Can Truckers Haul Us Out of Recession?

At least one part of our economy has good news to offer. According to the American Trucking Associations, February's seasonally adjusted truck tonnage index was its highest level in more than two years. Its 3.5% increase from February 2007 marked the index's fourth consecutive year-over-year increase.

ATA Chief Economist Bob Costello found February's reading encouraging, saying, "The fact that truck tonnage did not lose any of January's robust 2.4-percent gain is quite positive."

Does truckers' good news signal an end to the U.S. recession, even before most economy watchers have admitted it's begun? Costello noted that truck tonnage typically leads general economic activity. "Truck tonnage rebounded in 2001, for example, just as the aggregate economy was slipping into a recession."

Truckers: Harbingers of recovery?
There's good evidence to suggest that transportation is a leading indicator for the entire economy. For one thing, anything you buy at a store had to get there from the factory. Even online sales require a truck to get the product from the warehouse to your door.

The link was historically so strong that it became the centerpiece of Dow Theory, which suggests that positive or negative moves in industrial stocks are more relevant when they are "confirmed" by similar moves in transportation stocks. I'll say one thing: Trucking tonnage certainly provided an early warning to the downside, with the index peaking in early 2007.

Whether you believe in Dow Theory or not, the latest tonnage index is at least a modestly positive indicator for trucking companies.

Calling CAPS on the CB
Looking at CAPS' picks in the sector, the average trucking company has a mere two-star rating. Contrarian investors might want to take a look, since CAPS at large may not appreciate the fundamental improvement the tonnage index has shown.

The highest-rated trucking stock in CAPS is Saia (Nasdaq: SAIA  ) , a small-cap trucker focused on the retail, chemical, and manufacturing industries. However, that company is burning through more cash than it generates, and it's had to significantly increase its debt load.

Some three-star CAPS picks may be more appealing. In trucking, CAPS players have awarded this rating to Frozen Food Express (Nasdaq: FFEX  ) , Dynamex (Nasdaq: DDMX  ) , Forward Air (Nasdaq: FWRD  ) , Landstar System (Nasdaq: LSTR  ) , Heartland Express (Nasdaq: HTLD  ) , and YRC Worldwide (Nasdaq: YRCW  ) .

I have long been a fan of Landstar, which I own, primarily because of its business model. Rather than owning its own trucks, the company outsources hauls to a network of independent contractors, who in turn get to keep most of the revenue generated by each load. Since Landstar doesn't have to spend money buying new trucks each year, its operating cash flow translates almost entirely into free cash flow.

It's not my cup of tea, but with a potential industry rebound in sight, many investors prefer to look at the more leveraged names. Because the cost of truck ownership is largely fixed, when revenue rebounds, companies owning lots of trucks can see their earnings go through the roof. Interested investors would probably favor YRC Worldwide, which operates more than 17,000 tractors; its $750 million market capitalization is augmented by $1.2 billion in debt. Needless to say, YRC's approach is far riskier than Landstar's.

Either way, here's hoping the economy can keep on trucking.

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  • Report this Comment On April 01, 2008, at 2:23 PM, truckmiser wrote:

    Insightful information we need more articles that focus on transport index to see the trends of the way America looks to spend tommorrow

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