The Class 8 Frenzy

Recent months have seen U.S. Class 8 truck orders hit all-time records. The current cycle is arguably the strongest ever, and is being driven by a combination of structural and cyclical factors. For a number of reasons, this cycle is different from the one that came before it, and there are potentially nuanced ways to play this theme.

Class 8 truck orders –that is, trucks with a weight of 33,001 pounds or above –totalled 53.1k in August, an all-time record, and up an incredible 150% year-over-year. This also followed a record order month in July of 52.6k orders, which is even more impressive when considering the fact that Q3 is typically the seasonally weakest order period of the year. Class 8 orders are running at an annual rate of 532.6k units, an enormous gain over the current annual record of approximately 390k orders set in 2004.

So what is driving this order frenzy, and what does it mean for the companies in the industry?

Truck driver shortage

As I have previously written about, there is a severe truck driver shortage in the U.S. At its core, there simply aren’t enough new truck drivers entering the industry to replace the truck drivers that are leaving, with many retiring and leaving the industry for good. I recently visited California and heard from a number of trucking companies; the following comment on the truck driver shortage was illuminating:

“We’ve put through numerous driver initiatives to create competitive advantages for drivers to select and stay at Werner in a very tight labor market for drivers…So there are a lot of big issues that make competing for the driver and retaining best drivers very difficult. Aging driver demographics are working against us. There are more drivers retiring in our industry than there are new entrants coming in. The unemployment rate is low at nearly 4%. The time away from home is a big challenge in recruiting people to this industry” – John J. Steele, CFO of Werner Enterprises.

Carriers have had to compete aggressively to get drivers to join their fleets, and promising drivers a brand-spanking new truck is one of the bargaining chips being used to incentivize drivers to join. This has contributed to the increased demand for new trucks, but the somewhat of a frenzy that we’ve seen in Class 8 truck orders has also been driven by tight truck production capacity and the fear of missing out.

Ordering ahead to reserve build slots

It’s possible that many trucking companies and dealers are putting in orders just so that they can get a production slot with the truck OEMs. One sell-side analyst from Credit Suisse estimated that over 90% of the orders in June of this year were for 2019 delivery, an indication of the industry ordering ahead as production capacity has tightened significantly.

I recently spoke to the management team of a truck manufacturer who said that they are seeing strong orders from dealers, the majority of which are sold orders. However, a portion of the OEM’s order books are speculative orders that are driven by an understanding that production capacity is tight, and that new trucks are needed in order to attract new drivers and to meet growing freight demand.

Large fleets don’t want to risk being locked out of getting new trucks if all their competitors secure the limited build slots with truck manufacturers. It is for this reason, combined with the negligible consequences of deferring or cancelling an order, that truck orders have soared. Consider that if you cancel a truck order 10-12 weeks out, there is only a nuisance fee of $500 per truck, a tiny amount compared to the more than $100k sticker price of a new truck.

The risk for truck manufacturers is that the record Class 8 truck orders might prove illusory. There is a danger for truck OEMs that not all of these orders convert into deliveries, particularly given the difficulty in finding drivers to fill the seats of these new trucks. Looking back at the last trucking up-cycle in 2014, strong orders were being driven by dealer incentives; higher cancellation rates began to materialize 9 to 12 months later.

We continue to analyze this fascinating industry to find ways to make money from this theme.

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George Hadjia is a Research Analyst with Montaka Global Investments. To learn more about Montaka, please call +612 7202 0100.

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