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Transportation & Logistics Equity Research
Transportation & Logistics Equity Research
Economic Update & Transportation Market OutlookWhat Lies Ahead For The U.S. Economy & The Domestic Transportation Industry
Presentation to Ohio Trucking AssociationJohn G. Larkin, CFA | Managing Director | 214.706.9455 | [email protected]
John Engstrom | Associate Analyst | 214.706.9456 | [email protected]
Roxanna Islam | Associate Analyst | 214.706.9485 | [email protected]
Stifel does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.
Investors should consider this report as only a single factor in making their investment decision.
All relevant disclosures and certifications can be found on pages 43 – 48 of this report.
September 19, 2016
Transportation & Logistics Equity Research
Is Donald Fit to Be President?
2
Transportation & Logistics Equity Research
Is Hillary Fit To….Stand?
3
Transportation & Logistics Equity Research
What’s Certain is They Both Have Plenty of Mud to Throw at Each Other
4
Transportation & Logistics Equity Research
• The United States Continues to Chug Along at a 1.5% to 2% GDP Growth Rate
• Freight Market is Choppy at Best; Abysmal at Worst
• The Supply Side of the Market is Beginning to Contract and Right Size
• Some Trucking Segments Are Performing Better Than Others
• Who are the Players in Town?
• Conclusions: Gradual volume recovery and capacity contraction will combine to create the golden era for trucking
Discussion Agenda
5
Transportation & Logistics Equity Research
Source: U.S. Census Bureau 6
Transportation & The Economy—Signals & DriversConsumers drive freight, and population growth drives the consumer; global population still rising, but growth is slowing
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50E
Y/Y
Chan
ge In
Pop
ulat
ion
Grow
th
Abso
lute
Pop
ulat
ion
Leve
l (m
illio
ns)
Population (millions) Y/Y Population Growth
Transportation & Logistics Equity Research
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-5%
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10%
15%
20%
0
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Y/Y
Cha
nge
In P
rodu
ctiv
ity
Inde
xed
Prod
uctiv
ity (1
947
= 1)
Productivity Index Y/Y Productivity Growth
Chart displays seasonally adjusted annual dataSource: Bureau of Economic Analysis 7
Transportation & The Economy—Signals & DriversProductivity has been low and downward sloping since the beginning of the century
2Q16Productivity=-0.5%
Transportation & Logistics Equity Research
(6%)
(4%)
(2%)
0%
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6%
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¹
Y/Y
% C
hang
e
U.S.
GDP
(200
9 ch
aine
d $U
.S.,
Tn; S
AAR
)
8Chartdisplaysseasonallyadjustedannualdata;pinkshadedregionsdenoterecessionSource:BureauofEconomicAnalysis
Economics: Gross Domestic ProductThe “advance“ estimate of GDP for the second quarter of 2016 showed a 1.5% growth rate; slow but positive growth
Transportation & Logistics Equity Research
Average Real GDP Growth Rate Per Quarter in OfficeLast 11 Presidents (1953 – 2016)
Source:BureauofEconomicAnalysis 9
Transportation & Logistics Equity Research
¹ U6 Unemployment includes unemployed, discouraged workers, marginally attached, plus total employed part time for economic recessionsSource: U.S. Bureau of Labor Statistics; recessions shown in light blue 10
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Seas
onall
y Adj
uste
d Un
empl
oym
ent R
ate
U6 (seasonally adjusted) U3 (seasonally adjusted)
June. '164.7%Dec. '07
3.8%
Oct. '097.1%
June‘16U3(seasonallyadj):4.9%June‘16U6(seasonallyadj):9.6%
Transportation & The Economy—Signals & DriversBoth U6 and U3 unemployment¹ have come down, and U6 is now catching up to the rate of improvement seen in U3
Transportation & Logistics Equity Research
56%
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68%19
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Labo
r Fo
rce
Part
icip
atio
n Ra
te
PeakApr. 2000: 67.3%
Most RecentJune 2016: 62.7%
11.6 M Jobs Required to Keep Rate Constant
Source: U.S. Bureau of Labor Statistics 11
The Decline In Labor Force Participation Rate Is Partly Due To Retiring Baby Boomers, And Partly Due To Expanded Entitlement Programs
Transportation & The Economy—Signals & DriversThe decline in unemployment is largely due to a falling labor force participation rate
Transportation & Logistics Equity Research
12Chart displays seasonally adjusted retail sales, less gas, adjusted for inflation and population growth (1992 = 100) Source: U.S. Census Bureau; U.S. Department Of Labor - Bureau of Labor Statistics; Stifel indexing
Transportation & The Economy—Signals & DriversRetail Sales Ex. Gas and Adj. for Population Growth and Inflation Has Increased 2.6% Y/Y
(12%)
(7%)
(2%)
3%
8%
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hang
e
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thly
Ret
ail S
ales
(W
. Exc
lusi
ons
& A
djus
tmen
ts; $
U.S
., Billions)
Adj Retail Sales Y/Y% Change
Change from 2006 Peak: (0.7%)
Transportation & Logistics Equity Research
13Source: U.S. Census BureauISM Index values over 50 indicate industrial growth while ISM Index values below 50 indicate industrial contraction.
