Bill Stankiewicz Cscmp 1 14 2009 T Albrecht Pres


Published on

Presentation on state of the industry in logistics distribution, transportation, and banking center

Published in: Business, Real Estate
  • Be the first to comment

  • Be the first to like this

No Downloads
Total Views
On Slideshare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

Bill Stankiewicz Cscmp 1 14 2009 T Albrecht Pres

  1. 1. Freight Demand & Supply in a Crazy World! January 2009 Thom S. Albrecht, CFA Managing Director (804) 727-6235 [email_address] The analyst primarily responsible for the preparation of the content of this presentation certifies that (i) all views expressed in this presentation accurately reflect the analyst’s personal views about the subject companies and securities, and (ii) no part of the analyst’s compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the analyst in this presentation. Required disclosures may be found on page 43 of this presentation. Info posted on Bill Stankiewicz-VP Shippers Warehouse Linkedin Web Link from conference I attended with Thom Albrecht as key speaker
  2. 2. Give Yourself Some Credit!! <ul><li>A recent study found the average American walks 900 miles/year </li></ul><ul><li>Another found that Americans drink an average of 22 gallons of alcohol a year </li></ul><ul><li>Conclusion: Americans get about 41 miles to the gallon!! </li></ul>Source:
  3. 3. A Maze of Factors to Assess <ul><li>Why Domestic Demand Will Remain Lousy for Much of 2009 (don’t count on any demand help!) </li></ul><ul><ul><li>Housing is still a drag, with negative implications for freight </li></ul></ul><ul><ul><li>Other consumer issues </li></ul></ul><ul><ul><li>Commercial construction/real estate market </li></ul></ul><ul><li>International Demand Is Sick, Too </li></ul><ul><ul><li>Key international data points </li></ul></ul><ul><ul><li>The importance of global exports </li></ul></ul><ul><li>A Few Facts on U.S. Trucking </li></ul><ul><ul><li>The structure of the industry </li></ul></ul><ul><ul><li>Changing distribution patterns </li></ul></ul><ul><ul><li>Supply and demand trends </li></ul></ul><ul><li>2009-2010 crystal ball </li></ul>Sources: Kimball Hill for cartoon; Stephens Inc. for analysis.
  4. 4. Housing’s Impact to Economic Growth Sources: U.S. Bureau of Economic Analysis and Haver Analytics. The “1% of GDP” figure is annualized.
  5. 5. Supplies of New and Existing Homes Are Double What They Should Be… Source: Calculated Risk Blog Financial Analytics. Blue areas are recessions. For new homes Oct’08 was 11.1 months (peak this cycle was 11.4 in Aug ’08); all-time high was 11.6 in April 1980. For existing homes 10.2 months of supply exists. The all-time high is 11.5 months during 1982. This represents supply of 4.23 million existing homes (not new).
  6. 6. … Meaning New Home Starts Will Remain Weak (Now at the Lowest Level Since 1959) Source: Calculated Risk Blog Financial Analytics. Blue vertical areas are recessions; red and blue lines are the seasonally adjusted annual housing build starts.
  7. 7. The “Home Equity ATM” Is Broke Source: Calculated Risk Blog Financial Analytics. Based upon underlying study by Alan Greenspan and Dr. James Kennedy of the Federal Reserve Board. MEW is mortgage equity withdrawal and NSA is not seasonally adjusted.
  8. 8. Case-Shiller Index Shows Residential Real Estate Still Declining Top 10 : off 19.1% yoy and 25.0% from peak Top 20 : off 18.0% yoy and 23.4% from peak Sources: Case-Shiller and Calculated Risk Blog Financial Analytics.
  9. 9. 90-Day Home Mortgage Delinquency Rate & Overall Foreclosures Remain on the Rise Source: Mortgage Bankers Association (MBA). Both are percentages of all mortgage loans outstanding (inc. prime, Alt-A & subprime loans) on one to four-unit residential property. Data is seasonally adjusted. Foreclosure rate measures “in progress” foreclosures; closed foreclosures in Q3’08 was 1.3%.
  10. 10. Retail Sales and Credit Card Payments Will Continue to Weigh on 2009 Economic Activity Sources: Caclulated Risk Blog Financial Analytics & U.S. Census Bureau for left chart; TransUnion LLC for right chart.
