Commercial Diesel Truck Sales: "It's Cheaper to Keep Her"

Recent truck sales figures indicate that big truck manufacturing is on the up-tick. What does this mean to investors? Should you go long, short, hold or sell? Selling now could mean locking in some handsome gains year-to-date. Maybe you should go long knowing that eventually truckers will reach the point where they will be forced to replace their aging trucks, driving huge revenue growth and attractive profits for manufacturers. On the other hand, truck makers' stock prices may be overheated year-to-date since manufacturer stocks are all ahead of other industrials. It could be that the market will not come back for another couple of years. There is a possibility of a double dip recession followed by high inflation. In that case, stock prices will fall. In this last scenario, surely there will be more consolidation in the global truck manufacturing space.

Some good news for truckers is the recent slight improvement in credit availability to finance new truck purchases. According to the September Credit Managers' Index (CMI) from the National Association of Credit Management (NACM), U.S. credit conditions and performance are improving at an increasing rate. The index reading for combined indicators rose to 49.8 in September, up from 48.1 in August and 48 in July (with readings above 50 signaling growth). The latest reading represented a 1.7 percent increase in September, significantly higher than the August growth of 0.1 percent and the peak level for the past 11 months.

The NACM report attributes these gains to some dramatic improvements in dollar collections, as well as reductions in accounts placed for collection and dollar amount beyond terms.  Throughout much of last year, many companies attempting to weather the downturn fell behind or chose to delay bill payments in order to maintain an operational level of cash flow. But more businesses are now beginning to catch up with their accounts and becoming current with creditors and lenders.

There has been some movement in sales and some positive movement in terms of credit availability, but up to this point there hadn't really been positive news regarding payment on that debt. Now all three factors seem to be moving in a generally positive direction.

Truck sales have improved recently along with improved availability of credit. The average truck fleet age is more than 15 years and growing. Some trucking companies want to replace some of their old rolling stock ahead of the 2010 EPA exhaust emission standard hitting January 1st. This new standard drives up the cost of new Class 7-9 diesel trucks up to $10,000 per unit. 

Truckers are wise to hold off on purchases until the threat of a double dip recession passes. They would like to buy new since they have seen their maintenance expenses rise by double digit percentages as their fleet ages. But fixing up the old trucks is more cost effective than buying new especially with the cost of new trucks going up by 10% or more the first of the year. Yes, it may be “cheaper to keep her.”

All truck manufacturing stocks are overpriced currently and are ahead of the market. The question is, “How far ahead?” The market may improve modestly next year in North America but decline again in Western Europe. These are the world’s two biggest commercial truck markets. 

Investors must gain an understanding of how the market for heavy duty trucks will behave in these unchartered economic times.   The question that investors in companies like Scania, MANN, Volvo, Daimler, PACCAR, Hino and Navistar must ask is, “Should I buy, short, hold or fold?” This is not a one-size-fits-all industry and investors must understand the strengths and weaknesses of each of the manufactures before making investment decisions since, when the economic tide rises, it may not lift all boats.