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ISM
Ind
ex V
alue
ISM Index Values:May 51.3, Jun 53.2, July 52.6
30-year Average: 52.1
Transportation & The Economy—Signals & DriversThe ISM Has Weakened in July But Still Sits Slightly Above the 30-Year Average
Transportation & Logistics Equity Research
Economic IndicatorsTransportation & The Economy—Signals & DriversAre Elevated Retail Inventory/Sales the New Norm In Supply Chain Management?
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I/S R
atio
Reta
il In
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orie
s ($
bn)
Retail Inventories Inventory/Sales Ratio
May-16 I/S Ratio: 1.50
Source: U.S. Census Bureau
Transportation & Logistics Equity Research
• The United States Continues to Chug Along at a 1.5% to 2% GDP Growth Rate
• Freight Market is Choppy at Best; Abysmal at Worst
• The Supply Side of the Market is Beginning to Contract and Right Size
• Some Trucking Segments Are Performing Better Than Others
• Who are the Players in Town?
• Conclusions: Gradual volume recovery and capacity contraction will combine to create the golden era for trucking
Discussion Agenda
15
Transportation & Logistics Equity Research
Trucking Dominates The LandscapeThe trucking sector dwarfs other modes in scale, and truckload (TL) accounts for the bulk of trucking in the U.S.
16
DollarMarketSize:$877bnU.S.FreightTransportationMarket,2014
TonnageMarketSize:14.6bn TonsU.S.FreightTransportationMarket,2014
Source:AmericanTruckingAssociations,StifelestimatesEstimatesarebasedon2014marketdata.
Truckload4,765.8
33%
LTL72.8 1%
Private Truck5,044.3
35%
Rail Carload1,943.7
13%
Rail Intermodal
191.2 1%
Water849.5 6% Pipeline
1,528.5 10%
Air Express12.9 0%
Ground Parcel152.3 1%
Truckload319.1 35%
LTL19.2 2%Private
Truck324.6 36%
Rail Carload63.4 7%
Rail Intermodal
18.3 2%
Water11.8 1%
Pipeline48.4 6%
Air Express29.8 3% Ground
Parcel75.0 8%
Transportation & Logistics Equity Research
Source:FTRAssociates,OnIndex2000=100 17
Transportation & The Economy Rail intermodal loadings have outperformed since the Great Recession
70
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170TruckLoadings Heavy-DutyTruckTonnage RailIntermodalLoadings U.S.RailCarloads
FORECAST
Transportation & Logistics Equity Research
Source:FTRAssociates,OnIndexJanuary2003=100;StifelRTMforecast 18
Transportation & The Economy Freight rates have continued on an upward trajectory since the Great Recession
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270Truckload(w/oFSC) LTL(w/oFSC) Intermodal/Rail+Dray(w/oFSC) RailroadRTM
FORECAST
ExcludesFSCImpact
IncludesFSCImpact
Transportation & Logistics Equity Research
19Source:ITSTrans4Cast;MDIindexvaluesbelow7indicatethatthemarketfavorsbrokers/shippersfromaratenegotiationstandpoint.MDIindexvaluesabove7indicatethatthemarketfavorsthetrucker
Market Demand IndexThe ITS Market Demand Index was weak throughout 2015 and but a capacity crunch is reversing that trend now during 2016
1
5
9
13
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25
29
33
37
Dec-09
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Jul-10
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Jul-16
ITS
Mar
ket D
eman
d In
dex
Transportation & Logistics Equity Research
20Source:AmericanTruckingAssociations
Truckload VolumesTL volumes exhibited weak growth throughout 2015 and have continued to struggle throughout 2016
(25%)
(20%)
(15%)
(10%)
(5%)
0%
5%
10%
15%
20%
25%
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Y/Y
% C
hang
e
Truc
kloa
d Lo
ads
Inde
x (S
easo
nally
Adj
uste
d)
Total Loads (Adj) Y/Y % Change
June -4.1% from May; -3.2% Y/Y
Relative to Recession +56.7%
Transportation & Logistics Equity Research
• The United States Continues to Chug Along at a 1.5% to 2% GDP Growth Rate
• Freight Market is Choppy at Best; Abysmal at Worst
• The Supply Side of the Market is Beginning to Contract and Right Size
• Some Trucking Segments Are Performing Better Than Others
• Who are the Players in Town?
