Few Guardrails for Trucking Stocks

Matthew Young: In transportation, a hot topic over the past year has been the marked tightening of truckload capacity. It's been most notably felt on pricing in the full-truckload space for carriers like Knight Transportation (KNX), but it's also been a benefit for the asset-light truck brokers like CH Robinson (CHRW). At the heart of the capacity constraints really is the driver shortage. And in essence, what it does is it prevents carriers from boosting fleet size and increases turnover.

And what you have, really, over the past decade or so is a lack of new entrants into the industry, coupled with an aging workforce and, in recent years, really strong demand.

You might ask why it is that you can't get drivers into the industry. Why is it difficult to recruit? Well, there are several factors at play there. One we would highlight is low pay, especially relative to industries that traditionally compete for drivers--like construction. Another factor weighing on the pool of drivers is intensifying regulation. For example, hours-of-service rules changes in mid-2013, which effectively lowered carrier productivity.

In terms of implications, tight supply is generally a positive. What you've seen over the last year is a marked upswing in pricing power for the asset-based truckers. And rate gains, which have been in the mid- to high single digits on average, have handily offset relatively minimal volume growth, which is, itself, linked to the lack of fleet growth in the industry and the driver shortage.

That said, we would caution investors that across the trucking industry, as well as maybe to a lesser extent in the domestic third-party logistics industry, valuations are generally lofty and rich right now. As we survey the space, we see few bargains.