Need to replace aging trucking fleet could benefit certain stocks
By Kathleen Gallagher of the Journal Sentinel
Sept. 5, 2010
Even in a slow, gradual economic recovery, there should be stocks to buy.
Sure, places such as China, India and Brazil may offer broader growth opportunities. But there still are pockets of strength and pent-up demand in the U.S., said Adam Longlais, a Green Bay investment analyst.
The recession and poor profitability forced trucking companies to under-invest in their fleets and delay buying new trucks for the last four years, said Longlais, of Kellogg Asset Management, an Associated Banc-Corp subsidiary.
There are 2.2 million semitrailer trucks on the road in North America, and their average age is about seven years, he said. Typically, these trucks last about 10 years. So in a normal replacement cycle, the entire fleet would have an average age of five years.
"This is the oldest it's been in more than 20 years," Longlais said.
It would take annual production of 220,000 trucks just to maintain the average fleet age of seven years, he said. Manufacturers are on schedule to make about 150,000 trucks for North American markets this year, he added.
Stricter Environmental Protection Agency standards that took effect Jan. 1 are also depressing truck sales this year. Trucking companies have been hesitant to buy the new technology in its first year, Longlais said.
"This all sets up 2011 and 2012 to be huge truck purchasing years. That's really regardless of what the U.S. economy does," he said. "We've seen truck companies come out and raise equity to buy trucks. They can't delay it any longer."
Production growth could reach annualized rates of 20% or more over the next three to four years, he said.
Rather than choose a winner in the industry, Longlais turned to a company that sells to many of the trucking manufacturers.
Cummins Inc. (CMI, $83.16), Columbus, Ind., is the only major independent left that makes diesel engines but not trucks.
Cummins has a market share of more than 40%, up from 20% a decade ago, Longlais said.
Cummins shares are up considerably, reaching a 52-week high closing price of $83.16 on Friday from a low of $42.54 in October 2009. That means the market has identified the truck cycle, but it is still missing other benefits the company will see, Longlais said.
This year's new engines, which have more parts to comply with EPA regulations, cost about $40,000, or 25% more than the previous models, he said.
Also, the company will earn recurring revenue for parts and service on a much larger installed based over the next few years. Cummins has the largest dealer service network in the world with more than 5,000 locations in 190 countries and derives about 25% of its revenue from service and parts, he said.
The biggest risk Longlais sees is the possibility that truck makers that also make engines, like Paccar Inc., will use more of their own engines. But Cummins' reputation, quality and billions of dollars of research and development is expected to keep luring those manufacturers, particularly when demand skyrockets, he said.
Cummins shares could reach $95 by the end of the year, and have potential for a return of as much as 35% in the next year or two, Longlais said.
Disclosure: Long CMI