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Who’s Going to Move All Those Durable Goods?

By Linda McDonough on November 1, 2017

A mini-boom is building up in the economy. The back-to-back quarters of strong gross domestic product growth witnessed this month should support continued strength into the fourth quarter and is good news for one industry whose job is to move all that domestic product from seller to buyer.

Since the 2009 recession, the economy has crawled out on a bumpy road. Consumer spending and industrial production numbers jump forward one quarter just to reverse the next. It’s been nearly impossible to find any metric growing faster than one-half of one percent, and when the economy sees one month of robust growth, half that gain is taken away the next period.

So it was with restrained excitement that analysts celebrated the 3% gross domestic product announced last week. This report is the first time in three years that the U.S. economy has grown more than 3% for two quarters in a row.

Hands down it’s the best six-month performance we’ve seen, especially when considering Hurricanes Harvey and Irma that dampened growth.

The strong GDP numbers joined robust data on orders for durable goods. The definition of durable goods includes items expected to last more than three years. This category captures everything from toasters to transportation equipment and rose 2.2% in September.

Corporations are starting to order more goods and build up the inventory that they’ve been working down for the past year.

This demand is great news for the trucking industry. All of the components needed to make those durable goods, and then the finished product must be moved from factory to warehouse to distributor to the showroom floor.

The hurricanes, which disrupted shipments for several days, will add an incremental layer of demand on to the truckers. All of the materials needed to help rebuild needs to be transported from other regions of the country.

Less is More

The less than truckload (LTL in industry parlance) is the group I like best. Less than truckload shippers mix smaller orders from multiple customers in the same truck to extract the most profit from every trip.

The packages are typically lighter than those for a full truckload. Due to their flexibility in filling trucks from a larger number of customers, LTL shippers tend to be less cyclical than their giant counterparts which must fill an entire truckload with product from one or two customers.

The industry suffered through some difficult times in 2015 and early 2016 due to overcapacity. Since then trucking companies have been hesitant to add more trucks to their fleets only to be stuck with empty cargo if the economy cools.

Less capacity means better pricing but shippers are being rational with their pricing, a smart strategy to keep customer orders flowing. Results from several LTL shippers illustrate the sturdy economics underlying the industry right now.

Two for the Road

Old Dominion Freight (NSDQ: ODFL) and SAIA Inc. (NSDQ: SAIA) both reported the trifecta for shippers; an increase in a number of shipments, an increase in the weight per shipment and an increase in price. CEOs of both companies commented that the pricing environment is solid but rational.

Lest investors fear that this bump in demand would disappear, both companies reported that the growth in shipments remained strong from month to month. Sometimes when reporting a quarterly number, a company sees all the demand lump into one month; an indicator that business may not be as reliable as thought.

Both SAIA Inc. and Old Dominion added the incrementally bullish news that momentum in shipments continued in October. Old Dominion noted that month-to-date revenue for October is up an impressive 17.5%. SAIA Inc. sees a smaller but still impressive high single-digit increase.

Adam N. Satterfield, Chief Financial Officer at Old Dominion Freight Line, Inc., confirmed that demand remains bullish:

“And certainly, most of our business is tied to industrial end markets. We’re seeing good growth in the Midwestern regions, really through the middle of the country, I think. And that would be supportive of the industrial growth that we’re seeing. And when we look and sort of break down the revenue, I think it’s coming pretty balanced from industrial and retail-related type of counts but probably geared a little bit more to industrial than anything. And I think when you look at some of the macroeconomic numbers, that would be supported.”

Subscribers of my Profit Catalyst Alert service just booked gains in bullish options on SAIA Inc. Old Dominion Freight of 51% and 79% respectively in less than two months. I still like these stocks and am looking for strategic entry points for my next trades.

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