Improving fundamentals for the trucking industry have attracted a lot of attention from investors. Favorable market dynamics are at play that support improving returns and mid-teen earnings growth on the back of incremental margin expansion from modest tonnage growth, pricing gains, and relatively benign unit costs.
However, this theme does not present a straightforward investing idea. Within the trucking industry, we have two main types of players: asset owners and truck brokers. The question is: Which is better exposed to improving fundamentals?
The difference
For those who haven’t been following the trucking industry you might not have an idea about the difference between these two types.
Asset owners like Old Dominion Freight Line (NASDAQ:ODFL) own their own trucks which are used for transportation purposes.
On the other hand, incumbent truck brokers do not own trucks; they just earn commissions by connecting self-employed truckers who own trucks with shipping customers. Prime examples of pure-plays on this model are Landstar System, Inc. (NASDAQ:LSTR) and C.H. Robinson Worldwide, Inc. (NASDAQ:CHRW). There are many other truckers like J.B. Hunt and Knight Transportation that have both asset-based truckload shipping segments and non-asset based truck brokerage segments.
In these circumstances, common sense suggests that asset owners, by the virtue of owning their own trucks, will outperform the truck brokers given that they are more operationally leveraged to the industry cycle which is in its early stages. Moreover, truck brokers face ongoing competition from new entrants which are hampering pricing and dampening earnings growth for them.
Apart from that every company has its own secular growth/decline story. Let’s have a look at it:
The top pick in the trucking sector
For many analysts out there at the Street, Old Dominion Freight Line (NASDAQ:ODFL) is believed to be the best company in the trucking industry.
The stock is currently operating at a multiple of 20 times earnings. Though this seems expensive, but the multiple is justified given the strong upward momentum in the company’s margins. Not only this, many believe that the company is poised to improve its profitability given that it is experiencing increased density across its network by gaining share from peers. Moreover, the company has been focused on inward retained earnings rebuilding by adjusting its cost structure while trying to raise prices. This can also mean favorable re-rating of stock’s multiple.
Which truck brokers to lose?
As already mentioned, the truck brokers are expected to under-perform given high level of competition in the market. Landstar System, Inc. (NASDAQ:LSTR) and C.H. Robinson Worldwide, Inc. (NASDAQ:CHRW) are expected to lose the most.
