Trucking Keeps On ... Well, You Know

When you stop to think about it, the bulk of our economy rolls on eighteen mighty wheels. Trucking companies move the products of agriculture and mining; bring raw materials, intermediate goods, and spare parts to manufacturers; and ship finished goods from factories to wholesalers and retailers. In short, the industry might be an ideal barometer for the economy's overall health.

To quickly gauge the fortunes of the freight movers, I vetted the charts of two popular indexes:

• The Freight Transportation Services Index, a Bureau of Transportation Statistics' measure of activity by the various transportation methods (rail, truck, pipeline, air)
• The American Trucking Associations' For-Hire Truck Tonnage Index

Neither of these indexes can boast of a banner 2009. The FRSI is reading below year-2000 levels, while ATA's For-Hire Truck Tonnage Index has just recently advanced off a multiyear bottom.

Of course, that's rearview-mirror stuff. Investing is forward-looking. If you're a value guy or gal with a contrarian bent, indexes trading closer to lows than highs naturally pique your curiosity. After all, the odds of improvement are greater off the former than off the latter. 

Workin' on the railroads...
Now that a few of the economic green shoots are maturing into saplings, one should expect transportation issues to rebound. That seems to be proving true in the railroad sector, which has been buoyed by Berkshire Hathaway's (NYSE:BRK-A) proposed $34 billion purchase of Burlington Northern Santa Fe (NYSE:BNI).

Berkshire's reasons for hitching its engine to a railroad are persuasive. The green appeal is not the least of them. The industry bills itself as the greener alternative to the congested and dilapidated highway system. Burlington Northern's website notes that railways are up to four times more fuel-efficient than trucks, and states that "American railroads move 40 percent of our nation's freight, but account for just 2.2 percent of all transportation-related greenhouse gas emissions."

Railroads are also chatted up for their putatively wide economic moats -- a valid point. Few competitors can justify laying new track to serve a market one railroad already serves; therefore, most railroads can claim at least a few "captured" customers.

And let's not overlook gas prices. When they rise, they only make trucking less viable compared to the railroads. Moreover, increased trucking costs lead to more intermodal volume for the railroads (in which trains stack shipping containers from trucks on their cars).

... And the highways, for that matter
Given all that, you may think I'm all for going long on the railroads. I'm not. I'd much rather contemplate the known versus the unknown. Yes, the railroads have their advantages, but these advantages are well-documented, and thus reflected in current prices. I prefer the trucking stocks because of their unknowns: the direction of gas prices, and the degree to which the economy will recover. Uncertainty creates opportunity.

I also think trucks still command at least a couple of competitive advantages over railroads. In an improving economy, purchasers' focus tends to shift from price to convenience and expediency. Trucks are more convenient and more expedient (except for moving mass quantities of commodities like coal). In addition, trucks are more conducive to managing just-in-time inventory systems, which require more frequent, smaller deliveries.

The following companies are a stable play on truckload, less-than-truckload, and logistics businesses. If the last recession's any example, their relative girth and conservative financial structures should continue to buffer investors from the market's ups and downs as the economy improves.

Source: Capital IQ, a division of Standard & Poor's.

Thanks to Warren Buffett, more of us are familiar with the economics of railroads than we were a couple months ago. But let's not forget that trucking still dwarfs the rails, at least according to 2002 BTS data (long in the tooth, to be sure, but still relevant). Those numbers show trucks moving 63.7% of the value of all goods shipped, and 58.2% of the weight of all goods, while running 32.1% of all ton miles.

Let's also not forget that we're not talking mutual exclusivity or zero-sum games here, either. Railroads will likely prosper during the economic recovery, but there's no reason why trucking can't prosper as well.