Last year was an extremely tumultuous year for many industries, including trucking. Although the COVID-19 pandemic affected much of the year, e-commerce has reached an all-time high. The trucking industry is expected to recover throughout 2021. According to FTR Transportation Intelligence, truck freight will increase by 6 percent in 2021.
Rebound from COVID-19 Pandemic
The strong economy that the U.S. enjoyed prior to the pandemic as well as demand for products indicate that the economy will rebound in 2021. Those that put off certain purchases or life decisions (such as marriage or purchasing a house) because of the pandemic will most likely feel more confident to move forward. While the beginning of the year will still have uncertainty regarding the virus, the general feeling is that the year will be positive for the economy, as well as for the trucking industry.
LTL Freight Increase
LTL specifically might benefit from the COVID-19 vaccine distribution, as well as from companies who held off on projects, equipment and technology upgrades, and infrastructure improvements last year due to the pandemic. A rebound in housing demand and inventory restocking could equate to a surge in the industrial economy, as soon as the first quarter.
Jon Chappell, an analyst at Evercore ISI, feels that LTL market share will grow this year: “Although LTL stocks are trading at all-time high multiples, a multitude of growth opportunities and the eventual recovery of the U.S. industrial economy provides a much longer cyclical runway for this segment, with a likely multiyear period of double-digit earnings growth.”
What About TL?
The need for food, home improvement items, and retail consumables in 2020 meant a lot of work for TL carriers. Some analysts feel that the inventory imbalances will right themselves within the first few months of the year, while others think TL will ride out the increase longer. Those that think that TL will have another strong year claim there is still demand rebound that needs to happen.
While spot rates have been higher than ever, the current capacity crunch might go beyond the 1st Quarter of 2021. Ravi Shanker of Morgan Stanley favors TL due to its low valuation multiples but believes LTL will be strong in 2021 as well: “TL’s are currently trading near trough multiples, which makes them the best value in all of freight transportation.” He states that at least 55% of the demand cycle is left to turn, which will not end until the restocking cycle ends or a recession hits.
Will There be Price Hikes?
As more of the economy reopens and manufacturing remains consistent, TL capacity will remain tight at least for the first few months of the new year. This means that pricing is going to be higher as companies restock their depleted inventories. Mr. Shanker believes that even if the spot rates have peaked, they will not fall as the catch-up phase continues. Pricing will drop once the completion of restocking takes place, which could take place within the next few months. If the industry experiences positive growth prices that truckers operate at will increase as well.
With the continued growth of e-commerce sales, earnings in the industry may exceed expectations. The current high valuation will continue for most of 2021. The first few months of the year will be busy as retailers restock and the COVID vaccine gives consumers confidence in purchasing behavior, which means earnings may be better for the 1st Quarter than expected.
Mr. Chappell favors more expensive LTL stocks over TL because of their multi-year earning potential. Improvements in the industry economy will create growth in the LTL segment. Mr. Shanker stated that TL earnings will be much higher on a go-forward basis, with the rise of restocking and constricted supply lifting TL earnings by about 50%. The peak might be a prolonged one with the opportunity to earn even more.
The growth of the e-commerce industry, which is so reliant on the trucking industry, will not slow down in this upcoming year. Improvements within the e-commerce industry will lead to improvements in the trucking industry as well. With about 70% of goods being shipped via truck, it is likely that 2021 will be a positive year for the industry.
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