Analysts Raise Carrier Earnings Forecasts as LTL Leads Upcycle
Deutsche Bank expects median EPS growth of 15% in Q2 and 21% in Q3 as LTL carriers restore margins and truckload capacity tightens.
Are LTL carriers finally recovering from the multiyear downturn?
Analysts raised earnings expectations for truckload and less-than-truckload carriers heading into the second-quarter earnings season, with LTL operators leading the charge. Deutsche Bank forecasts median earnings-per-share growth of 15% year-over-year for the second quarter and 21% for the third quarter across its transportation coverage. That marks a sharp improvement from the 3% increase the group recorded in the first quarter and the 7% decline logged in the fourth quarter.
Richa Harnain, Deutsche Bank analyst, raised her LTL forecasts roughly 8% on average and now sits above consensus expectations. "We expect less-than-truckload (LTL) operators to lead the way, with our official earnings forecasts for the group 5% above consensus on average," Harnain said. "Even that may prove conservative, given how these names have historically performed in the early stages of cyclical upturns."
What's driving the LTL recovery?
Less-than-truckload demand is starting to reflect six consecutive months of positive manufacturing data. Intraquarter updates provided by public carriers showed tonnage turned positive for the group in May on a two-year-stacked comparison following an extended downturn. Tightness across the truckload market and heavier shipments from the industrial complex are shaping LTL demand.
Large national carriers continue to garner mid-single-digit contractual rate increases despite a glut of excess door capacity. General rate increases are occurring at an accelerated pace and LTL fuel surcharge programs become more profitable as fuel prices increase. Higher pricing and cost takeouts, including AI-led optimization initiatives, should allow carriers to restore margins.
Truckload capacity tightens as spot rates climb
The truckload market is showing signs of tightness. Current tender rejections, a proxy for truck capacity, show carriers are rejecting more loads. National truckload spot rates remain significantly higher on a year-over-year comparison in July. Dry van spot rates hit $2.14 per mile in May, up 31% year-over-year, while volumes fell.
A tighter capacity backdrop has produced better pricing. Higher rates across leaner cost structures should generate more pronounced earnings growth moving forward. Harnain is "forecasting mainly beats" across her transportation coverage.
Valuation concerns emerge after sharp stock gains
Harnain noted that the "sharp stock outperformance" has valuation multiples stretched compared to historical levels. Some trucking stocks are up 50% year-to-date. However, she believes improving industry fundamentals and carriers' ability to generate significant cash flows to fund dividends and stock buybacks warrant ownership.
Ravi Shanker, Morgan Stanley analyst, also flagged valuation as a concern in his second-quarter preview. "We believe stocks have priced in the easy early-cycle gains, with record valuations increasing the risk of greater volatility ahead, making us more selective," Shanker said this week in a note to clients.
He raised EPS estimates by 5% on average for the transportation companies he follows, but downgraded his industry view to "in-line" from "attractive." Shanker downgraded Old Dominion Freight Line to "equal-weight" and both J.B. Hunt Transport Services and Landstar System to "underweight." All three stocks are up over 40% year-to-date.
Analysts still expect record upcycle ahead
Despite valuation concerns, Shanker still expects the space to witness "the biggest upcycle ever" in the coming quarters. "We are more convinced than ever on the strength of the upcycle, though the debate now moves on to how high the record upcycle will peak and how structural the gains are," Shanker said. "However, it would be naive to ignore significant stock moves and relative valuation dislocations across the group."
He continues to favor the truckload carriers, select LTL operators, and the Canadian railroads. The second-quarter earnings season begins on Wednesday when J.B. Hunt reports results after the market closes.
Carriers exiting a multiyear downturn are still comping to trough results in some cases. The change comes as the sector moves into the early stages of an upcycle. Intermodal volume jumped 10.9% in mid-June as rising truckload rates push long-haul freight to rail, further tightening truck capacity.
