North American truckmakers such as Navistar International Corp. (NAV) are poised for a third year of sales gains as the economic recovery forces fleet owners to replace aging vehicles.
Shipments of Class 8 trucks, the backbone of interstate hauling, may rise 12 percent this year to more than 285,000, according to industry consultant FTR Associates. That follows gains of 65 percent and 29 percent the past two years as the industry rebounded from a recession-low of 120,000 in 2009.
Carriers have been busy hauling everything from produce to washing machines and cars as the Institute for Supply Management’s factory index has shown 31 months of expansion. The haulers, who let fleets age during the financial crisis, are reinvesting in new trucks, and that’s benefiting equipment makers including Paccar Inc. (PCAR)
“You don’t buy a truck unless there’s freight to haul, so that’s catalyst one,” said Jeff Kauffman, a New York-based analyst with Sterne Agee & Leach Inc. A second driver of demand: Old trucks must be replaced when maintenance costs soar. “From an age perspective, there is a humungous need” for new vehicles, he said.
While truck production has risen each of the past two years, it topped the typical replacement level of 250,000 last year for the first time since 2006, and then by less than 2 percent. Truckmakers are boosting production to meet the forecasted demand, with Class 8 assembly up 74 percent last month from a year earlier, the latest for which data are available, according to Bloomberg Industries.
Backlog, or the time from order to delivery, is five to six months and will rise to seven months this year as manufacturers rush to meet growing demand, said Noel Perry, a managing director with Nashville, Indiana-based FTR. A nine-month lag is typical in a “hot market,” he said.
Truckers are seeking to refresh fleets largely composed of vehicles bought from 2004 to 2006 ahead of a 2007 emissions regulation. Those trucks, in use beyond the usual five years or 500,000 miles, now help compose a nationwide fleet that’s among the oldest since at least 1980, the final year of Jimmy Carter’s U.S. presidency.
Maintenance costs grow rapidly as vehicles age and break down more frequently.
“Trucks with less than 500,000 miles on them on average are 2 to 4 cents per mile maintenance cost. Above 500,000 miles, that goes up to 15 to 20 cents,” Ryan Amerman, lead manager of the Invesco Summit Fund, which owns Cummins Inc. (CMI) shares, said by telephone. “Especially if you’re a large fleet that’s doing long-haul deliveries, there’s a big incentive to use new versus older trucks.”
Even smaller carriers, which typically are less likely to have access to capital for new-vehicle purchases and often buy in the used market, are able to borrow money to buy vehicles, Perry said.
“The big question is, can the small guys, big swing orderers, get capital?” he said in a telephone interview. “The intelligence is they can.”
Revenue for Lisle, Illinois-based Navistar climbed 11 percent in the fiscal first quarter of 2012, while Bellevue, Washington-based Paccar’s sales advanced 58 percent in the fourth quarter, the most recent period for which it has reported results. Sales for Volvo AB (VOLVB), based in Gothenburg, Sweden, grew 20 percent in the quarter ended Dec. 31. Trucks made up 65 percent of Volvo’s revenue last year.
Navistar has advanced 7.2 percent this year, while Paccar has gained 24 percent, compared with 35 percent for Daimler and 27 percent for Volvo. Engine-maker Cummins Inc., another beneficiary of the boost in demand, has advanced 34 percent in that period.
Truck demand is somewhat muted by headwinds including a shortage of qualified drivers and rising fuel prices that cut into carriers’ profits. Federal Reserve Chairman Ben S. Bernanke told Congress last week higher energy costs may curb growth by slowing consumer spending.
The U.S. economy may grow 2.2 percent this year, the median forecast of 70 economists surveyed by Bloomberg. The nation’s jobless rate fell to 8.3 percent in February, the lowest level in three years, the Labor Department said March 9.
That growth has boosted freight shipments enough so that truck capacity is tight and carriers are able to pass some of the rising costs on to shippers, Hartford said. That, combined with greater efficiency of new trucks, means carriers are making those purchases even as emissions regulations have made new vehicles more expensive than in the past.
Truckers this year are doing more than replacing old vehicles, they’re adding to fleet size, said Perry.
“Are people ordering to grow fleets? Some are now,” Perry said. “None were in 2011.”
Not everyone agrees. The economic recovery is still sluggish, meaning most of the sales are for replacement trucks, Benjamin Hartford, an analyst with Milwaukee-based Robert W. Baird & Co., said in an interview.
“It’s not growth in the fleet,” Hartford said. “In fact, if you assume those ‘05, ‘06 model years coming out of the fleet, on the margin, the size of the long-haul, for-hire truckload fleet will shrink this year.”
Truckers, such as XPO Logistics Inc. and J.B. Hunt Transport Services Inc. are also seeing some shippers transfer freight to railroads for hauls longer than 500 miles to avoid the rising costs of trucking, according to Bloomberg Industries. Still, far more goods move by truck than by the so-called intermodal combination of rail and truck.
“We have a good economy now. It’s not robust, but it’s good. The cash flow of the truck industry is very good,” Kauffman said. “Are the right ingredients in place for truck purchasing to occur? The answer’s yes.”