Friday, November 19, 2010

Bloomberg: Oldest Truck Fleet Since 1979 May Mean 56% Jump in North American Output

With 2 years of "Great Recession" (I am using 2008-2009 versus the official recession start and end dates), and a 3rd year of muted recovery (2010) in the U.S., commercial trucking activity has been quite poor.  SAles of coal, agriculture product, and the like To Asia are driving railroads, but trucking doesn't get as much benefit due to nature of cargo and distance.  Looks like an emission standard change in 2007 also led to a jump in buying in 2006.

That said, despite domestic transport weakness (hence no need for expansion) the fleet is still aging - effectively 3 years of well below trend of sales is going to create a need for replacement inventory.  The average age of the commercial trucking fleet is the oldest since the late 70s. Bloomberg has a nice piece on this topic today.  This should bode well for companies such as Cummins (CMI), Eaton (ETN), Navistar (NAV), and Paccar (PCAR).

  • North American commercial truck production may climb as much as 56 percent in 2011 as owners refresh the oldest U.S. fleet in at least 31 years, boosting sales at Paccar Inc. and partsmakers such as Eaton Corp.
  • Output of Class 8 trucks, the workhorses of interstate hauling, may reach as many as 235,000 units in the U.S., Canada and Mexico next year from an estimated 151,000 in 2010, said Kenny Vieth, partner at market forecaster ACT Research Co.
  • Rising freight rates and volumes are helping rekindle demand after the worst recession since the Great Depression. A 2006 production surge to a record 376,448 units before new U.S. emissions rules took effect helped create a glut heading into the economic slump, leaving some trucks parked for two years.
  • “My members are saying they desperately need to replace trucks,” Bob Costello, chief economist for the American Trucking Associations, said in an interview.
  • U.S. trucks now average 6.7 years of age, about 11 months older than the historical average and the oldest in ACT data going back to 1979. While that fleet has logged fewer miles than usual because of the drop in shipping, “no matter how we slice it, we still come up with an answer that it’s old,” Vieth said.
  • “The replacement cycle is kicking in,” David Leiker, a Milwaukee-based analyst for Baird, said in an interview. He recommends buying Paccar and rival Navistar International Corp. and holding shares of Sweden’s Volvo AB.
  • Daimler AG, the maker of Freightliner trucks, expects the “vast majority” of 2011 purchases to be replacement vehicles.
  • That’s the case at San Mateo, California-based Con-way Inc., the second-biggest publicly traded U.S. trucker after YRC Worldwide Inc..  “We intend to continue acquiring tractors for fleet replacement, not expansion, in 2011,” said Gary Frantz, a spokesman.
  • The 18-month recession that ended in June 2009 ravaged the shipping industry.... sending the ATA’s freight-tonnage index to a seven-year low in April 2009. 
  • Sales excluding financial services at Bellevue, Washington-based Paccar plummeted 48 percent.
  • Volumes are rising again this year, with truck tonnage up for a 10th straight month in September on a year-over-year basis, (year over year comps are obviously easy due to the huge drops seen the past few years). 
  • “We think both 2011 and 2012 will be years of significant growth,” Eaton Chief Executive Officer Sandy Cutler said in a Nov. 11 interview. “Used truck prices are up, the inventory of used trucks are down, freight is up, and the trucking companies have been announcing price increases.”
  • Shipping volumes remain below their 2006 peak.

Now the offset is, while the fleet age is long in the tooth, wear and tear is not at usual levels due to the deep recession.
  • As many as 500,000 trucks were idled during the recession, and about 150,000 remain parked, Starks said.  “Age itself is not a very useful tool to say when you have to replace equipment,” Starks said. “With such a deep recession, the dynamics have changed.”
  • Wear and tear is important because annual maintenance costs can more than double once a vehicle exceeds 600,000 miles (965,400 kilometers), said Kubacki, the Avondale Partners analyst.

On the flip side... if I am wrong about the economy and the magic of QE2 creates a dynamic recovery in 2nd half 2011.... then there is upside.
  • “If freight is strong through the first half of next year, I would not be surprised to see growth for the first time surface as an initiative for truck purchases,” he said.


Investing themes:
  • Parts suppliers such as Cleveland-based Eaton and diesel- engine maker Cummins Inc. would join Paccar and Navistar in benefiting from increased truck sales. Revenue at Eaton’s truck unit plunged 35 percent to $1.46 billion in 2009. The drop at Columbus, Indiana-based Cummins was 25 percent to $10.8 billion.
Heck even our BorgWarner (BWA) is mentioned as a beneficiary.
  • Commercial trucks will be a “strategic area of focus” for turbocharger maker BorgWarner Inc. as the government keeps ratcheting up mileage standards, CEO Tim Manganello said in a Nov. 9 investor conference. Truck manufacturers use turbochargers to boost fuel economy without sacrificing power.

Long Cummins, BorgWarner in fund; no personal position

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