North American heavy-truck orders are hitting a speed bump, with cancellations jumping to the fastest pace in about two years as a stagnating economic recovery prompts fleet owners to delay or scrap purchases.
The March rate shot up to 9 percent from 6.1 percent a month earlier, according to data compiled by Bloomberg. North American freight shipments fell 1.3 percent in March and grew less than 1 percent in April, according to Cass Information Systems Inc.’s Freight Shipment Index.
Buyers are being squeezed by slower cargo volumes, tighter credit and diesel fuel prices exceeding year-earlier levels even with recent declines. That may erode profits at truck makers such as Paccar Inc. (PCAR) and Navistar International Corp. (NAV), and damp the manufacturing rebound that has bolstered U.S. job growth.
It “creates a situation where these guys say, ‘You know what? I’m just going to hold on for a little bit and maybe cancel or move my order out a bit,’” said Eric Starks, president of Nashville, Indiana-based forecaster FTR Associates.
Preliminary April orders for Class 8 trucks added to evidence of a surprise slowdown by falling to the lowest since September 2010, according to FTR data. Continued weakening in orders may lower industry expectations, Peter Nesvold, a Jefferies Group Inc. analyst, wrote in a note to clients May 4.
That’s already happened at FTR. As recently as March, the firm was predicting Class 8 shipments of 285,000 units, or 12 percent more than a year earlier. It has since cut that estimate to 275,027 units, an 8 percent increase, as truckers delay purchases to refresh the oldest fleet since at least 1980.
Sales and earnings are at risk for Paccar, whose brands include Peterbilt and Kenworth, and Navistar as high inventory and declining orders threaten production rates, according to Karen Ubelhart, a Bloomberg Industries analyst in New York.
March’s cancellation rate was the highest since the same month in 2010, excluding what Ubelhart said was an aberration in November, probably from manufacturers doing a periodic “backlog cleaning” to cull orders from buyers that aren’t fully committed.
Navistar’s first-quarter loss widened more than analysts had estimated after the Lisle, Illinois-based company said it was recalling vehicles because of faulty brakes. Profit at Bellevue, Washington-based Paccar beat estimates as sales advanced 45 percent.
Paccar Treasurer Robin Easton didn’t respond to a voice-mail request for comment about the company’s sales outlook, and Katy Troester, a spokeswoman, didn’t return an e-mail. A Navistar spokesman, Stephen Schrier, declined to comment.
The truck makers’ stocks have tumbled from this year’s highs, foreshadowing a drop in the broader market amid concern that Europe’s debt crisis will threaten global demand as developed nations cut spending to improve their finances.
Paccar has fallen 17 percent since its 2012 peak on March 15, closing yesterday at $39.45. That pared the shares’ gain this year to 5.3 percent. Navistar closed at $30.81, down 19 percent for the year. That has erased a 2012 gain of as much as 25 percent as of Feb. 6. The Standard and Poor’s 500 Index has dropped 4.3 percent since its April 2 year-to-date high.
The slowdown in truck orders follows last month’s report that U.S. gross domestic product rose at a 2.2 percent annual rate in the first quarter, slower than the prior three months and missing economists’ estimates.
Daily Tonnage Drops
“Slow and inconsistent economic growth” helped drag the freight unit of trucker Arkansas Best Corp. to a drop of about 9 percent in daily tonnage in the first 3 1/2 weeks of April, said Amy Mendenhall, director of investor relations. Rate increases at the Fort Smith, Arkansas-based company and “tough comparisons” from prior periods also damped volumes, she said.
One freight-company investor said the drop in truck shipments may be due to unusual weather, not a faltering economy.
Slower March and April deliveries may be the result of truckers being able to move more goods during a mild winter, said Eric Marshall, director of research at Dallas-based Hodges Capital Management Inc., which oversees about $700 million. The firm’s holdings include trucker Saia Inc. (SAIA) and railroads Union Pacific Corp. (UNP) and Kansas City Southern. (KSU)
Trucker earnings are increasing even with slow freight growth, and Marshall said the carriers are able to raise rates after cutting capacity during the recession.
“You’re seeing decent pricing power,” he said.
Beating Price Increases
Some truckers also may have accelerated vehicle purchases before manufacturers’ price increases went into effect this year, damping sales now, said analyst Nesvold, who is based in New York.
While profits have increased at Echo Global Logistics Inc. (ECHO) as the Chicago-based arranger of freight shipments takes market share and boosts rates, freight demand shows an economy that’s “still soft,” Chief Executive Officer Doug Waggoner said.
The economy is “recovering, but a lot less so than you would hope,” Waggoner said in a telephone interview. “We’re still stagnating.”
From the vantage point of YRC Worldwide Inc. (YRCW), the Overland Park, Kansas-based trucker that averted bankruptcy last year with new credit agreements, the economic indicators are at least pointing in a positive direction, Chief Financial Officer Jamie Pierson said.
Manufacturing isn’t “setting the world on fire,” Pierson said in an interview at Bloomberg’s New York headquarters. “The good news is, for us, it’s expanding. We just need it to expand.”