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Trucking Stocks: Downshifting Soon?

By Sam Stovall Thanks to recent strength in its member stocks, the Standard & Poor's 1500 trucking subindustry index recently rolled into S&P's industry momentum list. During 2004, this subindex jumped 36.3%, vs. a 10% advance for the S&P 1500. So now the question is: Do trucking stocks have any power left?

Take a look at the subindex' relative strength price chart, shown below. As a reminder, the jagged blue line represents the subindex' rolling 52-week price performance as compared with the S&P 1500's 52-week showing. Any point above 100 indicates market outperformance over the prior year, while points below 100 indicate market underperformance. The red line is a rolling 39-week moving average, while the two green bands indicate one standard deviation above and below the subindex' 14-year mean relative strength.

Source: Standard & Poor's

The trucking subindex consists of 10 companies. CNF (CNF

; recent price, $46) and Landstar System (LSTR

; $35) each carry 5-STARS (strong buy) recommendations, while USF (USF

; $32) is ranked 2 STARS (sell). The remaining outfits carry 3-STARS (hold) recommendations.

HAPPY MOTORING. After its impressive 2004 showing (helped in no small part by a 94% surge in Landstar), investors may find the group shifting into a lower gear in 2005. Andrew West, CFA, S&P's trucking analyst, is neutral on the trucking industry for the coming 12 months. He believes operating conditions were strong in 2004 on improving manufacturing output, and he sees a continuing favorable supply-and-demand balance boosting freight volumes and pricing in 2005. But valuations of the group's stocks look average to above average, in West's view.

Other factors could slow down the truckers. Investors historically rotate into this group in anticipation of economic and earnings recoveries, then tend to move out once a rebound is evident. The group has also historically underperformed after interest rate hikes, although past performance is not a valid indicator of future conduct.

Certainly, it has been happy motoring for the group in recent periods. The Cass Information Systems' indexes of freight shipments were near 10-year highs in December. Early fourth-quarter earnings results from truckload (TL; a designation for shipments exceeding 10,000 pounds) and less-than-truckload (LTL; shipments weighing 10,000 pounds or less) carriers confirmed this strength, as many players saw tonnage grow over 10% and rates rise over 5%.

FREIGHT SLOWDOWNS EXPECTED. S&P expects profitability, which rose strongly in 2004, to increase modestly in 2005, driven by continued strong freight demand, tight capacity, and high asset utilization. In the TL segment, West has near-term concerns on carriers' costs from the effects of regulatory uncertainty relating to new hours-of-service rules, elevated fuel prices, and difficulties in adding new drivers at acceptable wages.

West expects large public companies in the TL segment to seek merger or acquisition opportunities. However, the TL trucking industry will probably remain highly fragmented, which West believes will cause it to remain quite competitive in the longer term, with new capacity eventually pulling profitability down to historical industry levels.

As for the LTL segment, West thinks 2004 full-year results showed solid growth in freight volumes and profitability, driven by the industry's leverage to economic growth. But he expects slower growth in 2005. No large mergers have occurred in the LTL industry since 2003, but S&P believes further consolidation is likely through closures of weak operations and mergers. Longer term, the question is whether the group can maintain margin improvements during projected eventual slowdowns in economic and freight growth.

So there you have it. In S&P's view, the subindustry's momentum looks favorable, but the valuations appear stretched. Investors in trucking stocks should enjoy the ride -- but shouldn't expect it to last indefinitely.

Industry Momentum List Update

For regular readers of the Sector Watch column, here is this week's list of the industries in the S&P 1500 with Relative Strength Rankings of "5" (price performances in the past 12 months that were among the top 10% of the industries in the S&P 1500), their proxies (the highest STARS-ranked companies in the subindustry index -- tie goes to the largest market value) as of February 4, 2005.





Recent Price

Agricultural Products





Commodity Chemicals

Lyondell Chemical




Consumer Electronics

Harman International




Fertilizers & Agr. Chemicals

Scott's Co.




Home Entertainment Software

Electronic Arts





Standard Pacific




Internet Software & Services





Managed Health Care





Oil & Gas E&P

Devon Energy




Oil & Gas Refg., Mktg. & Trans.

Valero Energy










CNF Inc.




Required Disclosures

5-STARS (Strong Buy): Total return is expected to outperform the total return of the S&P 500 Index by a wide margin, with shares rising in price on an absolute basis.

4-STARS (Buy): Total return is expected to outperform the total return of the S&P 500 Index, with shares rising in price on an absolute basis.

3-STARS (Hold): Total return is expected to closely approximate the total return of the S&P 500 Index, with shares generally rising in price on an absolute basis.

2-STARS (Sell): Total return is expected to underperform the total return of the S&P 500 Index and share price is not anticipated to show a gain.

1-STARS (Strong Sell): Total return is expected to underperform the total return of the S&P 500 Index by a wide margin, with shares falling in price on an absolute basis.

As of December 31, 2004, SPIAS and their U.S. research analysts have recommended 26.5% of issuers with buy recommendations, 61.3% with hold recommendations and 12.2% with sell recommendations.

All of the views expressed in this research report accurately reflect the research analysts' personal views regarding any and all of the subject securities or issuers. No part of the analysts' compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.

Additional information is available upon request to Standard & Poor's, 55 Water Street, New York, NY 10041.

Other Disclosures

This research report was prepared by Standard & Poor's Investment Advisory Services LLC ("SPIAS"), and may have been provided to you either by: (i) Standard & Poor's under a license agreement with The McGraw-Hill Companies, Inc., which holds the copyright to this report; or (ii) a Standard & Poor's client who is granted a sub-license by Standard & Poor's. This equity research report and recommendations are performed separately from any other analytic activity of Standard & Poor's. Standard & Poor's equity research analysts have no access to non-public information received by other units of Standard & Poor's. Standard & Poor's does not trade in its own account. SPIAS is affiliated with various entities, which may perform services for companies covered by the recommendations in this report. Each such affiliate is operationally independent from SPIAS.


This material is based upon information that we consider to be reliable, but neither SPIAS nor its affiliates warrant its completeness or accuracy, and it should not be relied upon as such. Assumptions, opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results.

This material is not intended as an offer or solicitation for the purchase or sale so any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation of particular securities, financial instruments or strategies to you. Before acting on any recommendation in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Stovall is chief investment strategist for Standard & Poor's

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