s the industry that powers everything from wholesale consumer goods to homebuilding, transportation and logistics are the backbone of the economy. The sector is made up of three subsectors; air freight, maring, and road and rail. The first two are key for international transport, whereas the third is our focus moving forward.

Rail is a minuscule part of total freight transportation in the U.S., contributing to just 3% of the overall freight movement in value and 9% in weight. Rail movement has shrunk in the last several decades and road has continued to be the dominant mode for freight movement contributing to 64% in value and 70% in weight.

Freight movement by trucks (in both value and weight terms) forms the bulk of the movements among all modes of transportation.

transportation subsector trailing enterprise values to ebitdasource: bloomberg

Public market comps are very segmented across transportation modals. This is largely a factor of the value of freight moved, the distance it moves, and the size of the subsector itself.

The future value of freight moved is expected to increase faster than the weight, rising from $882 per ton in 2007 to $1,377 per ton in 2040. This pattern fits trends in industrialization and manufacturing, demonstrating a move toward more sophisticated and expensive finished goods or raw commodities.

The largest percentage of goods movement occurs close to their sources. Approximately half of all goods are moved within 100 miles between origin and destination. Less than 10% of goods are moved more than 1,000 miles from their origin.

Most goods are moved short distances (less than 250 miles), accounting for 55.7% of the value and 16.7% of the ton-miles for all shipments within the United States. Shipments transported more than 250 miles represent less than 30% of tonnage.

Modal shares of freight vary by distance. Trucks carry the largest shares by value, tons, and ton-miles for shipments moving 750 or fewer miles, while rail is the dominant mode by tons and ton-miles for shipments moved from 750 to 2,000 miles. Critically, road and rail should be in focus for US investors because it is resilient to geopolitical turmoil and backed up canals. There are always goods to move.

In early 2022 the truckload market continued to see strong performance in the United States on the back of a favorable rate environment and elevated utilization. Fleet size was down 5.4% from its peak in Q2 2019, but carriers raising rates, improving driver quality of life, expanding driver schools, and overall recruiting is beginning to translate into sequential improvements. Overall, the chances of capacity rebounding are limited given the lack of qualified drivers available and new equipment production.

trucking subsector revenue per employee, peer analysissource: bloomberg

For example, Walmart announced a driver pay increase and launched a training program to give employees who work in its distribution and fulfillment centers a chance to become certified truck drivers. The pay raise for its 12,000 truck drivers makes the starting range for new drivers between $95,000 and $110,000. The move comes as the pandemic has made trucker shortages more severe as demand to move freight reaches historic highs. The American Trucking Associations, a large industry trade group, estimates that the nation is short about 80,000 drivers.

Shippers are also increasingly choosing trucks over railroads because of supply chain bottlenecks and a need for speed, pushing more freight onto the country’s highways. Tens of thousands of container loads that would normally be moving on railroads are being carried by trucks.

Demand to move freight more than 500 miles stays strong as companies are desperate to keep inventories stocked. Intermodal shipping has lost over 1% of its market share to long-haul trucking since the beginning of the pandemic. Some executives in the industry believe that the railroads could handle an incremental 20,000 ‚Äď 30,000 loads per week. This has created strong investment opportunities in individual names. The key is to select companies with strong management teams, relationships with goods suppliers, and high efficiency through revenue per employee. More on this, throughout the week.


Aug 31, 2022
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