“I don’t think there’s any real motivation for somebody to be a truck driver. Mine was simple; dad was a truck driver, I wanted to own one.” – Lindsay Fox, Australian billionaire and founder of Australia’s largest privately held logistics company
“A man who has never gone to school may steal from a freight car; but if he has a university education, he may steal the whole railroad.” – Theodore Roosevelt
“Look for opportunities with pent-up demand.” – Sam Zell, American billionaire and real estate mogul
If you live in or have recently spent even a few days in any major city, chances are you have witnessed dozens of delivery vehicles whizzing throughout the city on any given day of the week. In the US, delivery trucks from the United States Postal Service, FedEx, and UPS spend all week weaving through cities across the country, retrieving and delivering parcels. The increasing number of delivery trucks on the road reflects the boom in online shopping.
According to the US Census Bureau, e-commerce now accounts for 8.9 per cent of total retail sales in the US, and grew by 16 per cent year-over-year in 2017. This growth in online retail is not only being directly driven by Amazon but also by traditional brick-and-mortar retailers complementing their physical presence with an online existence in a bid to keep pace with Amazon. Take for instance, Target and Williams Sonoma, both companies that recently reported earnings, citing robust growth in online sales as a reason for their expectations beating results.
For the three-month period ended 4 August, Target reported that comparable digital channel sales were up 41 per cent year-on-year and were responsible for more than a fifth of of the 6.5 per cent overall like-for-like sales growth during the quarter — the highest in 13 years.
Williams Sonoma this week reported year-over-year net revenue growth of 6.1 per cent for the last quarter. Online sales outpaced brick-and-mortar sales and now account for 53.9 per cent of the company’s overall sales, up from 53.7 per cent the previous quarter.
American retailers, particularly those with a strong online presence and / or differentiated brick-and-mortar offering, are benefitting from very strong consumer sentiment. Low unemployment levels and a windfall from tax cuts is increasing US consumers’ willingness to spend. And this is pushing US retailers and manufacturers to stock-up their inventories in expectations of consumer spending remaining robust all the way up to the end of the year,
Domestic freight demands are surging on the back of the strong re-stocking needs of retailers and manufacturers. This escalation in in turn is driving the demand for trucking services. Trucks are used to transport more than two-thirds of total US freight, taking imports from ports to distribution centres and raw materials to factories.
The trucking industry, after years of lacklustre demand, scaled back capital investments and today lacks the capacity to adequately cater for the rising demand. The supply-demand imbalance in the trucking market means that companies are unable to get their cargo moved in time and rising spot trucking rates are eating into their margins. In July rates for truckload services increased by more than 10 per cent year-over-year – the highest ever increase since records have been kept – continuing the streak of rising year-over-year prices for a seventeenth consecutive month – the longest such streak since the industry was deregulated in 1980.
As a corollary of the supply-demand imbalance, haulage companies are ordering a record amount of heavy-duty vehicles. In July this year, an all-time record 52,400 heavy-duty trucks were ordered as compared to the less than 19,000 heavy-duty trucks ordered during the same period last year. Month-over-month, heavy-duty truck orders were also up, increasing by 24 per cent. What makes the record orders even more astonishing is that trucking companies coming into the month had already been on a six-month long ordering spree and that July has typically been the slowest month for new orders.
The exceptional demand for heavy-duty vehicles has pushed the backlog at truck factories to nine months as compared to four to five months normally – meaning that any company ordering a heavy-duty truck today should only expect to receive it in the second quarter of 2019.
The availability of heavy-duty vehicles is not the only bottleneck faced by the trucking industry. A shortage of new drivers, an ageing pool of qualified drivers and the implementation of new regulations in December last year requiring truckers to electronically log their hours are compounding the problem further.
Long-haul driving is a tough sell – long working hours and extended periods away from home are not exactly the characteristics that pull in new recruits. Add to all of this a booming economy with jobs aplenty in other industries and it comes as no surprise that trucking companies are raising pay and are offering sign-on bonuses.
Given the inability of trucking companies to fully exploit the strong demand for their services due to the above described bottlenecks, we think industries vertically adjacent to trucking may provide a superior investment opportunity.
Investment Perspective
Allison Transmission $ALSN is the leading original equipment manufacturer of commercial-duty automatic transmissions and electric hybrid propulsion systems.
$ALSN has an impressive 60 per cent market share of the global on-highway fully-automatic transmission market. Specifically, the company has 68 and 71 per cent market shares in the Class 8 (i.e. heavy-duty) straight truck and Class 6 & 7 (i.e.) medium-duty truck transmissions, respectively. Sales of fully-automatic transmissions account for almost two-thirds of the company’s revenues; more than half of the automatic transmission segment’s sales come from the heavy- and medium-duty truck transmissions.
The company’s top customers are leading heavy-duty truck manufacturers Daimler, Paccar, Volvo, and Navistar. These customers made up 49 per cent of $ALSN’s sales in 2017.
With new long haul truck orders running at record levels, we do not expect $ALSN’s customers to experiment when it comes to critical components that go into assembling a heavy-duty vehicle. Moreover, it is unlikely that any other manufacturer has the capacity or expertise to deliver the sheer quantity of transmissions that will be needed to clear the order backlog. Therefore, we expect demand for $ALSN’s automatic transmissions to remain strong as long as the heavy-duty truck manufacturers’ order books remain full.
Lastly, the company trades at an undemanding valuation of 11.3x price to consensus 2018 earnings and has an industry leading return on invested capital of 27.0 per cent (based on trailing twelve month data).
We are long $ALSN.
In addition to $ALSN, we are looking into Navistar International $NAV and Commercial Vehicle Group $CVGI as potential long trade ideas under the trucking theme. We will send trade alerts in due to course should we decide to add either or both of these stocks to our long trade ideas.
This post should not be considered as investment advice or a recommendation to purchase any particular security, strategy or investment product. References to specific securities and issuers are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.