• Conclusions: Gradual volume recovery and capacity contraction will combine to create the golden era for trucking
Discussion Agenda
21
Transportation & Logistics Equity Research
Source:FTRTransportationIntelligence,StifelAnalysis 22
1,500,000
1,550,000
1,600,000
1,650,000
1,700,000
1,750,000
1,800,000
1,850,000
1,900,000
1,950,000
2,000,000
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Num
ber o
f Driv
ers
Driver Labor Shortage & Surplus
-240,000 Shortage Projected
Driver Demand
Driver Supply
Efforts to counterbalance a driver shortage need to look at increasing the driver pool to keep up with growing demand, not simply preventing it from shrinking
Compliance, Safety, Accountability (CSA)
Hours Of Service (HOS)
Drug & Alcohol Database
Speed Limiters
Electronic Log Devices (ELDs)
Driver ShortageForward looking projections show a gap in the growth of driver supply and demand
Transportation & Logistics Equity Research
Source:FTRIntelligence;2016.3to2019.4areestimates 23
Chronic Labor Shortage in the U.S.The cavalcade of capacity stripping federal regulations marches on to make things worse
Transportation & Logistics Equity Research
Focus On Safety By Insurance Companies & ShippersInsurance premiums have doubled and even tripled in some cases
• Many insurance companies have decided not to underwrite policies fortruckers who don’t have ELD’s implemented
• Some insurance companies have even outright left the market: AIG, Zurich
• Truckers have indicated that insurance rates are up dramatically, some from$5,000/truck to $15,000
• Some brokers have indicated that only truckers with a proven safety recordand all of the regulatory required technology must already be fullyimplemented prior to considering writing a policy
Source:Stifel 24
Transportation & Logistics Equity Research
Spot Market Insanity Flushing Out Small Carriers120 Trucking companies with an average fleet size of 17 halted operations in 2Q16; the number was only 70 in 2Q15
Source:AvondalePartners 25
0
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3Q15
1Q16
Tota
l Num
ber
of T
ruck
s Re
mov
ed
Transportation & Logistics Equity Research
Source:FTRIntelligence;2016.3to2019.4areestimates 26
Capacity Utilization Expected to Spike: With increasing regulations, defaults, and a constrained driver pool growing demand a tightening capacity is expected to increase utilization
Transportation & Logistics Equity Research
Some Big Carriers Pruning CapacityYear-Over-Year Change in Tractor Fleet from 2Q15 to 2Q16
0 5,000 10,000 15,000 20,000 25,000
CGI
CVTI
JBHT
KNX
MRTN
PTSI
SWFT
USAK
WERN
#REF!
2Q15
2Q16
Flat
-5.2%
+6.9%
-4.0%
-2.5%
+5.4%
-6.7%
2Q16NotYetReported
Source:CompanydataTotaltractorsincludingowneroperatorsunlessotherwisenoted;WERN,JBHT– Totaltractorsatquarterend 27
+5.9%
Transportation & Logistics Equity Research
28Source: State of Logistics Reports, U.S. Bureau of Economic Analysis
United States Logistics Cost as a Function of GDP
Efficiency Plateau: After post-deregulation improvements, incremental efficiency in logistics has been difficult to attain. Very little support from changes in size and weight restrictions.
