From Tesla To YRC Worldwide: The Road To Autonomous Truck Investments

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About: Tesla, Inc. (TSLA), YRCW, Includes: PGR, TA
by: Pinxter Analytics
Summary

There are roughly 3.5 million truck drivers in the US nervously awaiting for new autonomous technologies to become developed enough to shake up the industry.

Tesla is at the forefront of such efforts with intent to launch an automated long-haul truck throughout 2019 and they're not the only ones set to benefit from the "overhaul".

I believe there are 2 companies set to greatly benefit from the shift to autonomous short-long-haul trucks and 1 loser which will face nothing but headwinds.

As the technological transition is set to take place in the coming year, I believe investors looking to capitalize on such shifts are best to take a look now to avoid missing the train.

Tesla Inc. (NASDAQ:TSLA) is in the works to develop a driverless, all-electric with automated capabilities haul truck capable of driving merchandise around the country and perhaps the globe.

The US trucking industry employs roughly 3.5 million people on the interconnected system of highways connecting vendors and suppliers with 10.42 billion tons of "stuff" every year across all sectors of the economy including healthcare, manufacturing and technology, to name a few. Roughly 79.8% of the US's freight bill comes from the US trucking industry at over $676 billion in 2016 alone, a number which is expected to grow as fuel remains at low levels.

With the development of autonomous trucks that number should increase dramatically as costs of compensation, fuel and insurance decline on behalf of the automation and full-electric capabilities. Currently, Tesla is leading the way in its development, being the only electric-oriented manufacturer taking aim at the autonomous trucking industry, and with its vast array of technologies and resources, it's bound to capture a larger market share than its competitors.

The "Overhaul"

Looking at revenue figures from the trucking industry brings me to the bottom line of savings potential, where like everything in life, there's the good, the bad and the ugly.

With the trucking industry bringing in around $700 billion in revenue each year, across 3.5 million employees being paid an average of $56,500 per year, savings for shipping companies will amount to roughly $198 billion every year, or 28% of total revenues being converted to net income, the single largest expense nearly double the cost of 53.3 billion gallons of diesel and gasoline.

As revenues from the truck sales themselves, the cost savings from wages and insurance and the overwhelming headwinds these technologies create, I review the top winners and losers from autonomous trucking technologies, those with significantly higher than 28% operating expense and those reliant on the human factor of the trucking industry to bring in billions every year.

The Good: Beneficiaries

Without a doubt, Tesla will be a key beneficiary of autonomous trucking. Just like with electric vehicles, they don't have to be the first, they just have to be the best. With their current development pipeline they expect autonomous trucks to launch sometime during FY 2019 (announcement due throughout the upcoming weeks), which will put them in-line with competitors who mentioned an intention to do so like Uber (PRIVATE:UBER) or Alphabet's Waymo (GOOG) (NASDAQ:GOOGL), allowing them to capitalize on initial adaptation and work out the speed bumps while committing to enhance factors ranging from safety to pricing prospects.

A new company, launched with the backing of the Chinese firm Sina (SINA) called Tusimple, is gearing up to launch R&D and testing facilities in the US throughout the year and is expected to compete directly with Tesla and others for market share in the growing US trucking industry, which forms roughly 25% of the global trucking industry market share.

There are roughly 37.8 million trucks operating currently in the US. Now obviously Tesla will not capture all or even most, even if we assume every single truck owner in the country wants, or has the ability to, switch over to autonomous technologies. But assuming the company does capture anywhere from 5% to 10% of the long haul trucking (class 8) and around 1% of all other trucks, amounting to 276,000 and 507,000, respectively, there is immense opportunity out there with revenue implications ranging from $35 billion to $75 billion based on the current average price of a short/long hauling trucks.

(Source: Pinxter Analytics/Bloomberg)

Adding around $20 billion to revenues over the course of the next 2-3 years has the opportunity to nearly double the company's sales, which is currently expected at $21 billion and around $30 billion, respectively, allowing for a much greater valuation on behalf of the high growth rate industry.

(Author note: I am purposefully avoiding analysis of profitability, which I will discuss in a later date once more information and a timetable are announced)

Looking at the largest hauling companies, by revenue, we see the further beneficiaries of the automation of driving with companies like YRC Worldwide (NASDAQ:YRCW), J.B Hunt Transport (JBHT), Con-Way (XPO), Knight-Swift Transportation (KNX) and others leading the way in cost cutting opportunities. Taking apart some costs analysis brings me to favor YRC Worldwide where wages, salaries and employee benefits comprise of a whopping 60% of total operating expenses.

(Source: YRCW 10K)

With the company paying out over 60% of its operating revenues in salaries and benefits for employees, a 50% reduction in its workforce alongside a reduction in high paying driver jobs in favor of truck escort jobs creates a huge opportunity for the company which has trouble remaining competitive with pricing pressures from larger competitors with more wiggle room. As most other companies have 25% to 35% of their operating expenses tied up in employee salaries and benefits, I believe YRC Worldwide will be amongst the greatest beneficiaries of automated hauling adaptation allowing them to both efficiently compete with other major companies for hauling contracts and more importantly allow for the greatest increase to the company's valuation.

