Companies that act as brokers for trucking services are gaining favor with investors as the 20- month-old rebound shifts into a new phase that’s less dependent on inventory restocking.
The so-called asset-lite truckers such as Roadrunner Transportation Systems Inc. and C.H. Robinson Worldwide Inc. lease vehicles for businesses that need to ship goods, so they have more cost flexibility than companies that own and operate most of their trucks. Shares of these brokers have risen 6.9 percent since July 30, 2010, compared with a 1.5 percent decline for operators including Celadon Group Inc. and Werner Enterprises Inc., according to two new Bloomberg indexes.
“We are way past the early cycle rally,” and now see “sustainable elements to the recovery,” said Benjamin Hartford, transportation analyst at Milwaukee-based Robert W. Baird & Co., who co-wrote Baird’s 2011 freight-outlook report. As the rebound matures, investors will find “greater resiliency” in companies with flexible costs.
Trucking demand varies with the economy, accounting for 71 percent of the value, or $8.3 trillion, of U.S. goods shipped in 2007, according to the most recent data from the Department of Transportation.
The Baird report shows the recovery spanning 26 months so far, based on the Institute for Supply Management’s manufacturing index, which hit a recession low in December 2008. That’s more than halfway through an average of 40 months, which the current expansion may exceed, Hartford said. The recession that ended in June 2009 was the longest since the 43-month slump during the Great Depression, according to the National Bureau of Economic Research.
The U.S. economy likely will expand at a 3.2 percent rate this year, according to the median estimate of 63 economists surveyed in February by Bloomberg News, with exports and business spending on equipment and software poised to generate most of the growth, said Joseph Carson, director of economic research at AllianceBernstein LP in New York.
When the rebound began in the third quarter of 2009, growth was driven by government spending, along with companies that were building stockpiles and needed truckers to move their products. This made the operators more appealing to investors because their profits rise more quickly in this stage of recovery.
“I tend to favor the asset-based guys” early in the cycle, because they “are able to get rate increases as well as higher volumes,” said Kevin Sterling, an analyst in Richmond, Virginia, at BB&T Capital Markets.
Indianapolis-based Celadon’s stock more than tripled to $14.79 at the end of last year from $4.47 on March 9, 2009, as the operator reported net income of $2.86 million in the quarter ended Dec. 31, compared with a loss of $2.08 million in the January-March 2009 period.
Freight volumes peaked in September and have dropped 10 percent since then, as measured by the Cass Freight Shipments Index. Momentum for Celadon stock has slowed as well; it has fallen 2.6 percent since the end of December.
The Bloomberg U.S. Truckload Trucking Index tracks the performance of Celadon, Werner and seven other operators. The Bloomberg U.S. Non-Asset Based Trucking Index tracks Roadrunner, C.H. Robinson and six other brokers. The two indexes show that shares of the operators rose 25 percent between May 30, 2008, and July 31, 2010, compared with a 16 percent decline for the brokers.
The asset-heavy companies also outperformed in 2001 and 2002, coming out of the recession that ended in November 2001. As the recovery matured, the asset-lite truckers outperformed from 2003 to early 2008.
When freight volumes started to cool off in 2007, Roadrunner responded quickly to protect profits, adopting cuts that slashed its vehicle-leasing costs by 17 percent over two years.
“The advantage we have is we don’t run empty miles,” said Peter Armbruster, chief financial officer of the Cudahy, Wisconsin, company. If customers “go from needing to do eight trips instead of 10 between our Milwaukee terminal and southern California, we just do eight. It is more efficient.”
Inventory building aided economic growth for five consecutive quarters through the third period of 2010, when it contributed 1.61 percent to the 2.6 percent gain. When companies stopped adding to their stockpiles in the fourth quarter, the reduction subtracted 3.7 percent from growth, the most since the first quarter of 1988.
John Wiehoff, chief executive officer for Eden Prairie, Minnesota-based C.H. Robinson, said the broker’s lower-cost model allows it to adjust expenditures rapidly in response to demand.
“We’re very proud that we were able to manage through the recession with an earnings increase in each of the past two years,” he said on a Feb. 1 conference call with investors. “We think that’s a pretty visible statement about our business model.”
Brokers like C.H. Robinson “have higher returns, very little debt and a lot of cash on the balance sheet,” along with “more financial flexibility” and fewer capital-expenditure requirements, according to Sterling, who said BB&T Capital Markets is recommending investors purchase the Minnesota company and Roadrunner.
C.H. Robinson announced in December a 16 percent increase in its cash dividend to 29 cents a share. It had $398.6 million in cash at year-end, compared with $11.1 million for Celadon.
“The asset-lite guys can act countercyclically,” said Peter Nesvold, managing director and senior equity research analyst in New York at Jefferies & Co. “As fundamentals start to improve, we have a long way we can ride.”
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