A Look Back and Forward in Trucking
Matthew Young: 2018 proved an unusually robust year of top-line and EPS growth for the asset-based truckload and less-than-truckload carriers we cover.
Essentially, the truckload shipping industry saw a historic capacity crunch, driven by robust freight demand and widespread ELD adoption among small carriers. Recall enforcement of the government's ELD mandate came into play last spring.
In short, unusually tight capacity last year translated into a massive uptick in carriers' pricing power that sent spot rates to unprecedented levels. In the first half of 2018, market valuations across the trucking space also soared, and most names pushed into what we considered to be highly overvalued territory.
All that said, by fourth-quarter 2018, signs emerged that the TL capacity crunch is easing, including a pullback in spot rates off historic highs and less-robust contract pricing gains.
At same time, we've seen market valuations across the trucking industry come down to more reasonable levels as investors have become increasingly aware that 2019 will usher in significantly more modest revenue and EPS growth as the supply and demand balance normalizes.
Naturally, year-over-year growth comparisons are becoming quite challenging as well. As a side note here, we've already been baking in slower demand and pricing trends this year into our forecasts, so our DFC-derived fair value estimates haven't moved all that much.
So, where are we now? Currently, most trucking-related names like Schneider National and asset-light highway broker C.H. Robinson, are in fairly valued territory, which is much more palatable than what we saw a year ago.
We aren't seeing any clear bargains yet, but we do think investors should keep an eye on truckload industry leader Knight-Swift. There's elevated risk to sentiment as the freight cycle has likely peaked. But at a 10% discount to our fair value, we see upside potential as the firm continues to prove it can bring the recently merged Swift operations up to par with legacy Knight's best-in-class operating standards.
Also, Knight has met with success building out its asset-light truck brokerage division, and we see healthy growth opportunities in a highly fragmented logistics market.