Inventory Replenishment Could Spark Freight Rebound Sooner Than Expected

Inventory Replenishment Could Spark Freight Rebound Sooner Than Expected

Morgan Stanley analyst Ravi Shanker believes an uptick in freight volumes could occur in the next few months as companies look to restock depleted inventory levels. In a research note on Monday, Shanker laid out a bullish case for a potential turnaround in the freight transportation industry.

Prolonged Destocking Creates Unsustainable Imbalance

Shanker’s thesis centers on the need for companies across industries to replenish inventories after spending much of 2022 drawing down overstocked merchandise. As Shanker explained, “Shippers continue to remain on reorder ‘strike’ while they wait for stronger signals or more favorable conditions on macro but while destocking at the same time.”

This combination of companies hesitating new orders while continuing to sell off existing stock has created an imbalance, Shanker argued. He believes the pressure to restart ordering and refill shelves and warehouses will override concerns about broader economic conditions in the near future.

According to a proprietary Morgan Stanley survey, inventory destocking continued in Q4 2022 “at a historic pace” even as inventory levels dropped closer to normal. With stock levels now largely right-sized, the survey found only 5% of shippers intend to build inventories in the months ahead. However, Shanker believes record-high levels of destocking are unsustainable.

Shipper Survey Points to Inflection in the First Half of 2023

The Morgan Stanley survey polls shippers on their expectations for freight volumes, rates, and other metrics. According to Shanker, it has proven relatively accurate at predicting cycle turns in the past.

While the latest survey showed shippers’ volume expectations turned positive year-over-year for truckload and intermodal, their rate outlook remains downbeat. Specifically, 15% of shippers forecast truckload rates falling more than 4% this year.

Shanker believes this pessimism sets up favorable comparisons, especially in the back half of 2023. His base case calls for relatively flat overall truckload rates this year when fuel surcharges are excluded. More importantly, he thinks the pressure to restock inventories will override shippers’ current caution.

Carriers Positioned to Benefit from Volume Rebound

An upturn in volumes would provide a catalyst for transportation stocks, especially truckload carriers. Shanker sees the risk-reward setup becoming more constructive for this group as the year progresses.

Among truckload companies, he prefers Knight-Swift Transportation and TFI International as top investment ideas. The analyst also believes less-than-truckload carriers may participate in a broader rebound but sees less upside for that group after last year’s stock gains.

Notably, the two preferred truckload picks both have major acquisitions in progress that will significantly expand their capacity and footprint once integrated. Knight-Swift acquired U.S. Xpress in a $1.35 billion deal last year, while TFI is purchasing Daseke for $1.1 billion.

Overall, Shanker stressed his view diverges from the industry’s consensus outlook: “We are more bullish as we believe the pressure to restock is likely to be more intense than carriers or shippers believe.” Barring a significant economic deterioration, inventory rebuilding could drive a volume rebound far sooner than most anticipate.

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