7%
8%
9%
10%
11%
12%
13%
14%
15%
16%
17%
300
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700
900
1,100
1,300
1,500
1981
1983
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2005
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2009
2011
2013
2015
Logi
stic
s Co
st a
s a
% o
f U.S
. GDP
U.S.
Log
istic
s Co
st ($
U.S
., bi
llion
s)
US Logistics Cost ($ bns) Cost as a % of GDP
Transportation & Logistics Equity Research
Infrastructure Investment Relative to historical spend, current U.S. infrastructure investment is down one full percentage point
29Source:McKinseyGlobalInstituteAnalysis
United States Comparative Infrastructure SpendingGap between historical spend and estimated future spending need, % of GDP
$177BillionShortfall
Transportation & Logistics Equity Research
Intermodal Works Only In Long Haul Density MarketsTrucking competes with rail mainly in the 500 – 1,000 mile range, but current trucking pricing may be changing that
Source:FederalRailroadAdministrationNationalRailPlan,September2010ProgressReport;ATATruckingTrends2013,OliverWyman 30
Modal Shift Projection
Transportation & Logistics Equity Research
• The United States Continues to Chug Along at a 1.5% to 2% GDP Growth Rate
• Freight Market is Choppy at Best; Abysmal at Worst
• The Supply Side of the Market is Beginning to Contract and Right Size
• Some Trucking Segments Are Performing Better Than Others
• Who are the Players in Town?
• Conclusions: Gradual volume recovery and capacity contraction will combine to create the golden era for trucking
Discussion Agenda
31
Transportation & Logistics Equity Research
Sector Overview: Dry Van Truckload (TL)Dry Van Truckload market rates have been pummeled
Source: FTR, American Trucking Associations (ATA) 32
Dry Van Truckload Volume and Pricing
Large Fleets Have Decreased Y/Y
• Spot market pricing not sustainable
• Contract pricing pressure surprisingly intense
• Fleets downsizing
• Capacity sapping regulations are rapidly approaching
• Insurance companies and shippers may do more to enforce safety compliance than law enforcement
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TL L
oad/
Flee
t Siz
e In
dex
(Feb
ruar
y 20
05=1
00)
Large TL Fleet Size Index Total TL Loads Index
0
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Load
ings
Rates
TL Dry Van (w/o FSC) Dry Van Trailer Loadings (000s, SA)
FTRest.
Transportation & Logistics Equity Research
Sector Overview: Less-than-Truckload (LTL)Volumes tepid but pricing stable; flat is the new up
Source: Institute for Supply Management, National Bureau of Economic Research, American Trucking Associations; grey-shaded regions in top chart signify recessionary periods 33
• The last year and half has been tough for LTL volumes, thanks to 1) weak domestic energy/industrial sectors, 2) strong dollar-driven softness in manufacturing exports, 3) average shipment size declines
• While soft volumes tend to weigh on pricing, due to greater industry concentration than TL, rising costs, and some hard lessons in the last downturn, the pricing environment remains rational
• E-commerce and shortening supply chains could be positive for LTLs, but real margin growth necessitates more volume to drive density whether through economic growth or competitor failures
• If TL sector tightens significantly, LTL will be happy to handle the overflow
0
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JAN 2017
Loadings
Rates
LTL (w/o FSC) FTR Heavy-Duty Truck Tonnage (000s, SA)
FTRest.
LTL Trucking Pricing and Truck Tonnage
(50%)
(25%)
0%
25%
50%
75%
Aug-
99Au
g-00
Aug-
01Au
g-02
Aug-
03Au
g-04
Aug-
05Au
g-06
Aug-
07Au
g-08
Aug-
09Au
g-10
Aug-
11Au
g-12
Aug-
13Au
g-14
Aug-
15Au
g-16
Y/Y
% C
hang
e
ISM Index ATA LTL-SA Tonnage Index
Y/Y ISM Generally Negative for Last ~18mos.