Based on savings of $500 million in the first 2-3 years of operations, non-GAAP EPS (excluding one time investments for the trucks themselves) is expected to nearly double its expected doubling of FY 2018 and 2019 EPS as revenues grow from $4,697 million in 2016 to $4,895 million and $5,137 million in 2017 and 2018, respectively.

(Source: Pinxter Analytics/Bloomberg)

After fairly stagnant years of sales growth for the company, even with the uptick expected in 2017 and 2018, I believe the adoption of autonomous technologies will allow the company to overcome the revenue hurdle it faces when competing for contracts with other major companies and we should see a subsequent rise in revenue growth as the company captures market share.

Alongside YRC Worldwide's wages and benefits savings, a semi or all-electric truck will allow them to cut down on fuel costs in-line with other trucking companies, creating an even better valuation environment, even as Oil prices remain low. I discuss valuation metrics and conclusions later on in the article.

The Bad: Who Gets Hurt

Alongside the obvious human resources companies specializing in resources and personnel placements I'd rather focus on a slightly less obvious one: trucking rest stops.

Warren Buffett's Berkshire Hathaway (NYSE:BRK.A) recently pledged a vote of confidence to the trucking industry with its 38.6% stake in Pilot Flying J, which operates rest stops across the country serving primarily the trucking industry.

Although most of the top companies operating rest stops who mostly serve the trucking industry are privately owned, one such public company is TravelCenters of America (NASDAQ:TA), which I believe will be hurt the most from the autonomous trucking endeavor. Diving deeper into the company's revenue streams and income we see growing non-fuel revenues totaling roughly 36% of all sales and growing, up from 30% in 2015 and 21% in 2014, expected to surpass 40% throughout the fiscal year.

(Source: TA 10K)

The company's core operations of rest stop and dining options are the ones going to get hurt the most, with fuel revenues to remain fairly flat, even as the proposed autonomous haul trucks will be in some form of electric operation, fuel revenues will likely remain fairly stable with forms of fuel-powered autonomous trucks and the market-wide fuel-powered automobiles stopping in on their way from point A to B. Bottom line is - machines don't eat.

Now there's no doubt that rest stops will not be going away, there will even likely be a truck escort for some of the hauls alongside normal vehicle rest stops being visited by millions of Americans every day. Nonetheless, a material slowdown in trucking stops and activity alongside the US's highways will with no doubt take effect once short and long haul trucks go automatic.

Another company to keep in mind is insurance giant Progressive's Commercial division (PGR), which has a significant presence in the automotive insurance business and serves major hauling companies and smaller trucking operators. Autonomous driving will surely reduce overall insurance costs, even if it's further down the line than the aforementioned beneficiaries and losers.

(Source: PGR 10Q)

With the company taking in roughly $2,800 million annually from its Commercial Lines segment comprising mostly of accident and third party insurance premiums, I expect roughly 15% of the company's commercial income to be hurt through a decrease in premiums. Since overall insurance mandates will remain in place, switched over with autonomous-related liabilities, I don't expect as a material of an impact on Progressive as there will be on TravelCenters though I still expect it to hinder growth and the company's bottom line.

The Ugly: Risks and Solutions

Diving slightly deeper in to the safety slash regulatory aspect of autonomous driving as a whole, alongside the hauling industry in particular, it seems to be a rather split topic with a multitude of opinions, facts and even some fiction.

The bottom line for me is, things get better. Just like you pretty much assume that when you wake up in the morning your coffee pot will make your coffee and your toaster will brown your bread, eventually, autonomous vehicles and massive hauling trucks will be (if they are not already) significantly safer than human drivers and a superior road master for hauling merchandise.

From a regulatory aspect I don't believe industry wide autonomous vehicles will be overly regulated from a point of employment operations but rather from a safety one. Computing technologies security is the highest priority for an industry where new hacking revelations are out daily and with tens of millions of Americans hitting the roads every day, I believe the autonomous driving applications will remain fairly subdued until that issue is fully addressed, resolved and regulated.

Touching on to the profitability factor for Tesla, it has to be said that although in full operational mode for several years now, the company has yet to make any significant profits from the manufacturing of their vehicles. Although there are a multitude of factors affecting profitability, which I'll touch upon in a follow up article, the boost in revenue might not be enough for investors to get on board another venture that will only become profitable way down the line and as some do with the company's current profitability forecasts, significant upside will with no doubt be negatively affected by another profitless venture.

Investment Conclusion

As autonomous trucking technologies become more mainstream in the next 2-3 years, I believe investor can greatly benefit from the shift by investing in both manufacturing and trucking companies but holding off on selling or short selling companies that rely on the human element of the trucking industry as both the time shifting over its user base and circumstantial adaptation should keep them well serviced for the next few years as the technology takes off.

I believe a long term investment in both Tesla and YRC Worldwide will best capture the expansion opportunities put in place by the adoption of autonomous all-electric or fuel-based hauling trucks. Heading into 2018 as the technologies are adopted, I'll reevaluate companies like TravelCenters of America (TA) for potential loss of business associated with the technology launch and see if the company adequately adapts to the changing environment or remains exposed to the forces of the human element of the trucking industry.

Disclosure: I am/we are long TSLA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.