A sector I have been spending some time on is the trucking industry in the U.S. While it may seem like an odd place to be looking for ideas, there are a number of factors at play, which could create an attractive environment for well positioned businesses. This would fall under the category of an opportunistic trade vs. a long-term holding.
The trucking industry benefits from a stronger economy and the associated increases in volumes. We continue to believe the U.S. economy will strengthen over time as the housing market, consumer confidence and employment improves, but this is not what makes truckers unique. It is the supply side of the equation, which is underappreciated factor. To ship goods by truck you need 1) a truck / trailer and 2) a driver.
The trucking industry today is made up of two groups, the healthy (usually large companies) and unhealthy (often small). The healthy companies have reinvested in their fleets, are profitable and have access to financing. The majority of smaller truckers today are struggling financially, have limited access to financing and are driving much older trucks. The average age of a Class 8 truck today over six and half years (near record levels) vs. two years for some of the healthy players.
As trucks age, maintenance costs per mile increase exponentially to the point where it becomes cost prohibitive to operate. A typical truck drives over 100k miles per year. Maintenance costs are around five times higher for a truck with >500-600k miles vs. <200k miles. Newer trucks are also far more fuel efficient, further increasing their cost competitiveness. Could these smaller operators not just upgrade? Obtaining financing today for a barely profitable business is very challenging. On top of it, the cost of a new truck is substantially higher than the trade in value of their old truck due to tighter emission regulations (often $100,000+). This leaves the small operators (who make up a large percentage of the industry) in a very tough spot.
What about drivers? It must be easy to find drivers in this type of economy right? Wrong. I have heard from many trucking companies, truck makers and industry consultants. Finding qualified drivers today is a major challenge and it is about to get worse. Long haul driving is a tough job. You are on the road and away from your family for extended periods of time. Turnover rates at many companies run 50-100% per year and finding truckers is cited as one of the biggest challenges for operators. An improving economy is also shrinking the driver pool at the same time it is increasing demand for them as many return to jobs in manufacturing or skilled trades. This only compounds the shortage.
If that weren’t enough, additional driver regulation is kicking in this summer, which has the effect of reducing the number of driver hours. This is giving qualified drivers with good safety records their pick at where they choose to work. Not surprisingly, drivers are choosing to work for companies offering competitive wages, consistent work and newer trucks. Newer trucks are more enjoyable to drive and break down far less, resulting in more pay and higher personal safety scores. Who has the young and refreshed truck fleets? The larger and financially strong companies, many of whom are past their capex peaks and delevering, which is driving further earnings growth. When volumes ultimately improve, yields are likely to move higher benefitting companies who are financially strong and able to attract and retain drivers.
A handful of truckers with the most attractive characteristics and reasonable valuations can be found in a number of the Cambridge funds in prudent position sizes. These businesses are well positioned to take advantage of the trends and have the financial strength to wait out a softer economic environment should that scenario play out, a luxury that many do not have. We are watching the situation closely and will make changes to our positions as required.