Transportation & Logistics Equity Research
Sector Overview: Reefer Truckload (TL)Reefer Truckload market rates have been pummeled
Source: FTR, American Trucking Associations (ATA) 34
Reefer Truckload Volume and Pricing
Large Fleets Have Decreased Y/Y
• Broadly speaking the refrigerated market is expected to continue to grow with the need for fresh(er) food
• In 2015 some carriers struggled with end markets dealing with the bird flu filtering through end markets
• Locus of production moving east
• Intermodal experiment still alive
• Rate pressure has been acute
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TL L
oad/
Flee
t Siz
e In
dex
(Feb
ruar
y 20
05=1
00)
Large TL Fleet Size Index Total TL Loads Index
05001,0001,5002,0002,5003,0003,5004,0004,5005,000
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JAN
2003
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2004
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2017
Load
ings
Rates
TL Reefer (w/o FSC) Reefer Trailer Loadings (000s, SA)
FTRest.
Transportation & Logistics Equity Research
Sector Overview: Flatbed Truckload (TL)Flatbed Truckload market rates have been pummeled
Source: FTR, American Trucking Associations (ATA) 35
Flatbed Truckload Volume and Pricing
Large Fleets Have Decreased Y/Y
• Heavy haul freight struggling currently through soft industrial economy and low commodity prices
• US implementation of steel tariffs on China has only shown null to modest benefit to domestic steel volumes
• Building materials were ok up until recently
• Ag and construction equipment soft
• Drilling rigs and pipe very weak
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TL L
oad/
Flee
t Siz
e In
dex
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ruar
y 20
05=1
00)
Large TL Fleet Size Index Total TL Loads Index
0
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2009
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2010
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2017
Load
ings
Rates
TL Platform (w/o FSC) Flatbed Trailer Loadings (000s, SA)
FTRest.
Transportation & Logistics Equity Research
Sector Overview: Tank Truckload (TL)Tank Truckload market rates have been pummeled
Source: FTR, American Trucking Associations (ATA) 36
Tank Truckload Volume and Pricing
Large Fleets Have Decreased Y/Y
• The North American Energy industry in midst of a lull and some estimates show that construction is currently backlogged for 10 years
• Petrochemical industry investment is booming with 2017 being the first year for new capacity coming on stream
• There are 243 U.S. chemical production projects expected between 2010 and 2023
• Plastic pellet business is solid
• Frac sand is soft
• Grain is strong
80
85
90
95
100
105
110
Dec
'06
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'16
TL L
oad/
Flee
t Siz
e In
dex
(Feb
ruar
y 20
05=1
00)
Large TL Fleet Size Index Total TL Loads Index
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
9095
100105110115120125130135140
JAN
2003
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2017
Load
ings
Rates
TL Tank (w/o FSC) Bulk Trailer/Straight Truck Loadings (000s, SA)
FTRest.
Transportation & Logistics Equity Research
• The United States Continues to Chug Along at a 1.5% to 2% GDP Growth Rate
• Freight Market is Choppy at Best; Abysmal at Worst
• The Supply Side of the Market is Beginning to Contract and Right Size
• Some Trucking Segments Are Performing Better Than Others
• Who are the Players in Town?
