Trends so far during the first-quarter earnings season are supportive of truckload carriers posting sizable growth in 2021.
February’s severe winter storms had many analysts lowering estimates for the quarter heading into the print. The assumption was network disruption and lost freight opportunities would eat into earnings.
While analysts took down estimates for the first quarter, some raised expectations for the full year and 2022 given the overall strength of freight fundamentals, which have been highlighted by tight capacity. The thought was the first quarter was just a minor speed bump on the way to a big year.
Those bullish calls appear likely to be rewarded as the industry quickly recovered from weather outages in March to report results ahead of consensus expectations in many cases. The negative impact from adverse weather has been notable but not course altering. More importantly, the broader macro economy continues to gain steam, providing the requisite catalyst for a memorable year.
Latest macro data pops, consumer remains strong
The need to rebuild inventories, especially after record holiday spending, remains in place. The retailers’ inventories-to-sales ratio ticked higher in February to 1.23x, a modest improvement from the all-time low set in January, but still well below pre-pandemic levels of roughly 1.45x.
Retail sales remain robust, up 14.3% year-over-year in the first quarter as vaccinations increased and fresh rounds of federal stimulus hit consumer accounts. Retail and food services sales jumped 27.7% year-over-year in March, up 9.8% from February, according to the Census Bureau.
Freight flows are expected to remain very high. The National Retail Federation is forecasting a 26.9% year-over-year increase in twenty-foot equivalent units (12 million TEUs in total) at the nation’s top container ports in the first half of 2021. A combination of strong spending and easy year-over-year comparisons from widespread COVID-related lockdowns during the 2020 second quarter are the basis for the outlook.
The industrial economy is inflecting higher as well, although semiconductor, parts and raw materials shortages are headwinds.
The Purchasing Managers’ Index, a survey of manufacturing supply executives, moved to a more than three-decade high in March at 64.7%. It was the tenth consecutive month the index has signaled growth (a reading above 50%) in U.S. manufacturing.
The dataset showed increases in manufacturing employment and new orders with customers’ inventories retaining the “too low” designation, falling further to a sub-30% reading. Even after adjusting for the spike in the deliveries component of the index, which is due to an increase in transportation and supply chain delays, the overall index remains firmly in expansion territory.
Also, industrial production finally crossed over to positive territory, up 1% year-over-year and 1.4% sequentially, according to the Federal Reserve.
Many have speculated that consumer spending will shift toward services as vaccination rates climb, spoiling the freight boom. But those fears have been pushed back by some economists, which have said the consumer is strong enough to spend on both. Further, if a broad reopening does not happen until later in the summer, consumers will likely have transitioned to seasonal spending on back-to-school and early-holiday merchandise.
Pointing to the favorable macro conditions, Deutsche Bank (NYSE: DB) analyst Amit Mehrotra summed it up in a recent note to clients. “While we expect the truckload market conditions to normalize, albeit at higher levels than pre-pandemic conditions, we believe that the near to medium term offers opportunity from a pricing perspective with demand likely to remain elevated and supply to remain constrained.”
Volumes elevated, capacity in short supply
TL volumes accelerated following the February storms. By the beginning of March, volumes reached the highest level of 2021 and were on par with levels seen during the 2020 peak season. There has been little retreat since. The year-over-year comparison in FreightWaves Outbound Tender Volume Index continues to widen as the COVID-impacted comps from a year ago take hold.
However, most fleets are unable to seat incremental tractors and cash in on the heightened demand. Capacity remains extremely tight as the industry’s driver pool has been reduced by more than 200,000. Over the last year, COVID fears have led to early retirements, driver schools have operated at restricted capacity and Drug & Alcohol Clearinghouse compliance has sidelined operators.
As a result, tender rejections have been higher than 20% since August and above 25% since the storms. The high-demand, tight-capacity environment has allowed carriers to take rates significantly higher and become more selective in choosing which shippers to work with.
Rate surge continues, driver concerns mount
Spot rates continue to outpace year-ago levels with the gap expanding as carriers work through bid season. Most carriers expected contractual pricing to increase by high-single to low-double-digits entering the year. It now appears double-digit rate increases are likely as fundamentals suggest no near-term relief is in sight.
Spot rates were roughly 30% to 70% higher year-over-year throughout the first quarter. Rates are more than 80% higher in the latest week.
J.B. Hunt Transport Services (NASDAQ: JBHT) reported that revenue per loaded mile (excluding fuel surcharges) increased 28% year-over-year in its truck segment during the first quarter. Contractual rates renewed 14% higher.
Nick Hobbs, the company’s COO and head of dedicated, commented, “The industry is facing the most challenged driver market that I’ve seen in my 37-year career at J.B. Hunt” on the first-quarter call.
Increases in driver wages and recruiting costs were cited as reasons for a 180-basis-point year-over-year decline (when excluding one-time expenses from the prior-year period) in its dedicated segment’s 87.2% operating ratio.
Carriers have been raising driver pay for months now but are still unable to find the drivers needed to materially grow fleet counts and take advantage of a robust demand environment.
