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Ren•ais•sance [ren-uh-sahns] n. A renewal of life, vigor, interest, etc.; rebirth; revival: a moral renaissance.
Fancy pants words like "renaissance" aren't often heard when talking 'bout trucking. But this week, the word is appropriate -- because what's happening in the trucking industry really is a revival, and in more ways than one. Quite aside from the seasonal announcements at FedEx -- which predicted Dec. 13 will be its busiest day in history as it ships 16 million packages around the globe -- and UPS -- which is hiring 50,000 temps to keep up with its demand -- things are looking up all across the shipping industry.
Rules and exceptions
According to the American Trucking Association, September marked the 10th consecutive month of year-over-year increases in tonnage moved by U.S. truckers. Demand is running so strong that, in October, General Electric (NYSE: GE ) and Penske joint venture Penske Truck Rental posted a 27% increase in the number of Class 8 trucks it rented out.
So while pockets of weakness in the industry remain -- YRC Worldwide (Nasdaq: YRCW ) announced closure of 40 freight terminals in response to "low freight volume." But YRC's problems seem specific to YRC. According to analyst RW Baird, the company is losing market share to its rivals such as Arkansas Best and Heartland Express (Nasdaq: HTLD ) . AB reported earlier this month that its daily tonnage levels are on the upswing, with revenues up 12% year over year. Heartland reported a similar increase last month, and Knight Transportation (NYSEK: KNX) is growing as well. In short, it seems as if YRC's weakness is the exception to the rule.
Now ... here's how knowing what "the rule" is can make you some money: According to a report recently published by ACT Research, at the same time as trucking demand revives, demand for new trucks is reviving as well. Commercial trucks on U.S. highways today are the oldest they've been in 31 years. While "6.7 years old" doesn't sound like a lot, the fleet is 11 months older than the historical average. Orders for replacements rose 24% sequentially in October.
Focus on the shovel makers
There's an old saying in investing circles that it's hard to pick precisely which gold mine will pay off, but you can always get rich selling picks and shovels to the gold miners. This is especially true in trucking today. While I'm not optimistic about any of the major shippers (with the possible exception of UPS, and for reasons unrelated to trucking), I do see a bright future in the stocks of companies that sell truckers "shovels" -- truck builders Paccar (Nasdaq: PCAR ) and to an even greater extent, Navistar (NYSE: NAV ) .
You see, the cold fact of life is that trucks don't live forever. Knight boasts of having a "relatively young fleet," while Heartland says the average age of its tractors is "1.6 years ... one of the newest and most fuel efficient fleets in the industry." But keeping your fleet young requires constantly buying trucks. Heartland recently ordered 200 new 2011 model year International ProStar tractors from Navistar. Con-way says it's in the market for more than 1,300 new tractors next year.
According to ACT, keeping these fleets "young," and modernizing the rest of the U.S. trucking fleet, will require perhaps 235,000 new trucks in 2011, up 56% from the 151,000 sales expected in 2010. And while that would be a sizable jump, it's really not extraordinary. Typical replacement rates for Class 8 trucks runs to about 220,000 vehicles annually.
As a result, it seems likely 2011 will be a good year for truck builders. Even better, if 220,000 units is the norm, and 2011 will see only slightly above-normal sales volume, then the years beyond 2011 should see pretty good sales, too. But what's the best way to play this trend?
Big honkin' truck maker
I have to tell you, folks, when I look at truck making stocks today, I get the distinct impression this impending surge in truck sales isn't exactly a secret. Volvo stock sells for 35 times earnings. America's Paccar is even pricier, at 58 times earnings. Daimler is really more of a Mercedes-maker than a truck icon, and so more comparable to Ford than to Paccar -- but even so, the company's 16 price-to-earnings ratio, at a time when Ford is selling for less than nine times earnings, tells me investors may be gifting Daimler with a trucking-sales-bump premium as well.
And yet, there's one stock playing odd-man-out in this group: Navistar. Selling for 14 times earnings, the stock looks only slightly overvalued relative to expected long-term earnings growth of 12% per year. When you look closer, and realize that the company generates free cash flow at nearly three times the rate it reports GAAP earnings ($737 million in trailing FCF), the stock is positively cheap at a P/FCF multiple of only five.
While admittedly back of the napkin, a valuation this cheap tells me Navistar's not just a pick-n-shovel provider -- but a potential gold mine itself.