• Conclusions: Gradual volume recovery and capacity contraction will combine to create the golden era for trucking
Discussion Agenda
37
Transportation & Logistics Equity Research
Source:CHRobinson 38
Truckload Market Fragmentation & CompetitionTransportation status quo: fragmented with very few large players
90.5%
6.8% 2.8%
6orFewer 7to20 Morethan20
U.S. Motor Carriers Operating a Given Number of Power Units
AddLTLFragmentation
Transportation & Logistics Equity Research
Truckload/Dedicated Market Size and Share 2015 Ranking of Top 25 U.S. & Canadian Carriers (2014 Data)
Total201
4Re
venu
es
(USD
$M
illions)
Source:TransportTopics;MarketSizeIncludesPrivateTruckloadandTruckloadCVTIrevenueincludesStarTransportation;USAKrevenueisTruckingrevenueonly;PTSIrevenueistotalrevenue
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
U.S.&CanadianCarriersRankedFromLargesttoSmallest
Public Company Revenue Private Company Revenue
39
Truckload Market Fragmentation & CompetitionTransportation status quo: fragmented
Transportation & Logistics Equity Research
Competitive LandscapeThe top-5 LTL carriers comprise nearly 55% of the industry
Source:Companydata,measuredby2014revenue;Stifelestimates 40
Note: LTL Industry Is 12% As Large As The TL Industry In Terms of Annual Freight Bill
FedEx Freight$6,093 16%
YRC Worldwide
$5,069 14%
Con-way Freight$3,632 10%
UPS Freight$2,633
7%
Old Dominion
$2,788 7%
Other$17,285
46%
FedEx Freight YRC Worldwide Con-way FreightUPS Freight Old Dominion Other
Transportation & Logistics Equity Research
• The United States Continues to Chug Along at a 1.5% to 2% GDP Growth Rate
• Freight Market is Choppy at Best; Abysmal at Worst
• The Supply Side of the Market is Beginning to Contract and Right Size
• Some Trucking Segments Are Performing Better Than Others
• Who are the Players in Town?
• Conclusions: Gradual volume recovery and capacity contraction will combine to create the golden era for trucking
Discussion Agenda
41
Transportation & Logistics Equity Research
42
ConclusionsThe sluggish U.S. economy should continue to pull the freight market into a tightening position, especially given current regs
Source: Stifel
§ Slow, steady growth most likely scenario (recession risk, however, whilelessened of late, still remains)
§ Longer term, a tight TL supply and demand dynamic is still probable
§ All other logistics sectors benefit from tight TL supply and demand§ Shipper and carrier collaboration is largely untapped reservoir for
incremental productivity§ 3PL’s likely to continue helping shippers
Ø Drive down total logistics costsØ Source capacityØ Reduce overheadØ Optimize supply chain designØ Winning 3PL's and winning/larger TL carriers will make peace
Transportation & Logistics Equity Research
Important Disclosures & Certifications
I, John G. Larkin, certify that the views expressed in this research report accurately reflect my personal views about the subject securities or issuers; and I, John G. Larkin, certify that no part of my compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this research report.
Our European Policy for Managing Research Conflicts of Interest is available at www.stifel.com.
The equity research analyst(s) responsible for the preparation of this report receive(s) compensation based on various factors, including Stifel’s overall revenue, which includes investment banking revenue.
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BUY – We expect a total return of greater than 10% over the next 12 months with total return equal to the percentage price change plus dividend yield.
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SELL – We expect a total return below -5% over the next 12 months with total return equal to the percentage price change plus dividend yield.
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Transportation & Logistics Equity Research
Important Disclosures & Certifications(continued)
Occasionally, we use the ancillary rating of SUSPENDED (SU) to indicate a long-term suspension in rating and/or target price, and/or coverage due to applicable regulations or Stifel policies. SUSPENDED indicates the analyst is unable to determine a “reasonable basis” for rating/target price or estimates due to lack of publicly available information or the inability to quantify the publicly available information provided by the company and it is unknown when the outlook will be clarified. SUSPENDED may also be used when an analyst has left the firm.
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Transportation & Logistics Equity Research
The information contained herein has been prepared from sources believed to be reliable but is not guaranteed by us and is not a complete summary or statement of all available data, nor is it considered an offer to buy or sell any securities referred to herein. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation or needs of individual investors. Employees of Stifel, or its affiliates may, at times, release written or oral commentary, technical analysis or trading strategies that differ from the opinions expressed within. Past performance should not and cannot be viewed as an indicator of future performance.
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Important Disclosures & Certifications(continued)
Transportation & Logistics Equity Research
Important Disclosures & Certifications(continued)Registration of non-US Analysts: Any non-US research analyst employed by SNEL contributing to this report is not registered/qualified as a research analyst with FINRA and is not an associated person of the US broker-dealer and therefore many not be subject to FINRA Rule 2241 or NYSE Rule 472 restrictions on communications with a subject company, public appearances, and trading securities held by a research analyst account.
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Transportation & Logistics Equity Research
Important Disclosures & Certifications(continued)
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Transportation & Logistics Equity Research
Important Disclosures & Certifications(continued)
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