The economy is booming, yet share prices of trucking companies are stepping on the brakes. Even though U.S. GDP jumped at a 4.2% pace in Q2, and Q3 GDP looks almost as robust, the Dow Jones trucking index has slipped 5% in the past three weeks. Compare this to the S&P, which is up 1% and near its all-time high. Does this make sense? Shouldn’t trucking companies be riding – or driving -- the economic wave higher? The venerable Dow Theory of investing taught that transportation stocks pull others along. So why do we hear the squeal of brakes?
The problem is not reported earnings. Werner Enterprises, for example, reported that second quarter earnings catapulted 90.6% higher than last year’s. J.B. Hunt reported a 55% jump. The problem is threefold:
First, investors simply worry that things have gotten too good and that share prices had already reflected a near-perfect scenario. Recent price-earnings ratios still look lofty, with J.B. Hunt leading the pack at 17.4. These are not high-flying tech stocks! J.B. Hunt’s ratio looks more like Apple than, say, Norfolk & Southern (9.0) or Delta Air Lines (12.0).
Second, with the U.S. unemployment rate at just 4%, trucking firms are having trouble finding qualified bodies to step into the cabs to drive the vehicles. More hiring requires higher wages, and trucking lines are passing these costs onto their clients. Long distance shipping rates have climbed 9% over the past year. This is nudging shippers to talk to competitors, chiefly the railroads.
Third, trade war fears are making investors nervous about supply chains. With tariffs on steel and aluminum pushing up prices 25%, and Ford CEO Jim Hackett warning that such moves will cost the firm $1 billion, investors worry that trucking lines will eventually bear some of the burden.
These factors don’t imply that trucking stocks are on the brink of something dangerous; but their days of coasting may be over.