Why Watching Bankruptcies Can Help Stock Performance 11 comments
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This is a bit dated, but bear with me. Last week, Jevic Transportation [JEVC] closed down. It looks like it is liquidating. On the next day, trucking stocks fell as a result. Are things tough in the trucking industry? You bet. Volumes are low, and fuel costs are high.
Now, Jevic wasn’t that big, but if I see a few more large-ish Truckers disappear, I will move to a major overweight in trucking stocks. Why? Pricing power will return to the remaining trucking firms, and after a time, the stocks will rebound. That’s what happened to steel in 2002. I owned Nucor, and did quite well, though, I sold too soon.
When my next reshaping comes up, I will toss some of the highest quality trucking stocks into the mix. The idea is that if the industry weakens further, they will remain among the survivors, but if pricing power comes back, I will make more than adequate profits.
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Now, if you have read me for a while, you know I like to rotate sectors within a value discipline. I do well at it. But who is the best of them all? Ken Heebner. Now, that’s a guy I would love to learn from. I deliberately don’t let sector rotation become the whole strategy because I am trying to limit risk. I also don’t trade like a maniac, because I can’t do that well. But I do more than adequately, and all of us could learn from the expertise of Ken Heebner. Unlike Peter Lynch, who was totally bottoms up, there are real advantages that come through analyzing the economy, particularly individual industries. But, if most investors ignore economics, or, if they only focus on broad macroeconomics, that’s fine with me. I will focus on the economics of industries, and that will help me invest well.
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This article has 11 comments:
Thx jegan
That is a fallacy. There is a difference between a broken company business model and a broken industry business model.
Remember the typewriter industry? When a marginal players went, it was a matter of time before the rest went. Do you still remember "Smith Corona"?
The trucking companies need more than just pricing power to fix the industry. There are a lot of structural problems with the trucking industy besides pricing.
Cheers.
By the way, I forecasted AHI (Allied Holdings, Inc) going into bankruptcy a year before the company filed -- it was obvious AHI was on life support by it's bankers. AHI was the largest independent car/SUV hauler in the country. AHI's bankruptcy didn't materially change the car/SUV hauling industry -- it has crappy economics. Buyers of new cars/SUV's have to pay about $700 for shipping costs, which means there is a general limit on how much the hualers can charge.
Remember, my contention is: it's the industry (dynamics), silly."
Cheers.
Chungst's argument is that internal fleets that are a subsidiary of a larger company (i.e. Ford having its own trucking fleet) are more efficient at transportation than companies that specialize in trucking. This would be like saying that Ford should also operate its own airline to transport its employees, its own shipping line to import materials from overseas, etc. While I agree that there are some companies that operate their own internal fleets more efficiently than an outside trucking company would be able to, by and large efficiency in the logistics industry, especially the trucking industry, is driven by lane density. If you only have one company, you are limited in the freight that you can source and deliver. If its concentrated and predicatable, then an internal fleet may well be the best option. However, if you have multiple production and delivery points in multiple locations, you will be able to develop lanes that minimize empty miles and out of route miles. You will be able to reduce those empty and out of route miles to a greater extent than the internal company fleet, which means that you will be able to charge a lower price. If you can charge a lower price, companies are more likely to decide that they want to stick to their core strengths rather than get involved in handling DOT audits, inspections, unionization efforts, volatile fuel prices, etc.
If anything, internal fleets are the ones that will suffer in the future: they are very similar to the car haulers, as the internals depend upon their mother company for their freight. Any variation in that demand, and you will get load imbalances in different regions of the country where you will have too many or too few tractors.
A few points to consider:
I covered the railroads as a buy-side high grade analyst for 2+ years a few years back and all I hear on the conference calls were how the big 4 railroads (UNP, BNSI, NSC, and CSX) were taking business from trucking companies. A railroad may run at 30 mph but it can run almost 24 hours a day in theory, far more than an average truck driver that is limited to 10 hours of drive time on crowded highways. I specifically recall UNP telling listeners how if the product got on its system, it could deliver across the US from the west coast to the east coast in as little as 3 days, maybe 2 days. Think about it for a second, a truck (which is an expensive piece of capital) with a solo driver can't be driven, on average, 14 hours of every day -- which is a waste of capacity (airlines typically fly 8 to 10 hours a day as well). Trucks just can't compete with these types of economics. Look at Warren Buffett and his acquisitions in railroads of late.
Companies like WMT cherry pick the best drivers (i.e. great safety records over a number of years) and paid them accordingly. It is not an internal fleet per se, it is when the internal fleet is an integral part of operations that is important. Not all internal fleets are the same.
IMHO, the biggest problem with the trucking industry is the employees. The high turnover, low pay considering the standard doesn't allow for overtime at 1.5x pay like most normal jobs, poor working conditions, living in a cramp box for long-hual drivers, etc. Compare that to WMT's internal fleet of highly paid drivers that are also highly motivated to do a good job. It's so obvious why the trucking companies are having a hard time succeeding -- the industry needs to get modernized into the 21th.
Again, don't take my word for it -- listen to Buffett who historically liked trucking firms to railroad companies and now switched his mindset once he saw how efficient railroad companies were moving products across the US.
Cheers.
Additionally, if you really think these carriers havent' stepped into the 21 century, then you should visit the dispatch office of any Conway or Fedex terminal. Very impressive.
Granted, there are still carriers out there stuck to the old way of doing things. There demise is emminent, and the freight they hauled still has to move.
My comments was about average "solo" driver (the guy that lives in the truck) limited to 10 hours a day. I understand trucking firms also use teams -- but the majority of long hual-trucks are driven by an individual driver.
Companies like FDX and UPS (or WMT) are separate from the tradition trucking companies. I think you will agree my comments are geared toward the trucking pure plays.
Also, my general comments are about the trucking industry as opposed to specific trucking companies. I can make a general comment that trucking pay is poor, but anyone who works in the industry knows how much WMT or UPS will pay (yes, a truck driver can make over 6 figures annually at UPS!).
Lastly, as for my 21st century comment, just recall the average class 8 truck is using an engine technology developed in the 19th century. Separately, the cost of diesel costs over $5 a gallon in some parts of the US -- what will happen when diesel reaches $6 or $8 a gallon? My point is the trucking (like the airline) industry was built on cheap fuel. If you do the math of an average truck going 150,000 miles a year at 6 mpg, it will require 25,000 gallons (ignoring idling, etc). When diesel was under $3 a gallon, the system was still profitable, but at $5 a gallon, the system is breaking. In the 21th century, the price of diesel will not be as cheap as what we had in the 20th century.
Cheers.