New regulations that cap work hours and mandate rest breaks for commercial truck drivers go into effect July 1. Called hours-of-service or HOS rules, they’re expected to aggravate problems stemming from a driver shortage that has already hampered the trucking industry. One potential outcome is increased movement by shippers from truck to intermodal transport. A handful of companies stand to reap significant benefits if that takes place.
Among other provisions, the new rules require drivers to take 30-minute rest breaks every eight hours and work no more than 70 hours every seven days (the previous limit was 82). Implemented by the Federal Motor Carrier Safety Administration, they’re designed to cut accidents associated with fatigue. Opponents call them onerous and predict they will instead cut industry productivity by 2%-5%.
They also feel that in combination with the 200,000 openings for long-haul drivers now unfilled nationwide, so-called truckload or TL carriers will become less attractive to shippers. Beneficiaries will be increasingly aggressive competitors in the intermodal segment, which hauls freight largely by rail and uses short-haul trucks to deliver it to and pick it up from local terminals.
Intermodals already on the rise
A decade ago, intermodal transport beat long-haul trucking only on freight movements of 1,500 miles or more. Recent improvements cut that distance to well under 1,000 miles, and even 500-750 miles on certain lanes. Nonetheless, at present intermodal represents just 3% of the total North American freight spend and remains a niche part of most shipping budgets.
Railroads have been seeking ways to change that and supplement declining revenue from coal shipments. A slew of improvements — particularly larger terminals in underserved areas — have already given intermodal a big boost. Volume in 2012 rose nearly 6% from the year before to its highest level ever, and so far in 2013 is up nearly 4.5% from this point last year. It’s also increasing nearly twice as fast as overall railroad carloads.
With truckload carriers facing new obstacles, truck capacity should become even tighter and costly in the second half of 2013. This will likely spark additional movement to intermodal, even for shorter hauls.
Here are 5 companies that could benefit
1. Norfolk Southern Corp. (NYSE:NSC) — The fourth largest U.S. railroad has been one of the most aggressive in trying to offset coal revenue declines, and it shows. In 2012 its intermodal revenue increased 5% to $2.2 billion, and now represents about 20% of the company’s total.
A big part of Norfolk Southern Corp. (NYSE:NSC)’s strategy is to build new rail yards where more cargo containers can be transferred directly between their trains and their partner’s trucks. Central to this is the $2.5 billion Crescent Corridor project, which enhances its north-south shipping and distribution capabilities with 2,500 miles of upgraded tracks between New Jersey and Louisiana and new or upgraded rail yards in Birmingham, Memphis, Charlotte and Greencastle, Pa.
2. CSX Corporation (NYSE:CSX) — While slightly behind Norfolk Southern in the sector, this rail carrier saw an even larger boost in intermodal revenue last year, growing 11% to $1.6 billion. It is also expanding its Charlotte facility, and planning an even bigger-impact project in Baltimore.
In that city, CSX Corporation (NYSE:CSX) is replacing its existing rail yard with one better positioned to handle increased cargo traffic expected through the Port of Baltimore once the Panama Canal expansion is completed in 2015. Containers can also be double stacked on trains leaving the city from this new facility, something not possible at its old one. A labyrinth of federal and state hoops are involved in the process because of the site’s location, but approvals are expected.
3. J.B. Hunt Transport Services, Inc. (NASDAQ:JBHT) — This container fleet operator was one of the first in its industry to stake a position in intermodal, entering the segment in 1989. It made it a major part of operations since, and intermodal accounted for 62% of total revenue and 77% of total operating income in the first quarter of 2013. Both figures are up compared to the same period in 2012, and the company now captures nearly one-third of all domestic intermodal revenue.
To remain dominant, Hunt added more containers over the past year than any competitor. With tighter capacity in the truck market, this resulted in 19% Eastern network growth and 10% transcontinental growth during the first three months of the year. It expects these conditions to continue going forward.
4. Swift Transportation Co (NYSE:SWFT) — Concentrating on short- to medium-haul lanes between terminals and dedicated customer locations, this $3.3 billion truckload giant has increasingly focused during the past 10 years on intermodal transport across the U.S., Mexico and Canada. In the second half of 2012, it added about 2,000 containers to pursue even more intermodal opportunities.
As a result, Swift Transportation Co (NYSE:SWFT) saw intermodal revenue grow by more than 50% last year over 2011. And the company plans to build on that going forward. At an investor day conference in mid-May, executives said their current 2% share of total domestic load counts provided “opportunities for continued double-digit growth.”
5. Hub Group Inc (NASDAQ:HUBG) — This 41-year-old company describes itself as an asset-light provider of freight transportation management, which is a tongue-twisting way to say it outsources integrated transportation services including intermodal to a wide range of shippers. Also known as a 3PL, or third-party logistics provider, the firm lays claim to about 18% of all domestic intermodal revenue, second only to J.B. Hunt Transport Services, Inc. (NASDAQ:JBHT).
In the first quarter of 2013, Hub Group Inc (NASDAQ:HUBG) reported income rose 12% and earnings per share climbed 14% compared to the prior year. Intermodal revenue increased 6% to $427 million during the quarter and executives said they expect EPS in 2013 between $2.00-$2.15 — compared to $1.83 in 2012 and $1.65 in 2011.
The bottom line
Changes are coming quickly that will further make truckload transport more challenging and expensive. These top intermodal providers are positioned well to gain from the truckers’ loss.
The article New Trucking Rules Could Boost Intermodal Segment originally appeared on Fool.com and is written by Howard Rothman.
Howard Rothman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Howard is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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