Heartland Express (NASDAQ: HTLD) announced plans to implement additional “driver pay enhancements” when it reported first-quarter earnings on Wednesday. The company previously raised driver pay by an average of 6% in October.
“We also continue to navigate the challenge to recruit, hire and retain qualified and safe operating drivers,” said Heartland Express CEO Mike Gerdin.
The nation’s largest TL carrier, Knight-Swift Transportation (NYSE: KNX), raised full-year EPS guidance on Wednesday, noting the improved outlook assumes mid-teen percentage increases in over-the-road contract rates. “Inventory restocking and strong demand will continue to support a favorable rate environment,” the presentation read.
A good chunk of the rate increase is likely to show up in driver pay as “the challenge of sourcing and retaining drivers will intensify and lead to additional driver wage inflation,” the company added.
During the quarter, Knight-Swift’s revenue per loaded mile (excluding fuel surcharges) increased 16% year-over-year as “over-the-road truckload demand is at unprecedented levels and expected to continue into 2022.”
U.S. Xpress (NYSE: USX) reported an almost 10% increase in revenue per mile (excluding fuel surcharges), 16% higher in the company’s over-the-road segment. “These conditions are expected to continue to support spot market rates in excess of contract rates and a strengthening contract renewal environment through the remainder 2021,” the earnings release read.
“If you look at the market, the driver situation is probably more difficult than anything I’ve ever seen in my entire career. And I envision if we get an infrastructure bill, it’s only going to get worse,” stated U.S. Xpress President and CEO Eric Fuller.
Carrier P.A.M. Transportation Services (NASDAQ: PTSI) also saw a mid-teens percentage increase in rate per mile with Covenant Logistics Group (NASDAQ: CVLG) posting a 6% increase.
Refrigerated carrier Marten Transport (NASDAQ: MRTN) reported a 6% year-over-year increase in revenue per loaded mile (excluding fuel surcharges) in the company’s TL division and a 3% increase in the dedicated segment.
“We have been increasing and will continue to increase the compensation from our customers for our premium services within the tightening freight market, which is the result of both accelerating demand and constraining capacity driven by the intensifying national driver shortage,” said Randy Marten, chairman and CEO.
Brokers see revenue per load soar
Not surprising, but any broker with spot exposure saw revenue per load gap higher in the first quarter. Those with contractual rate exposure are seeing annual contract rates renew higher as well. It’s important to mention that the year-over-year comps were not inflated by COVID-related demand destruction, which really didn’t occur until April 2020.
The highlight of J.B. Hunt’s report was the performance in its brokerage segment. Revenue per load increased 58% year-over-year. Spot and contractual rates moved higher with the company placing an emphasis on pricing versus volumes, which were down 1%. The rate improvement drove gross profit margin to 12.4%, 280 bps higher year-over-year.
While the company’s original guidance called for the brokerage segment to not achieve sustained profitability until the second half of 2021, the division posted its second consecutive profit in the first quarter.
U.S. Xpress’ brokerage division reported a 67% year-over-year increase in revenue per load, with gross margin improving almost 4x to 14%. Revenue per load was up 43% in Knight-Swift’s brokerage unit as gross margin dipped slightly to 14.4%.
Broker Landstar System (NASDAQ: LSTR) posted EPS well ahead of the consensus estimate and nearly double its prior-year mark. The company achieved multiple records in the period and issued second-quarter guidance 30% above analysts’ expectations. The outperformance was driven by an increase in dry van brokerage revenue, which was up 52% year-over-year as loads increased 17% and revenue per load climbed 30%.
February’s storms pushed several loads into March, resulting in a surge in revenue per load as truck capacity tightened further and spot rates stepped higher. Management believes the market is strong enough to hold the March rate level through the second quarter.
“Typically, truckload volumes in the first quarter of any year are softer than in the second, third and fourth quarters due to seasonality. Given the exceptional performance by Landstar in the 2021 first quarter, I believe the stage has now been set for what should be a record-setting year,” stated Jim Gattoni, president and CEO.
Exit rates were strong
Landstar wasn’t the only company to end the quarter on a high note.
Marten modestly beat expectations in the quarter, posting earnings of 22 cents per share. Most telling was the company’s earnings exit rate. March accounted for nearly half of the quarter’s earnings at 10 cents per share.
Heartland Express also reported a strong exit rate leaving the first quarter. “The month of March delivered a strong finish to the end of the first quarter, with significantly better revenue and operating results as compared to the first two months of 2021,” Gerdin said.
U.S. Xpress said freight demand through the first half of April “is running better than normal seasonality,” with the expectation it will “remain strong throughout 2021.”
While a good portion of the outperformance from carriers in March was due to a snapback from February’s declines, the year-over-year comps remain very easy throughout the second quarter. Importantly, the weather events in the first quarter don’t appear to have disrupted what may end up being a remember-when year for carriers.
While back-half 2021 comps stiffen, a strong consumer, a lack of capacity and still sky-high rates all signal that fundamentals are supportive of the current freight cycle running through the rest of the year.