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Forget "Ice Road Truckers." The Real Excitement in Trucking Is Here

By Rich Smith – Jan 23, 2016 at 8:13AM

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Business is booming for military haulers.

Introduced in 2007, Ice Road Truckers was a surprise hit for The History Channel. Recounting truckers' travails as they drive their semis across frozen lakes and rivers in the Arctic, the series rates 8.2 out of 10 on and boasts nearly 1 million "likes" on Facebook.

So I'm probably going to offend a lot of people when I say this, but "ice road" trucking is nothing. You want real excitement? Try the business of hauling explosives for the military.

Image source: Mike Weston ABIPP/MOD via Wikimedia Commons.

Ice isn't the only thing "slippery" in this business, you see. According to a report conducted by trucking magazine Overdrive in 2014, 76% of truckers working on contracts outsourced by the Department of Defense have seen rates for their services slide since 2009.

But military hauling actually comprises two widely different segments. The first is general freight -- everything from uniforms to construction materials to MREs -- and rates for shipping such freight are slipping. You can thank XPO Logistics (XPO 2.52%) subsidiary Menlo Worldwide for this. You see, the Pentagon hired XPO to help it control shipping costs in 2007, and it's doing a bang-up job, pitting subcontractor against subcontractor in a race to the bottom on prices.

The other segment concerns more sensitive arms, ammunition and explosives hauling (AA&E). And the same survey that showed Pentagon rates for general freight dropping in the first half of this decade also noted a 5% increase in the rates paid for AA&E.

UPS (UPS 2.62%) subsidiary Access America has a whole division dedicated to trucking for the Department of Defense, and one UPS spokesman told Overdrive that the Pentagon "does a great job of keeping prices competitive" on general freight. Now, UPS didn't come out and say that the best way to make money on military hauling is in AA&E -- but as investors, I think we can infer that.

Who's who in military trucking
Civilian companies trucking arms and ammo for the military are a pretty elite bunch, comprising perhaps a half-dozen smallish contractors, three or four larger operations (Secured Land Transport, Tri State Motor Transit, and Baggett among them) and three more that are both large and publicly traded:

  • Integrated logistics company Landstar (LSTR 1.39%), which does $3.3 billion in business (both civilian and military) annually.
  • Panther, a subsidiary of $2.7 billion-annual business ArcBest (ARCB 1.75%).
  • And "FedEx Custom Critical," subsidiary to the $48.6 billion-a-year transport titan that is FedEx (FDX 2.47%).

Why so few prospects? Overdrive says "it's harder to break in to the military hauling niche" than to enter other businesses. XPO may be able to cast a wide net and attract multiple bidders on ordinary freight contracts. But heaps of federal red tape make this harder to accomplish in AA&E.

Among the regulations: Freight carriers must be registered, they must be bonded, and they must accept payment electronically. On top of that, the Pentagon requires higher-than-ordinary compliance, safety, and accountability (CSA) scores for companies seeking AA&E contracts. These contractors' vehicles must be better maintained, and their drivers need cleaner driving records. Additionally, companies must obtain Defense Security Service background clearance to haul AA&E.

All of this helps to keep the list of contractors pretty stable. It also protects contractors' profit margins.

Speaking of margins...
The Motley Fool is an investing website, and what we're really interested in isn't just "who does military trucking," but who are the best military truckers to invest in.

Of the big three publicly traded military truckers, FedEx clearly boasts the best operating profit margin -- 9.6%. Landstar is a close second with a 7.2% margin, with ArcBest bringing up the rear at 2%.

On growth, the positions shift a bit. S&P Capital IQ puts Landstar in the lead at 15% projected profits growth over the next five years, with ArcBest pulling into second place at 14%, and FedEx lagging at 13%.

On the other hand, from an investor's perspective, ArcBest's 1.8% dividend yield is twice FedEx's puny payout of 0.8%, and three times the 0.6% that Landstar pays. ArcBest also boasts the cheapest stock. Its 8.6 P/E ratio costs half what a share of Landstar will set you back (16.3 times earnings). ArcBest costs barely a quarter the P/E ratio at FedEx (32.3).

Does this make ArcBest a "buy," and FedEx a "sell"? Not necessarily. I will say, though, that based on the numbers alone, ArcBest looks pretty attractive (and in fact I have bought shares of ArcBest myself). Landstar, too, looks like a decent value to me.

Meanwhile, every time I take a look at FedEx stock, I come away with just one conclusion: At 20 times earnings, and paying a 3.2% dividend yield, UPS is simply a lot better.

Rich Smith owns shares of ArcBest. You can find him on Motley Fool CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 245 out of more than 75,000 rated members.

Rich's reservations notwithstanding, The Motley Fool still recommends FedEx. TMF also recommends United Parcel Service and XPO Logistics as well. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

FedEx Stock Quote
$182.22 (2.47%) $4.40
ArcBest Stock Quote
$82.77 (1.75%) $1.42
United Parcel Service Stock Quote
United Parcel Service
$189.73 (2.62%) $4.84
XPO Logistics Stock Quote
XPO Logistics
$38.62 (2.52%) $0.95
Landstar System Stock Quote
Landstar System
$172.98 (1.39%) $2.37

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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