Last week I wrote an article on TravelCenters of America (TA) titled TravelCenters Of America: Truckin' Down The Road Of Recovery. Almost immediately after, Raymond James downgraded TA from Outperform to Market Perform, followed by Zacks from Neutral to Underperform, causing the price to fall about 10%. I still stand behind my thesis that TA is a solid company that is poised to capitalize on the recovering economy and will expand through acquiring other locations.
TA is getting ready to release its Second-Quarter 2013 results, and they should be good. Historically, the first and fourth quarters are its worst; the weather is not as good, people are not traveling, and except for the Christmas rush, the economy generally slows. The second quarter is better as spring brings better weather, and the third quarter is historically the best as it captures all the summer travel.
The AAA predicted that this summer would not be a blockbuster summer but a steady increase over last year. People would be back on the roads, but increases in gas prices and hotel prices mean that some will stay home.
Another gauge of what earnings will be like is to look at what the customers are saying about their potential earnings. TA caters primarily to the trucking industry, designing its locations around ease of access for the big rigs, and providing facilities for drivers to relax in. Each of the companies will have different earnings and valuations based on their market shares and margins, but overall their view and forecasts for the economy and future shipping can directly correlate to how much business TA can expect.
Here's a look at them:
American Trucking Association
To start off, the American Trucking Association released its June numbers for seasonally adjusted (SA) For-Hire Truck Tonnage Index. The number edged 0.1% higher in June after surging 2.1% in May, providing a little comfort that the large surge wasn't just a fluke:
"The fact that tonnage didn't fall back after the 2.1% surge in May is quite remarkable," ATA Chief Economist Bob Costello said. "While housing starts were down in June, tonnage was buoyed by other areas like auto production which was very strong in June and durable-goods output, which increased 0.5% during the month according to the Federal Reserve."
"Robust auto sales also helped push retail sales higher, helping tonnage in June." he said, "The trend this year is heavy freight, like autos and energy production, is growing faster than lighter freight, which is pushing truck tonnage up."
Additionally, it added the following based on the Less-that Truck Load driver turnover rates:
"Our data shows that competition for drivers across the industry remains high," said American Trucking Associations Chief Economist Bob Costello. "It is our fear that this competition for drivers may be exacerbated by losses in productivity caused by recent regulatory changes such as the new hours-of-service rules."
"If the economy continues to improve as we expect it to," Costello said, "we'll see competition for drivers intensify, which will increase not just the turnover rate and exacerbate the driver shortage, but will push costs for fleets higher as well."
In a report that looked at the long-term trend of trucking, it issued the following:
"The trucking industry continues to dominate the freight transportation industry in terms of both tonnage and revenue," said ATA Chief Economist Bob Costello, noting that Forecast projects trucking's share of tonnage will rise to 70.8% by 2024 from 68.5% in 2012.
Over that same period, Forecast calculates:
- Overall freight revenue will grow by 63.6% to $1.3 trillion annually in 2024 and trucking will see its share of those revenue rise to 81% from 80.7% in 2012.
- Truckload volumes will grow 3.2% through 2018 and 1.1% annually between 2019 and 2024. Less-than-truckload volume should grow 3.5% annually through 2018 and by 2.4% until 2024.
- Anemic growth for rail carloads of just 1.5% through 2018 and 0.4% from 2019 through 2024, contributing to a decline in market share to 14.2% from 14.8% in 2011.
- Intermodal rail will continue to be the fastest growing freight mode, growing an average of 5.1% a year until 2018 then slowing moderately to 4.8% annual through 2024.
The recent reports from the ATA provide insight into the overall industry and where the growth can be expected. This growth in the industry as a whole will help TA to continue its earnings growth.
Old Dominion Freight (ODFL)
Old Dominion Freight, with a market cap of 3.75 billion, has exposure to all parts of the trucking industry. During its recent quarterly earnings, David S. Congdon, President and Chief Executive Officer of Old Dominion, stated the following:
"We believe our industry-leading service once again enabled us to win market share during Q2 and led to the 5.6% increase in tonnage per day compared with Q2 last year. In addition, our revenue per hundredweight increased 2.4% for the quarter, which, when combined with our tonnage growth, accounted for the 8.0% growth in revenue. Revenue per hundredweight, excluding fuel surcharge, increased 3.0% for the 2013 Q2 from the same quarter last year and reflects an improving pricing environment for the industry as well as our continued commitment to yield management. The improvement in yield and increased operating leverage, resulting from the increase in freight density, contributed to the improvement in our operating ratio."
JB Hunt Transport Services Inc. (JBHT)
On July 15t JB Hunt Transportation, with a market cap of 8.73 billion, reported its 2nd-Quarter 2013 results, and had a healthy revenue increase of 10% and operating income increase of 7%. The press release also included some details of its volumes:
"Overall volumes increased 12% over the same period in 2012 in an environment of moderating fuel prices and less seasonally volatile freight demand. Eastern network growth was 14% and transcontinental growth was 11% over the second quarter 2012. Revenue grew 12% with the effect of traffic mix, customer rate increases and fuel surcharges keeping revenue per load virtually flat compared to a year ago."
United Parcel Service, Inc. (UPS)
UPS has a market cap of 81.6 billion, although only a small portion of its business model deals in ground freight. Still, its recent conference call provided some insight into the ground freight segment:
"Daily ground volume increased 2.3%, and deferred was up 1.4. Our next day air volume declined for the first drop in five quarters. Next day package volume gained slightly; however letter volume was down more than 5%."
Trucking companies will continue to experience moderate growth in volume, but real revenue growth will come primarily through attrition of smaller companies and by their ability to consolidate to improve their margins. The sector as a whole is projected to have moderate growth through 2024, with an increase of 2.3% of total freight movement by truck (up from 68.5% to 70.8%).
For TA, this means that we can expect to see moderate growth in the volume that passes through each truck stop. In addition to the increased volume, its ability to increase earnings will be impacted by the rent it pays out and the improvement in the margins for fuel. Rent negotiations to either bring down the rent, or maintain the levels long term will add more predictability. TA currently does not sell branded gas. If it were to strike a deal with a major supplier, this would have the possibility of increasing margins, and making it less susceptible to local market and vendor prices. And then there is always the potential for increasing its market share through acquisitions. The CEO, Mr. O'Brien has indicated that he intends to expand through the acquisition of struggling sites. Over the past few years, that expansion has been about 10%, and continuing that projection forward will only serve to add to the bottom line.
Looking at the customer base, and projecting its future growth, will help to map out the growth of TA. The trucking industry is poised to grow over the next 10 years. As the economy recovers, it will capitalize on the increase of trucks on the road. Industry experts also point to the trucking industry taking a larger portion of the shipping industry as a whole. The 2nd and 3rd quarters are historically TA's best quarters, and going into earnings, I expect to see good numbers now (2nd quarter), and huge numbers when it releases its 3rd-quarter earnings in November. That said, the recent downgrades have caused a 10% pull back, but I believe the rest of the market will be pleased after these earnings. Many think that TA is now overpriced, and while there may be a few pullbacks in the short term to sub-$10, I expect TA to be on track to a long and prosperous life.