Know what the analysts know

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U.S. Small Business Administration announced a fiscal year 2006 budget request of $593 million that provides a record $22 billion in loan authority for the agency’s flagship lending programs – $16.5 billion for the 7(a) loan guarantee program and $5.5 billion for the 504 Certified Development Company plan.

Internal Revenue Service has certified the model year 2005 Honda Insight, Honda Civic Hybrid and Honda Accord Hybrid as being eligible for the clean-fuel vehicle deduction. This certification means that taxpayers who purchase one of these hybrid vehicles new may claim a tax deduction of up to $2,000 on Form 1040. Under the recently signed Working Families Relief Act of 2004, the clean-burning fuel deduction is up to $2,000 for certified vehicles first put into service in 2004 and 2005. The deduction drops to $500 for vehicles placed in service in 2006, and no deduction is allowed thereafter.

Truckers B2B and International Truck and Engine Corp. struck a deal to allow the more than 16,500 TruckersB2B members to receive major fleet pricing on parts at International dealers. TruckersB2B members will be given access to the Diamond Advantage, an International purchasing card program that guarantees parts pricing at more than 900 locations across North America.

Universal Truckload Services, a primarily non-asset based provider of transportation services based in Warren, Mich., set a price of $20 per share for the initial public offering of 5,300,000 shares of common stock. The shares began trading last month on the NASDAQ market under the ticker symbol UACL.

Not that long ago, equity analysts must have felt like they were being punished when they were asked to track publicly traded trucking companies. Trucking lacks the excitement and exponential growth you see in sectors like entertainment, Internet technology or bio-medicine. And the long slump that began five years ago must have been even more depressing for analysts.

My, how things have changed. The trucking industry – especially the truckload segment – now draws more interest on Wall Street. On the whole, when investors are more interested in truckload stocks, that’s a nice sign that things are going much better financially.

Only a tiny fraction of truckload carriers are publicly held, so why should you care that equity analysts are paying more attention to this segment? Because by reviewing how Wall Street looks at public companies, privately held companies can learn about improving their own financial performance.

Consider Morgan Keegan, the most recent firm to initiate coverage of truckload carriers. In a January 2005 report, the firm noted that “over the last five years, the trucking industry has experienced a tremendous change brought about by a convergence of macroeconomic forces.”

The 10-year economic expansion of the 1990s that ended with the recession in 2000 slammed the brakes on truckload carriers, creating what many called “The Perfect Storm” in disastrous financial forces. Now the report states that many long-time executives describe “the last 12 months as the best operating environment in recent memory – maybe ever.”

Morgan Keegan goes on to assert that “less obvious than the improving economy has been the increased sophistication of the premium TL companies that operate within it.” Here are some lessons based on Morgan Keegan’s analysis that may help you improve your own financial position.

Be just-in-time favorites. Retailers love truckload carriers because they enable just-in-time inventory management. Shippers must be nimble in delivery across wide ranges of territory. The most profitable carriers are the ones who position themselves as partners in the JIT value chain.

Have discipline in capacity expansion. No matter how good your profits and cash flow get this next two years, be constrained in how rapidly you expand your fleets. The temptation is to reinvest our profits in a 25 percent or 50 percent expansion. Never forget that unbridled expansion of capacity is what created the last mess. Add capacity cautiously, keeping this nice supply/demand curve in better balance for good rates.

Capitalize on trends toward outsourcing. Increasingly, shippers are realizing that they simply cannot do all things well, and that includes running their own trucking fleets. So, outsourcing will continue. Watch it happen first in your own customers, then in others, and pick and choose carefully when you add a customer. Former fleet owners make better customers because they have a new appreciation for the vagaries of managing a fleet.

Grab part of the market share gains from LTL. Morgan Keegan’s report concludes that truckload is gaining at the expense of LTL. Plan for opportunities in this segment.

Use the windfall intelligently. Analysts predict double-digit growth in top-line sales and bottom-line profits for the big carriers, as well as significant free cash flow for 2005 and 2006. What can they do with the cash? They can pay down debt, pay dividends, repurchase stock or fund acquisitions. I add a fifth: Build a healthy “rainy-day reserve fund” for the next inevitable downturn.

Morgan Keegan’s report concludes, “We believe the truckload group has evolved into a healthier and more price-disciplined industry, which could very well translate into a period of prolonged prosperity and earnings growth.”

As for the privately held sector of the industry, your ability to share in that prosperity grows when you learn what the analysts are saying about publicly traded carriers.

“Truckload Industry” A Morgan Keegan Industry Report, January 11, 2005 by Daniel C. Moore and Chaz G. Jones.

“A View from Wall Street on Freight Transportation Capacity” by Chad A. Bruso CFA, October 12, 2004, Morgan Stanley North American Freight Transportation Equity Research Team.

Yahoo! Finance Industry Center: Trucking – Stocks, news, and investment information for publicly traded trucking companies.