Truck Stocks will Profit from Natural Gas
Jonathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
While other groups in the transportation sector have recovered, such as railroad stocks, the trucking industry is still lagging behind. Navistar International (NYSE: NAV) is down over 56% for the last 52 weeks of market action. Over the same period, PACCAR Inc, (NASDAQ: PCAR), is off more than 24%. The Cass Freight Index, which measures freight volume and expenditures for trucking, is down by 1.3%.
It is due to a choice of fuels: trains run on coal, which has plunged in cost, and trucks still use petroleum products, which have not fallen as much. While the exchange traded fund for coal, Market Vectors Coal (NYSEMKT: KOL), is down 27.47% for 2012; the exchange traded fund for oil, United States Oil (NYSEMKT: USO), is off 13.09%, less than half as much.
But it is the collapsing price of natural gas that could put the trucking industry back into high gear.
Due to abundant new supplies from fracking, the exchange traded fund for natural gas, United States Natural Gas (NYSEMKT: UNG), is down almost 60% for the last 52 weeks of market action. By the basic economic principle of substitution, more businesses are moving to utilize natural gas. According to an article in Investors's Business Daily, Pilot Flying J is installing natural-gas pumps at 150 of its fueling stations over the next years.
Natural gas production is growing in the United States by 4-5% annually. Obviously the demand is not keeping up, or the price would not have fallen so much. As a result, more and more companies are adapting to natural gas. United Parcel Service is adding 48 more trucks to its natural gas fleet. “It’s the only long-term viable option to diesel,’’ said Michael G. Britt Sr., director of maintenance and engineering at United Parcel Service.
The Big Brown of United Parcel Service is not alone. Kenworth, the truck manufacturer associated with PACCAR, reports several orders in the last few weeks for trucks powered by liquefied natural gas. Peterbilt also reported buying 50 liquefied natural gas vehicles from a company in British Columbia. The ports of Los Angeles and Long Beach have a fleet of about 1,000 trucks that run on liquefied natural gas. Westport Innovation has booked orders for 230 liquefied natural gas engines for the next 12 months.
Trucking companies like Navistar International and PACCAR are in a very vulnerable condition. The global economy is still weak, so there is less demand for vehicles and parts. But, if Federal Reserve Chairman Ben Bernanke initiates another round of quantitative easing or similar stimulus measure, the price of oil will skyrocket, as it did in the 2010-2011 period of Quantitative Easing 2. As for the percentage of costs for trucks emanating from fuel, according to one article: "In real terms, at least 50 percent of truck-generated income is going right back into the fuel tanks. Factor in maintenance, and that bill can approach 75 percent."
Natural gas can alleviate that burden for truckers and raise profits, over time. According to some observers, natural gas has destroyed the coal and alternative energy sectors in the United States due to its low cost. Coal is surviving only due to the demand from abroad. Many clean tech companies are going out-of-business. Despite all the hopes and promises and billions and billions in funding from the private and public sector, green tech has not produced any viable substitute to fossil fuels. The booming production of natural gas, which holds down the price of coal and oil, makes that even more unlikely in the future.
About the trucking industry during the past, specifically the years of The Great Recession, US Express spokeperson Greg Thomson stated that, “There were thousands of small companies and hundreds of mid-sized companies and a couple of big businesses that went out of business during the recession." Both Navistar International and PACCAR survived The Great Recession, although many other truckers failed. But while railroad companies such as Union Pacific, CSX and Norfolk Southern have double digit profit margins, for Navistar International it is only 9.53% and for PACAAR it is only 6.52%...and that is with petroleum prices falling in recent months. Greatly reducing the fuel cost burden through expanded usage of natural gas will have higher profits rolling for the trucking industry in the future.
jonathanyates13 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend PACCAR Inc. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.