There was a time when the Dow Jones Transportation Average, or DJTA, was seen as an economic predictor. The movement of goods across the continent and around the world was thought to be a precursor to what was coming for the broader economy. When shipments slipped and transportation stock prices dropped, a recession was on the horizon.
While it would be nice to have some clear recession predictors, this particular theory doesn’t do the job. As Fisher Investments wrote in an article published last year, the DJTA “has called 14 of the last 6 recessions” over the period from 1978 to 2022.
Despite this debunking, some people still pay close attention to the DJTA, looking for signs of economic stress. What they’re seeing right now won’t alarm them too much. It’s true that as of May 5, the DJTA was showing a one-year loss of 6.37 per cent. But it takes a 20-per-cent drop from the previous high to trigger a recession warning – and as Fisher showed, even that is dubious.
Moreover, the DJTA is up by 5.46 per cent so far this year. It’s actually doing much better than its more closely watched relative, the Dow Jones Industrial Average, which is ahead only 1.59 per cent over the same period.
So, no recession indicator here. But recent financial reports from two major trucking companies, one Canadian and the other American, suggest something is happening in the transportation sector that warrants attention. Here’s a closer look.
TFI International Inc.
Ticker: TFII-T
Background: This Montreal-based company is a North American leader in the transportation and logistics industry. It operates across Canada, the United States and Mexico, offering package and courier service, truckload and less-than-truckload haulage, logistics, and other services. It has more than 80 operating companies and almost 25,000 employees.
Performance: The stock hit an all-time high of $173.90 in February but has pulled back since, and is now trading at around the same level as in mid-December.
Recent developments: The recent drop in the share price can be traced directly to first-quarter results that were down from the year before and below analysts’ estimates.
Revenue for the quarter came in at US$1.85-billion, down from US$2.2-billion in the same quarter of 2022. Analysts had been looking for US$1.95-billion. Management said reduced freight volume in the latest quarter was a major contributor to the revenue downturn. All segments reported revenue declines.
Operating income was US$166.4-million, down from US$219.8-million the year before. Adjusted net income was US$116.5-million (US$1.33 per diluted share) compared with US$157.6-million (US$1.68 per share) in 2022.
Net cash flow from operating activities was US$232.1 million during the quarter, compared with US$137.7-million the prior year. The company said the 69-per-cent gain was due to an increase in non-cash working capital of US$187.1-million resulting from a decrease in sales, offset by an increase in income tax net payments of US$50.1-million related to prior year profits.
Acquisitions: TFII has a history of growing by acquisition. Last week, it announced it has agreed to acquire Siemens Transportation Group (STG) and has completed the acquisition of Hot Line Freight Systems. Terms of the transactions were not disclosed.
Founded in 1962, the majority of STG’s operations are LTL (Less-Than-Truckload), with a smaller portion of its business in truckload and flatbed. Based in Saskatoon, STG is a family-owned business providing a total supply chain solution spanning North America through its 15 terminals, including 11 in Canada and four in the U.S. The company generates annual revenues of approximately $150-million.
Hot Line is a specialized LTL provider based in Wisconsin. The company was founded in 1988 and has nearly 200 employees. It operates a network of 14 terminals (eight of which are owned) and generates approximately US$30-million in annual revenues.
Dividend and buybacks: Despite the decline in revenue and net income, the board of directors approved a 30-per-cent dividend increase, to US$0.35 per share (US$1.40 a year). The shares yield 1 per cent at the current price.
The company continues to buy back shares, spending US$6-million in the quarter.
Outlook: TFII reduced its 2023 guidance. Earnings per share are now projected to be US$7.00-$7.25, down from US$7.50-$7.60, compared with the consensus estimate of US$7.44. Free cash flow is expected to be US$700-million to $800-million, compared with more than US$800-million previously.
J.B. Hunt Transport
Ticker: JBHT-Q
Background: This company is in the freight transportation business, providing truckload, intermodal and contract carriage facilities to customers across a diverse set of industries in the U.S., Canada and Mexico. It specializes in handling imports through its “shore to door” service. Major customers include the Burlington Northern and Norfolk Southern railways.
Performance: The stock hit an all-time high of just over US$200 a share last summer but has recently traded in a narrow range around US$175 to US$180.
Recent developments: The company’s first quarter results looked remarkably similar to those of TFII. Revenues and earnings were down year-over-year for the same reason: volume decline.
Total operating revenue for the quarter was US$3.23-billion compared with US$3.49-billion for the first quarter of 2022, a decrease of 7 per cent.
Operating income decreased by 17 per cent to US$277.5-million versus US$334.3-million for the first quarter of 2022. The decline was primarily due to lower volumes and pressure on customer rate and cost recovery effort. Increases in professional driver wages, insurance-related costs, and equipment-related and maintenance expenses also contributed to the year-over-year decline in operating income.
Net earnings were US$197.8-million (US$1.89 per diluted share) versus first-quarter 2022 net earnings of US$243.3-million (US$2.29 per share). Those are significant declines.
Dividend and buybacks. As with TFII, J.B. Hunt increased its dividend despite the drop in revenue and profits. The 5-per-cent increase brings the quarterly payment to US$0.42 (US$1.68 per year) to yield 0.9 per cent.
The company repurchased approximately 183,000 shares of its common stock during the quarter, for a cost of approximately US$31-million. As of March 31, it had approximately US$520-million remaining under its share repurchase authorization. Actual shares outstanding on March 31 were about 103.6 million.
Outlook: The company did not revise its guidance for the year, but first quarter results suggest a sluggish period ahead.
The slowdowns in both these trucking companies may not be a signal of a looming recession, but I view them as an indication that the economy is weakening. To the point of recession? I see it as a toss-up.
Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to www.buildingwealth.ca/subscribe
Gordon Pape