Morgan Stanley: Freight Cycle Favors Shippers Over Truckers

Barge capacity and rail capacity are set to expand the most according to a recent note from Morgan Stanley.

The bank focused on the current freight transportation cycle among other things. In the report, analyst William Greene points out that “When freight volumes reached prior peaks, there were usually 1-2 years of additional growth before volumes started to low/decline, a lead indicator of recessions”, meaning roughly a year to two years after a peak in US Freight Cycles we'd see a contraction.

Freight Cycles Source: Morgan Stanley (Click To Enlarge)

The capacity at which the various modes of transportation operate at are expected to remain tight with Barge and Rail expanding the most.

According to data from Bloomberg, truck-driver's are at shortage levels, truck loads have increased and the price-to-shipping (excluding fuel) has remained elevated since the 2009 dip. Baltic Dry Index is reversing and hardly anyone is chirping.

To make matters worse for trucking is the heavily utilized active truck population used to move freight. If truck shipment increase, truckers will need to put out money to train new drivers or push the legal limits of what the current drivers are able to do. Current Federal regulation makes it very difficult for drivers to earn money. A driver under US law is allowed a 14-hour work day limit and an 11-hour daily driving limit, according to the FMCSA.

Should a driver be forced to wait to unload/load at a yard, that wait time eats into hours and leads to further delays in delivers which is not optimal for outlets shipping goods. This means instead of hiring companies will be more likely to push the limits of the bodies already on the books resulting in tired drivers, a breach of Federal guidelines and the potential for fatal on-road accidents.

Truck Utilization & Truck Load Rates Source: Bloomberg (Click To Enlarge)

Sadly, much of the strength the truckers have shown may be lost once the push for winter holiday shipping starts running full steam ahead. As big box retailers fill their warehouses the indices tracking trucking have appreciated far beyond the rate of the broader S&P 500 Index.
Truck Indices Vs. Russell 2000 & S&P 500  Source: Bloomberg (Click To Enlarge)

As the truckers run out of momentum the rails will be there to pick up the slack. CAGR for rails far outstrips that of the other choices.

CAGR Source: Morgan Stanley (Click To Enlarge)

Companies in the rail business that may benefit from this transition in the transportation space include:

• Kirby Corp KEX
• Union Pacific UNP
• CSX Corp CSX
• Canadian Pacific CP

Truckers that may experience pain from the transportation transition include:

• Con-Way CNW
• Universal Truckload Services UACL
• J.B. Hunt JBHT
• Knight Transportation KNX

If you are unwilling to seek exposure to individual stocks the following ETFs may be appealing:

• iShares Dow Jones Transportation Average Index Fund IYT
• SPDR S&P Transportation ETF XTN
• Guggenheim Shipping Index Fund SEA