Trucking Along to Find Ideas – Part II

Stephen Groff's picture

A little over a year ago, we talked about the interesting industry dynamics that were shaping up in the trucking space – primarily in the form of a driver shortage which was getting increasingly serious at the time. When combined with an improving U.S. economy, we felt capacity could get tight and have real implications for pricing.

A year later we are clearly seeing that scenario play out.

Not only is trucking capacity increasingly scarce but the rails are dealing with well-publicized service issues of their own that can no longer be blamed on a tough winter (it’s hard for BNSF Railway to stay out of the media these days). This is driving many shippers to the conclusion that they no longer hold the upper hand over transportation providers and that higher prices are no longer a question of “if”, but rather “when” and “how much”. We have already seen spot pricing move higher and we believe this momentum will not only continue, but accelerate as this shortage becomes increasingly acute.

Does this mean you should just go out and buy any trucker? Absolutely not.

The very reason that pricing is likely to move higher – the availability and cost of drivers – is also a headwind for truckers. Long haul trucking is a tough job. You are driving long and odd hours. You’re away from your family for extended periods of time, and regularly consuming energy drinks and beef jerky isn’t exactly advised by any doctor. More truckers are retiring than getting into the business and when you combine it with the ones leaving to return to other jobs (like skilled trades and manufacturing) the deficit gets even worse. The use of electronic on-board recorders being mandated over time will also force the many (often smaller) players to stop “cheating”* further taking out capacity.

The only way to solve the driver issue is to raise wages and improve their quality of life which takes time and is not easy to do. Right now you are seeing pay going up rapidly (mid-single digits to mid-teens year over year) depending on the firm and driver type. As a company, if you can’t attract and retain drivers you can’t operate. If you can’t offset this major cost headwind, margins will compress.

As in many sectors there are going to be winners and losers. It’s our job to find the companies with quality business models who are set to benefit from changes in market dynamics and avoid those with secular pressures – and of course to not overpay. After spending a few days this week at an industrials conference in Las Vegas meeting with trucking, railway and logistics companies, I continue to feel good about the names in our portfolio. We even found a couple new interesting businesses that we feel warrant more work.

*Truckers can “cheat” by taking fewer breaks and driving longer hours than allowed by law and keeping different log books to throw off inspectors. When you’re paid by the mile, every mile helps. Not surprisingly it’s often smaller and less established owner operators that conduct themselves outside the law.

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