Mon, 2 Oct 2017
Many trucking firms are trading at high valuations, but we see value in highway brokerage companies.
Matthew Young: Roughly two years ago, regulators mandated that interstate trucking companies must install electronic logging devices by Dec. 18 of this year. For reference, ELDs automatically record a truck driver's time behind the wheel, and because they're more exacting than paper logs, they force drivers to adhere much more closely to government hours of service rules. In fact, following installation, full truckload carriers commonly see mid-to-high single digit productivity losses, with small fleets at the high end of that range, often higher.
What's interesting here is that roughly 65% of small fleets, which make up most of the truckload industry carrier base, are waiting until the last minute to install the devices. Boiling it down, we estimate that widespread ELD adoption will translate into a 2% to 3% reduction to total truckload industry capacity by the end of 2018. We believe this will be enough to the reduce and potentially eliminate the lingering capacity glut and revive pricing conditions, which have been mostly sluggish since early 2016.
This is good news for the large, sophisticated asset-based truckload carriers on our coverage list, such as Knight-Swift and Schneider National, which have already installed ELDs in years past. It also bodes well for asset-light truck brokers like C.H. Robinson and Echo Global Logistics that benefit from supply disruption.
However, while it might seem at odds with our belief that pricing conditions will improve in the year ahead, we do think investors should avoid asset-based truckload stocks at the moment because valuations are once again running ahead of themselves.
On the other hand, we see a few opportunities in the asset-light highway brokerage space. In particular, we prefer Echo Global Logistics. Echo has grappled with integration-related headwinds and disappointing operating margins this year, but we think the market has overreacted, and expect several of the firm's headwinds to dissipate in the quarters ahead.