  11. 11. Historically, Housing Bottoms a Few Months Before Recessions End and Then Becomes an Engine of Growth Source: Calculated Risk Blog Financial Analytics.
  12. 12. 4 Keys That Will Signal Housing Is Bottoming Source: Calculated Risk Blog Financial Analytics and Case-Shiller. OFHEO stands for Office of Federal Housing Enterprise Oversight. HPI is House Price Index.
  13. 13. Commercial Construction and Real Estate Will Be Headliners During 2009 “Developers Ask U.S. for Bailout as Massive Debt Looms” ( Wall Street Journal *) Source: Headline and chart from page A1 of the December 22, 2008 Wall Street Journal .
  14. 14. The ABI Signaled Weakness in Early 2008 That Is Now Becoming a Reality Sources: Calculated Risk Blog Financial Analytics and the American Institute of Architecture (AIA). ABI is a leading index of commercial construction. Quarterly data.
  15. 15. And You Thought Most of the Issues Were Subprime Related? Source: Calculated Risk Blog Financial Analytics, U.S. Treasury and T2 Partners LLC.
  16. 16. 2 Examples of Weakness in the Commercial Properties Market Source: Calculated Risk Blog Financial Analytics. Occupancy rates are rising due, in part, to over-investment
  17. 17. Note the Steep Drop in the Blue Line (Nonresidential Construction) Since August Source: Calculated Risk Blog Financial Analytics. Left chart contains August ’08 data, while the right chart contains November ’08 data.
  18. 18. The International Outlook Just as Ugly as the U.S.
  19. 19. The International Economy Is Sick <ul><li>China PMI was 40.2 in Dec (38.8 in Nov); new orders were 37.3 (32.3 in Nov); and export new orders was 30.7 (was 29.0) </li></ul><ul><li>Global PMI was 33.2 in December and new orders were 25.3; in August they were 48.6 and 46.8 </li></ul><ul><li>Global airfreight dropped (-13.5%) and Asia/Pacific fell (16.9%), the 6th straight month of declines </li></ul><ul><li>Asia is 44.6% of global airfreight </li></ul>Sources: ISM (Institute for Supply Management) and IATA (International Air Transport Association). Airfreight is measured in freight tons per kilometer. PMI stands for Purchasing Manager’s Index.
  20. 20. Exports Drive a Lot of Economies, Meaning International Weakness Has Seriously Negative Consequences Sources: Organization for Economic Cooperation & Development (OECD) and Bureau of Economic Analysis (BEA). Chart on the left is for 2007. Since Q4’07 U.S. growth has been non-existent.
  21. 21. Key Facts and Figures on the Trucking Industry
  22. 22. Key Trucking Trends: OR and Driver Composition Source: Both from American Trucking Trends 2008-2009 book. Chart on right measures percentage of total drivers.
  23. 23. 3 Things Never Change: Death, Taxes & Driver Turnover Source: All from the American Trucking Association (ATA) STATS newsletter. Large carriers have revenue above $30 million and small are below that.
  24. 24. Demographics Remain Unfavorable for Significant Driver Additions Source: U.S. Census Bureau.
  25. 25. Breakdown of Fleets by Tractor Size and Trailer Types Sources: FMCSA and U.S. DOT, Stephens Inc. analysis and 2008-2009 American Trucking Trends book. Left chart includes private fleets and for-hire fleets.
  26. 26. Dry Van Rate Index Since 1992 <ul><li>TL van rates could drop 2% to 4% during 2009 </li></ul><ul><li>Spot rates could be off 15% to 25% during 1H’09 </li></ul><ul><li>Lots of bid packages between November 2008 and March 2009 with winning bids put in place between April and June </li></ul>Sources: Data from 11 selected public carriers & private carriers; Bureau of Labor Statistics (U.S. Dept. of Labor) and selected ATA data. Stephens Inc. estimates for 2008-2009 figures. Data is an index that begins in 1992 at 100.0.
