 17.8% y/y, slightly less scintillating than the 38.4%
and 20.7% y/y increases seen in 2Q14 and 3Q14, respectively.
• Spot rates were up slightly in W52 on a sequential basis, and still remain elevated y/y. On ITS, the overall equipment
rate increased 4.5% sequentially to $2.31, largely driven by an 8.8% increase for flatbed equipment (dry van was
also up a modest 3.8%). On DAT, dry van and flatbed rates were flat on the week, while refrigerated rates ticked up
slightly. For 4Q14 as a whole, overall equipment spot rates were up 7.6% y/y on ITS, while dry van rates were up
8.4%. On DAT, dry van rates were up 8.1% y/y in the quarter.
Rail
• Class I commodity carloads were up 11.2% y/y during W52 as winter weather in 2013 led to soft y/y comps. As well,
despite quickly declining oil prices, railroad demand has continued to hold strong in the “new energy” business
commodities (i.e. crude, frac sand, drilling pipe). As expected, volume from wells already drilled has continued,
though further drilling could be at risk if oil prices stay low. QTD, CNI has been the strongest performer (total unit
volume up 10.1%) while CP has been the laggard of the group on volume growth (+0.4%).
• Intermodal volume was up 7.9% y/y on the week. CN’s volume was up a whopping 25.5% y/y on the week, while
KSU’s was up 20.2%. QTD, CNI has shown the most growth in intermodal (+9.6%) while CP has been the worst
performer on intermodal volume (-3.4%).
• Total unit volume (i.e. commodity carloads & intermodal units) showed declined sequentially as a result of the
holiday, but was up 9.9% y/y in the most recent week. CN and UP were the leader and laggard of the group (+20.8%
and +5.9% y/y, respectively).
• Class I performance metrics still remain at depressed levels, but are beginning to show improvement on a y/y basis
as the railroads lap the start of the deterioration in December of 2013. High carload demand, matched with
infrastructure challenges have made a full correction near impossible, but it seems unlikely that conditions should
worsen from this point—as significant investment has been made on the part of the railroads and we do not often
see winter conditions as difficult as we saw last year. For the 4Q14-to-date, velocity is down 5.2% y/y, though Week
52 was the first positive comparison the railroads have posted all year (+0.9%). For the 4Q14-to-date, terminal dwell
is up 10.3%, but Week 52 also showed the first negative (which is good) comparison this year for the railroads
(-4.8%). Cars on line are up 14.0% QTD y/y, and were still elevated in Week 52 as the majority of additions occurred
in early February of last year.
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