Improving freight demand could signal brighter days ahead for transportation companies -- if they can persuade retailers and manufacturers to pay more for shipping.
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Trucking and logistics firms should give their outlooks for the rest of the year as they begin to report earnings next week, with investors watching for signs of a rebound from a two-year slump in freight rates.
J.B. Hunt Transport Services Inc., one of the largest U.S. freight carriers, is expected to announce its second-quarter earnings Monday. C.H. Robinson Worldwide Inc., the biggest freight brokerage, reports Thursday. Several large trucking companies report the following week.
The results come as bountiful produce harvests and increased shipping demand tied to Amazon.com Inc.'s Prime Day sales promotion have helped boost rates on the spot truckload market, where companies book freight transportation on a daily basis. The average rate for dry vans, the most common type of tractor-trailer used to ship consumer goods, rose 11% in June compared with the same month last year, according to DAT Solutions LLC, an online freight marketplace.
The recent lift has fueled hopes for a broader freight recovery, and transportation firms will be watching closely this month to see whether the upswing holds. Spot rates can be a leading indicator for contract rates, the long-term prices transportation firms negotiate with shippers. Big carriers do the majority of their business via contract, and those prices have remained stubbornly low even as freight volumes rose.
"July is the canary in the coal mine for the industry," said Cowen & Co. analyst Jason Seidl.
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Overcapacity in the truckload sector, where customers book entire trailers to carry their cargo, has weighed on trucking companies since late 2015. Fleets that expanded during a previous boom found themselves with too many trucks chasing a smaller pool of freight. The glut has also tamped down rates in the intermodal business of moving container cargo over long distances by rail and truck.
At J.B. Hunt, the largest U.S. intermodal carrier, second-quarter earnings are expected to hold steady at $0.92 per share, according to a consensus of analysts via FactSet.
"Moving into 2018, you got to believe that at some point truckload rates may improve, even if just slightly," Darren Field, J.B. Hunt's senior vice president for the intermodal division, said at an industry conference last month. "It offers an opportunity for intermodal."
Over the past 18 months large truckload operators have trimmed their fleets to reduce capacity and gain more leverage with shippers. Demand is also picking back up from manufacturers and retailers that cut back on shipping last year as they worked through excess inventory levels.
Still, it could be months before improvements in the spot market translate into broader pricing gains for most carriers, which often negotiate freight contracts in the first half of the year.
Rates may start to climb this year, and catch up in 2018, said Dave Yeager, chief executive of Hub Group Inc., an intermodal and brokerage provider that expanded its trucking portfolio this year with the $306 million acquisition of Estenson Logistics, which provides dedicated trucking services for shippers that have outsourced their private fleet operations. "It does appear that pricing is headed upward, versus that horrific downward trend we saw for quite some time," Mr. Yeager said in an interview.
The surging spot market could shrink profits for freight brokers, which use it to source most of their trucking capacity. Citi recently lowered its second-quarter and 2017 estimates for C.H. Robinson.
Even as some truckload carriers report freight demand is picking back up, analysts expect earnings for their most recent quarters to lag behind compared with the same period in 2016 because contract rates remain low.
Better results are forecast for less-than-truckload carriers, which consolidate small shipments into trailer loads for multiple customers and have benefited from the rise in online shopping. Last month Old Dominion Freight Line Inc., Saia Inc. and YRC Worldwide Inc. reported increased freight volumes during the second quarter.