On June 26th 2015, TranzAct's Mike Regan participated in a conference call with John Larkin of Stifel Capital Markets to provide insights about the transportation industry. These are insights you need to hear to understand where transportation rates are headed.
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Key Takeaways of the Stifel Conference Call
Provided by Stifel Capital Markets
We had the pleasure of hosting a conference call featuring transportation industry guru extraordinaire, Mike Regan. Mr. Regan was co-founder of TranzAct Technologies in 1984 and, by 2000, had grown the business into the largest privately held freight payment company in the United States. His company assists many large shippers with freight capacity sourcing projects and has presided over the award of billions of dollars of freight hauling contracts.
Just last September, Mr. Regan was awarded the Council for Supply Chain Management Professionals Distinguished Service Award. This award is awarded to one supply chain professional each year. The winner has been judged by his peers in the industry to have made significant contributions to the advancement of the supply chain management profession. He joins industry legends such as Don Bowersox, Bud LaLonde, Cliff Lynch, and Ken Ackerman as a winner of this prestigious award. Mr. Regan discussed the looming capacity crisis that will soon hamstring the freight shipper community, if plans are not put in place today to cope with this “predictable surprise”.
The following bullets represent our key, high level takeaways from his formal remarks and the Q&A session that followed:
Key Takeaways:
- Freight rates are poised to increase 15%-20% or more over the next several years as capacity growth will lag the growth in demand. The driver shortage will combine with the implementation of a series of federal safety regulations to either reduce the pool of compliant drivers or to reduce the productivity of compliant drivers.
- Start planning today for the impending capacity crunch. Don’t believe that the modest reprieve the industry has experienced in the 1H15 will continue long term. Ultimately, those that wait for the capacity shortage to become obvious will pay extraordinarily high rates in the spot market to obtain sufficient capacity.
- There is a cascading effect that will impact all modes during this time of short supply. With many shippers looking to benefit with the cost saving associated with rail intermodal solutions, rail intermodal capacity is likely to be taxed. Shippers will then look back to the truckload industry, which will have trouble fielding all the freight, and overflow freight will be offered to less-than-truckload carriers who will soon run out of capacity themselves.
- The federal government is not coming to the rescue. Instead, regulations are sapping industry capacity, fueling the coming capacity crisis. Productivity enhancing ideas like the legalizing of longer and heavier trucking combinations are not being seriously addressed, much less implemented.
- Investment Conclusion: With investor sentiment having turned so negative in the past few months, several compelling opportunities are available presently to harness the coming shortage of adequate capacity. Swift Transportation (SWFT, Buy, $21.57), Knight Transportation (KNX, Buy, $25.68), and Celadon Group (CGI, Buy, $20.86) are all well positioned to ultimately enhance the profitability of their operations in 2016, and particularly in 2017 and 2018, as scarce capacity will enable these sophisticated carriers to allocate capacity to those customers in lanes where rates can be maximized (on a round trip basis) and empty miles can be minimized.
Asset-light freight brokers may struggle to find capacity as the coming rules and regulations will impact small carriers (many of whom make their capacity available to brokers), as some small carriers will no longer be able to survive the onslaught of regulations. XPO Logistics (XPO, Buy, $43.88) has heavily diversified away from truck brokerage and should be fine as this capacity shortage scenario unfolds. Less-than-truckload carriers are also well positioned to benefit from the coming capacity shortage as mentioned above. Right now, our partner David Ross is recommending SAIA (SAIA, Buy, $37.74), Conway (CNW, Buy, $35.92), and Old Dominion Freight Line (ODFL, Buy, $67.07) as carriers that are well positioned, but also attractively valued.
Prices are as of the close, July 24, 2015.
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