  27. 27. Average Fleet Size of Failures Is Higher <ul><li>2008 bankruptcies of 3,065 up 55% yoy; Q4’08 of 375 down 52% vs. Q3’08. </li></ul><ul><li>Approximately 27,000, 42,000, 46,000, 39,000 and 10,650 tractors were represented by the Q4’07 through Q4’08 carrier bankruptcies/failures. </li></ul>Sources: Bankruptcies from D.A. Broughton of Avondale Partners and the American Trucking Association; EIA for diesel fuel prices.
  28. 28. Fuel Expense Trends <ul><li>Stability in Figure 1 from 2002-2006 reflected healthy increases in base freight rates (exc. fuel surcharges). </li></ul><ul><li>During the 1990s Figure 2 would have been consistently between $0.095 and $0.105 per mile. </li></ul>Sources: Stephens Inc. analysis and Company reports from CLDN, CVTI, HTLD (Fig. 1 only), KNX, MRTN, PTSI, USAK and WERN.
  29. 29. Despite Lower Fuel Prices Carriers Would Be Foolish to Abandon Longer-term Intermodal Options <ul><li>The FACTS (1988-2007): </li></ul><ul><li>TOFC: 8 “Up” Years Since 1988, 11 “Down” Years; -1.5% CAGR </li></ul><ul><li>COFC: 19 Straight “Up” Years; +7.7% CAGR </li></ul><ul><li>6 Significant Influences: </li></ul><ul><li>Packaging Revolution under way (Ex: 7,000 containers and toy example)--driven by “green motives” and high fuel costs; 100 mil. fewer cases on 60 mil. fewer miles; packaged dinners </li></ul><ul><li>Shippers will increasingly locate along rail heads, esp. intermodal yards </li></ul><ul><li>Fuel economics favor intermodal and penalize lousy backhauls </li></ul><ul><li>Drivers-demographics will remain horrible in the coming years </li></ul><ul><li>LOH: will continue to shorten due to regional JIT moves and due to intermodal growth </li></ul><ul><li>Shipment sizes will grow to lessen fuel exposure by reducing shipment counts </li></ul>Source: Association of American Railroads (AAR). Measures millions of units. YTD 2008 through Dec. 20 is down -4.0% for TOFC and -3.7% for COFC. Combined intermodal is off -3.8%, while car-loadings are down -1.7%.
  30. 30. Trucking: A Quiet Revolution Is Under Way
  31. 31. My, How Trucking Has Changed! <ul><li>1998 TL Market </li></ul><ul><li>Flat rates, but 1990s had few cost pressures </li></ul><ul><li>Dedicated in infancy, but infinite payoffs </li></ul><ul><li>High driver turnover </li></ul><ul><li>Brokerage? [“Playoffs?”] </li></ul><ul><li>Seasonality and “averages” not emphasized </li></ul><ul><li>1-way trucking dominated </li></ul><ul><li>Regional a nice niche, but not the “main thing” </li></ul><ul><li>Asset light element through owner-operators </li></ul><ul><li>2009 TL Market </li></ul><ul><li>Volatile rates now under pressure; turnover improved but only because of poor economy </li></ul><ul><li>Constant cost pressures </li></ul><ul><li>Dedicated=> either “capacity insurance” or “customized solutions”; payoff is limited </li></ul><ul><li>Dedicated is costly with ORs often worse than OTR freight </li></ul><ul><li>Reluctance to embrace 4 TL growth markets </li></ul><ul><li>Asset light element through brokerage and intermodal </li></ul><ul><li>Keep trucks moving [in theory  ] </li></ul>Source: Stephens Inc. analysis.
  32. 32. The Game Has Changed But Many TL Carriers Don’t Realize That <ul><li>Only 4 Growth Markets for TL Carriers: </li></ul><ul><li>DSD (direct store deliveries) </li></ul><ul><li>Customized dedicated </li></ul><ul><li>Drayage </li></ul><ul><li>Short-haul regional (now 250 to 450 miles, not 500-600 miles) </li></ul><ul><li>Also, freight brokerage and logistics are a part of many carriers’ arsenals </li></ul><ul><li>1-way OTR trucking is shrinking </li></ul><ul><li>Being a big network carrier is costly and too seasonal </li></ul><ul><li>Peak season changes are forcing carriers to find steadier freight </li></ul><ul><li>HOS changes and fuel prices are shrinking LOHs </li></ul><ul><li>New regional sweet spot will be 250 to 450 miles </li></ul><ul><li>Intermodal is having success in the 650 to 900 mile lanes </li></ul><ul><li>Product size revolution (iPODs, big-screen TVs, etc.) diminishes loads </li></ul><ul><li>Packaging revolution is cutting loads </li></ul><ul><li>Supply chain reengineering reduces miles and supports the 4 markets, but most TL carriers don’t realize the magnitude of the changes </li></ul>Source: Stephens Inc. analysis of the marketplace.
