Heavy Truck Data Show Signs Industry Is Poised to Recover

Net heavy truck orders have been above 20,000 since December, an indication trucking companies are doing more than just swapping out aging tractors for new ones.

Truckers need to buy about 20,000 vehicles a month just to replace older ones made by companies such as Navistar International Corp. (NAV) and Paccar Inc. (PCAR) North American net orders have averaged 21,619 a month since October and stayed above 20,000 since December. In February, net orders grew 3.4 percent to 22,816, the first such monthly gain in 14 months.

While still shy of a full-fledged rebound in the industry, investors see the early signs as reasons for optimism in an industry that is an economic bellwether. Carriers are moving more automobiles and home construction equipment, helping drive demand for Class 8 tractors, the backbone of interstate hauling.

“There is a lot of optimism out there,” Kristine Kubacki, a St. Louis-based analyst at Avondale Partners LLC. “It’s really geared toward a back-half recovery.”

Truck production has risen each of the past two years, it topped the typical replacement level of 250,000 in 2011 for the first time since 2006 after a fitful recovery from the recession-low of 120,000 in 2009.

New trucks are needed to replace aging models and to handle more goods as the economic recovery gains traction. The American Trucking Association’s truck tonnage index has risen 7.6 percent since October to the highest level since December 2011.

Class 8 Concern

Forecasters initially expected new orders of 285,000 last year. It ended up at 273,036, after a sluggish economy slowed demand in the second half of the year, said Karen Ubelhart, an analyst with Bloomberg Industries.

Despite the positive signs, Class 8 shipments will fall about 12 percent to 240,719 this year, industry consultant FTR Associates forecasts. Class 8 retail sales fell 18 percent in the first quarter from a year earlier, according to a Bloomberg Industries report.

Orders are running at an annualized rate of 250,000 to 260,000, FTR said. Orders tend to run higher early in the year as freight haulers buy new trucks in advance of peak shipping demand in the summer, Eric Starks, FTR’s president, said in an interview.

“I expect orders to start moving down as we get into the summer,” Starks said. “If they hold up, that’s a great thing, but I don’t expect them to, based on traditional behavior. We need to see monthly orders above 25,000 to be really optimistic, but we’re just not seeing that right now.”

Fleets tend to replace trucks after three to seven years of use, or about 500,000 miles, Starks said.

Cancellation Rate

The rate of canceled orders also is an important industry indicator. Class 8 order cancellations in North America dropped to 4.4 percent in March, the lowest level since December 2011, from 7.1 percent in February, according to FTR. A cancellation rate below 10 percent is a positive sign, Ubelhart said.

In addition, record stock prices and a housing-market rebound are offering reasons for optimism, she said.

New home sales in February capped the best two-month stretch in more than four years, the U.S. Commerce Department said March 26. Orders for durable goods climbed more than forecast in February, boosted by automobiles and a rebound in commercial aircraft. The Standard & Poor’s 500 Index has gained 11 percent this year and closed at a record of 1,593.37 (SPX) April 11.

“Freight started to improve and that ultimately is what’s going to move things,” Ubelhart said. “What drives freight? The economy. A couple of sectors finally turned. The stock market looks at orders and confidence is going to build if orders stay at this level.”

Navistar, Paccar

Navistar, based in Lisle, Illinois, has advanced 46 percent this year, while Paccar climbed 7.9 percent. Those increases compare with a 1 percent drop for Stuttgart, Germany-based Daimler AG (DAI), the maker of Mercedes-Benz luxury cars which also sells heavy trucks, and a 1.1 percent increase for Gothenburg, Sweden-based Volvo AB. (VOLVB) Columbus, Indiana-basedCummins Inc. (CMI), a maker of engines including for Class 8 trucks, slid 0.8 percent.

The U.S. economy may grow 2 percent this year, the median forecast of 76 economists surveyed by Bloomberg. The nation’s jobless rate fell to 7.6 percent in March.

“We’re cautiously optimistic,” Starks said. “We’re seeing some things that are really good and some things that are not so good.”

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