Morgan Stanley cut its predictions on Thursday, just before earnings season began. The company thinks that the trucking industry will reach its “peak pain” in the second quarter of 2023. After that, the industry will start to get better.
Ravi Shanker, Morgan Stanley transportation equities analyst, stated that most companies reported during the beginning of the quarter that there was minimal spring seasonal pickup. Although there was some improvement towards the end of the quarter, it was likely insufficient to salvage the quarter.
Knight-Swift Announces Drop in Combined Operating Profit Due to Soft Demand
After Knight-Swift made a bad pre-announcement on Wednesday, he cut his expectations for the company and the carriers he follows by more than 10%.
In a news release to mark the end of the U.S. Xpress purchase, Knight-Swift said that its combined operating profit would drop by 1,100 to 1,200 basis points year over year (y/y) in the third quarter. This was because of “persistently soft demand,” which affected sales and prices.
Morgan Stanley Analyst Sees Improvement in Data and Potential for Restocking-Driven Upcycle
Shanker observed that there has been some improvement in the data recently. He mentioned that if this trend continues in the next few weeks and during the earnings season in late July, it is likely that management teams will express more confidence in supporting a restocking-driven upcycle in the second half of the year. However, the exact extent of this bounce is still to be determined.
He thinks that the second quarter shows “the storm before the calm,” since spot prices hadn’t really gone up and negative contract rates agreed to in the 2023 bid season were applied to a larger number of carrier users. Even though cutting costs by a lot did slow the profit drop, Shanker said, “This quarter is not going to be pretty.”
He thought that shares of TL companies might go up if management teams gave a good outlook for the rest of the year. If the June and July volume numbers aren’t good, investors may be less forgiving of less-than-truckload names, which are priced for perfection (up 43% year to date) and may not be as forgiving.
Shanker believes that LTL stocks may have the most to lose this earnings season.
Morgan Stanley Analyst Predicts Difficult Next Three Months for 3PLs
Even though carriers’ intra-quarter reports from a month ago were all over the place, most said that volume trends were going up from one month to the next. Also, y/y volume comparisons were much easier in the summer and fourth quarter than they were last year, when the industry saw big drops.
| Company: | Sequential Q2 tonnage growth rates (implied) |
| ArcBest | 7.4% |
| Forward Air | 6.9% |
| Old Dominion | -2.3% |
| Saia | 8.6% |
| XPO | 2.7% |
| Yellow | 0.0% |
Shanker says that the next three months will be hard for 3PLs, and if spot rates keep going up, the second half of the year will be even worse. If spot prices were higher than the rates in their contracts, which tend to go down from year to year, brokers would have to pay more for capacity. Even when the industry rebounds from the spike in air and water rates during the pandemic, which caused income to go up, 3PLs with shipping operations will still feel the effects.
Shanker thinks that 18 of the 21 companies he keeps an eye on will not make as much money as expected.
Final Wording
In conclusion, Morgan Stanley thinks that the trucking industry will reach its “peak pain” in the second quarter of 2023. This is also when the cycle is expected to reach its lowest point. Ravi Shanker, the company’s transportation stocks expert, says that “the storm before the calm” is most likely what the second quarter will show. He also talked about recent improvements in the data and said that if the trend continues over the next couple of weeks and into the middle of earnings season (the end of July), management teams will likely “sound more confident in underwriting a 2H restocking-driven upcycle, though the magnitude of the bounce may still be TBD.” Overall, even though Q2 was a hard time for trucking companies, it looks like there is hope for the future. Follow Lading Logistics for daily news on Trucking and Logistics industry.