  33. 33. Freight Brokerage, Once a Dirty Word Is Now an Integral Part of the Market Measures percentage of CHRW shipments from carriers with 100 or less tractors. Sources: CHRW 10-K reports for left chart; Transportation Intermediary Association (TIA) and Stephens Inc. estimates for right chart.
  34. 34. When Will Capacity Tilt Back in Favor of the Providers?
  35. 35. Tractor Growth Wasn’t Outrageous, So Why Is Capacity So Lousy ? <ul><li>Tractor growth has been below GDP 4 of the last 6 years </li></ul><ul><li>It has also been below Industrial Production growth 3 of the last 6 years </li></ul><ul><li>Trucking is much more cyclical than the broader economy </li></ul><ul><li>Deregulation’s 20-year window of growth has run its course </li></ul>Sources: A.C.T. Research and Stephens Inc. analysis. Population figures in millions.
  36. 36. Capacity Growth Was Slowest in Dry Van, But Excess Capacity Is the Worst-Why? 2003-2006 CAGR : 1.54%; cumulative 4.7% -2.9% 2003-2007 CAGR : 3.4%; cumulative: 14.3% 2003-2007 CAGR: 3.1%; cumulative: 13.1% Source: A.C.T Research.
  37. 37. Tank Trailer Capacity Trends Source: A.C.T. Research. 2004-2008 Growth: 1.7% CAGR; 6% Shrinkage from 1999-2004 trough 2003-2008 Growth: 2.6% CAGR; 3.3% cumulative shrinkage from 1999-2003 trough 13.6% total growth 6.9% total growth
  38. 38. 2009 Issues to Watch <ul><li>LTL: </li></ul><ul><li>Employee Free Choice Act (EFCA): new union threat </li></ul><ul><li>Roadway Yellow merger </li></ul><ul><li>Escalating price war </li></ul><ul><li>6-7 LTL carriers are vulnerable </li></ul><ul><li>Top 59 carriers control 90% of tonnage </li></ul><ul><li>Weak flatbed, industrial prod & int’l trade all related to LTL </li></ul><ul><li>Shippers turning 6 loads into 5… </li></ul><ul><li>Both TL & LTL: dramatic reworking of supply chains </li></ul><ul><li>TL: </li></ul><ul><li>Lots of shipper bids now </li></ul><ul><li>Contract rates down 2% to 4% </li></ul><ul><li>Deep consolidation this winter </li></ul><ul><li>Banks now foreclosing on weak carriers </li></ul><ul><li>Packaging revolution </li></ul><ul><li>Intermodal success in 650 to 900 mile lanes </li></ul><ul><li>Only 4 growth avenues: DSD, customized dedicated, short-haul regional (250-450 miles), drayage </li></ul><ul><li>Potential rewriting of the independent contractor laws </li></ul>Source: Stephens Inc. analysis.
  39. 39. Possible Elements of the Eventual Freight Recovery <ul><li>How Fast Will it </li></ul><ul><li>Come Back? </li></ul><ul><li>It could be 2011-2012 before “robust” is used again </li></ul><ul><li>Depends upon supply shakeout in 2009 </li></ul><ul><li>Other issues (EFCA) could crimp carrier economics and supply </li></ul><ul><li>Worst business environment in 1H’09 since early 1970s </li></ul><ul><li>2H’09: lousy economy, but interesting truck supply dynamics </li></ul><ul><li>2H’09: GDP turns positive, but with growth of 2% or less </li></ul><ul><li>Features of the Recovery? </li></ul><ul><li>Truck supply will get healthier ahead of freight demand </li></ul><ul><li>Rate increases will make 2004-2005 look reasonable </li></ul><ul><li>A bunch of negatives could hit all at once, e.g., higher energy costs, general inflation and much higher interest rates </li></ul><ul><li>Infrastructure and capital projects will lead, not the consumer </li></ul><ul><li>GDP in a “growth recession” (2% or less) until summer of 2010 </li></ul><ul><li>Lots of “fits and starts”…years of uninterrupted growth are unlikely </li></ul>“ Are we having fun yet?”
