Trucking investors might not yet be singing the refrain from Rawhide ("rolling, rolling, rolling keep them doggies rolling..."), but the industry looks like it's on the road to recovery. As a result, we might see far more trucks heading down the highway.
Industry experts expect a modest 3% increase this year in heavy duty Class 8 trucks, but come 2011, they predict that the industry will put the pedal to the metal with 50% growth. Researcher FTR Associates says the economy has been slow to recover, accounting for the incremental rise in 2010, and there's also a large overhang from trucks that have sat idling on the shoulder from lack of demand.
Hitting the air brakes
But trucking fleets will be retiring older rigs, and tough new EPA emissions rules will ensure that those outdated models don't return to the nation's highways. Industry players like truck trailer maker Wabash National (NYSE: WNC ) rode a wave of sales as trucking companies rushed to beat those emissions deadlines a few years ago, only to jackknife when the economy slumped. However, industry trailer orders jumped 168% in February, hitting a two-year high.
A lot of other trucking-related industries are just getting up to speed, too. Admitting that it had been two years behind with its technology, Cummins (NYSE: CMI ) is coming to market with a EPA 2010-compliant engine that achieves double-digit fuel economy in some cases.
A spot-on recovery
Freight volume is also starting to trend up now. According to the American Trucking Association, truck tonnage rose 2.6% year over year in February, fueling cautious hopes that pricing will recover as well. Spot prices have also risen, but contract rates continue to fall. A lot still hinges on when the broader economy makes the turn, and how fast capacity gets absorbed. Bankruptcies like Arrow's at the end of last year, and YRC Worldwide's (Nasdaq: YRCW ) dalliance at the brink, will keep the pressure on for at least a while longer.
If the situation improves, which trucking companies might respond best? JB Hunt (Nasdaq: JBHT ) looks attractive, because it derives 55% of its revenue from intermodal transport. That's industryspeak for shipments hauled between the railroads and the shipyards. Its JBI segment works with all major rail carriers, but the majority of its business travels on Berkshire Hathaway's (NYSE: BRK-A ) Burlington Northern and Norfolk Southern railways.
Riding the rails
Buffett has expounded on the benefits of the rails over roadway, which might tip the scales in JB's favor. But in a growing economy, businesses might favor the greater flexibility trucking offers, as well as the ability to ship smaller loads. JB Hunt plays the best of both worlds in that regard, but I also like Knight Transportation (NYSE: KNX ) .
Despite fourth-quarter profits coming in 18% below last year's effort, Knight's debt-free will allow it to make a sizeable acquisition. The unnamed truckload company it's buying generated about $450 million in revenue last year, which would almost double Knight's size.
We got a great big convoy…
Knight has remained a profitable enterprise throughout the recession, and its margins are nearly double Hunt's. At 29 times forward earnings, though, Knight's not exactly cheap. It hits the middle mark of its industry, coming in higher than Hunt and Werner Enterprises, about equal to Heartland Express, and lower than Con-way (NYSE: CNW ) .
If the economy gets a full head of steam, however, the trucking sector will resemble a convoy, with most of the industry's players driving forward.