Transport companies are often viewed as a leading economic indicator because they haul raw materials and finished goods demanded by various industries. In particular, truckers carry a large bulk of the finished goods in the United States.
Stocks in the transport stocks turned in one of the strongest performances in 2004, bolstered by the US economic expansion and surge in global trade, as well as tight capacity.
In the last month, however, investors have stepped on the brakes as higher oil prices weigh on shippers and indications of slowing freight demand create wariness.
The Dow Jones Trucking index, which rose nearly 45% in 2004, has fallen nine percent in the last month.
A drop in oil prices or a less inflationary climate could help lift trucking stocks. Otherwise, freight demand trends in April will serve as an indicator of second-quarter activity and guide stocks, said Morgan Keegan analyst Dan Moore.
"During company conference calls, we'll hear management talk about April," Moore said. "That as much as anything will dictate the direction of the stocks."
Some analysts expect long-haul, or truckload, carriers to feel the pain first because they compete more directly with the growing intermodal businesses of railroads.
Although railroads have raised prices, they are still more fuel-efficient - and their services are less expensive than truckers. As fuel costs rise, shippers may opt to go to the cheaper alternative.
While earnings at shared-load, or less-than-truckload, carriers may show less pain than at their long-haul counterparts, there are indications that they, too, are seeing slower demand, Moore said.
The first quarter is seasonally slow for transports as they come off robust activity from the year-end peak season. A year ago, the first quarter was atypically strong amid a surge in economic activity and trade, but some analysts said trends may be returning to more usual patterns.
The American Trucking Association's tonnage index fell 2.2% in February after a five percent increase in January.
Long-haul truckers U.S. Xpress Enterprises Inc. and Covenant Transport Inc., which raised prices last year, have warned of a weaker first quarter, citing slower freight demand.
U.S. Xpress also said it did not see demand pick up in the last couple weeks of the quarter, as it did in the past, and noted a slowdown in the West Coast, a major gateway for goods from Asia.
That has raised concerns about whether the softness is company-specific, limited to parts of the industry or indications of broader economic weakness.
"Although overall economic indicators appear stable, slight cracks are sprouting, such as March's weaker-than-expected consumer confidence," Merrill Lynch analyst Ken Hoexter wrote in a research note.
U.S. Xpress' comments call for "a cautious outlook for the upcoming earnings season," he added.
But some investors still are upbeat about parts of the transport sector, such as less-than-truckloads, citing Yellow Roadway Corp.'s recent deal to buy USF Corp. and the creation of larger companies with more economies of scale.
"As big shippers find it advantageous to deal with one or two transport companies vs. eight or 10, the big ones are in better competitive position," said Glenn Fogel, portfolio manager at American Century Investment Management's Vista Fund which owns Yellow and some rail stocks. (Reuters)