  40. 40. Closing Crystal Ball Thoughts <ul><li>Credit issues will still dominate 1H’09 ($11 trillion in mortgages); commercial loans, credit cards and auto loans will come home to roost. We’re a long way from done. </li></ul><ul><li>TL van excess supply will be 4% to 5% by February, but be in the midst of a sharp correction </li></ul><ul><li>LTL excess capacity could be as much as 7% to 10% at its worst point </li></ul><ul><li>Unemployment (9%?) might not peak until spring 2010 </li></ul><ul><li>Industrial production could drop 10% from peak to trough (-4% so far) </li></ul><ul><li>Unprecedented supply shake-out will occur as these pressure points are too great not to cause chaos </li></ul><ul><li>Get your supply chains ready now when the cost of change is manageable </li></ul>Sources: Stephens Inc. analysis and Wall Street Journal for loan figures.
  41. 41. <ul><li>Public companies mentioned: Celadon (CLDN-$8.53); Covenant Transport (CVTI-$2.00); C.H. Robinson (CHRW-$55.03); Heartland Express (HTLD-$15.76); J.B. Hunt (JBHT-$26.27); Knight Transport (KNX-$16.12); Landstar System, Inc. (LSTR-$38.43); Marten Transport (MRTN-$18.96); P.A.M. Transport (PTSI-$7.00); USA Truck (USAK-$13.79); Werner Enterprises (WERN-$17.34). Reflects closing prices from December 31, 2008. Schneider/SNI, Swift and U.S. Xpress/XPRSA are private. </li></ul><ul><li>REQUIRED DISCLOSURES </li></ul><ul><li>The research analyst principally responsible for preparation of this presentation has received compensation that is based on the firm’s overall revenue which includes investment banking revenue. </li></ul><ul><li>Rating Definitions: </li></ul><ul><li>OVERWEIGHT (O) - The stock's total return is expected to be greater than the total return of the company's industry sector, on a risk-adjusted basis, over the next 12 months. EQUAL-WEIGHT (E) - The stock's total return is expected to be equivalent to the total return of the company's industry sector, on a risk-adjusted basis, over the next 12 months. UNDERWEIGHT (U) - The stock's total return is expected to be less than the total return of the company's industry sector, on a risk-adjusted basis, over the next 12 months. VOLATILE (V) - The stock's price volatility is potentially higher than that of the company's industry sector. The company stock ratings may reflect the analyst's subjective assessment of risk factors that could impact the company's business. </li></ul><ul><li>Distribution of Stephens Inc.'s Ratings (as of 12/31/08) </li></ul><ul><li>% Investment Banking Clients </li></ul><ul><li>Rating % (Past 12 Months) </li></ul><ul><li>BUY 48.0 9 </li></ul><ul><li>HOLD 51.0 4 </li></ul><ul><li>SELL 1.0 0 </li></ul><ul><li>OTHER DISCLOSURES </li></ul><ul><li>This presentation has been prepared solely for informative purposes as of its stated date and is not a solicitation, or an offer, to buy or sell any security. It does not purport to be a complete description of the securities, markets or developments referred to in the presentation. Information included in the presentation was obtained from internal and external sources which we consider reliable, but we have not independently verified such information and do not guarantee that it is accurate or complete. Such information is believed to be accurate on the date of issuance of the presentation, and all expressions of opinion apply on the date of issuance of the presentation. No subsequent publication or distribution of this presentation shall mean or imply that any such information or opinion remains current at any time after the stated date of the presentation. We do not undertake to advise you of any changes in any such information or opinion. Additional information available upon request. </li></ul>© 2009 Stephens Inc. 111 Center Street Little Rock, AR 72201 501-377-2000 800-643-9691 Member NYSE, SIPC