The Trucking Trends of Q1 2020
Fast and fluid will be the terms that will define what all industries but specifically the trucking industry in Canada experienced during the beginning of 2020. From rail blockades to oil price decline and finally COVID-19, the trucking industry has faced unique threats and opportunities that may offer flexible and strategic companies an opportunity to grow their market share.
Rail blockades which started in early January of 2020 and continued into March disrupted much of Canada’s highly integrated supply chain; with rail transportation taking the brunt of the impact. As trucking tends to be a less fuel-efficient mode of transport for long-distance shipping compared to railways, many companies in the past have leaned towards railways as their choice of transport. But as blockades continued to cripple railway logistics, trucking companies were presented with a rare chance to prove the strengths of flexibility over cost and receive contracts that normally would be awarded to railways.
To add to that, the decrease in the price levels of oil has created an interesting market. However, decreasing oil prices are a double-edged sword. On one side, low oil prices mean cheaper fuel for truckers which allows earnings to be more stable and the industry to become more cost-competitive against railways. Yet on the other side, low fuel costs mean companies are prevented from generating revenue from fuel surcharges which can contribute significantly to the bottom line. Moreover, those companies that service much of Western Canada’s oil industry may experience downward pressure on their prices as that industry attempts to cut costs and weather these historical lows of crude oil.
And to top this all off, COVID-19 lockdowns have touched every industry whether they are deemed “essential” or not and the trucking industry is no exception to this. Though supply chains have been regarded as “essential,” many retail businesses have been forced to shut down and thus shrunk demand for LTL services as e-commerce booms and couriers are moving goods from distribution centers to consumers that once would have been delivered by truck to retail units. This may increase the number of horizontal acquisitions seen in the near future of courier and forwarding/logistics companies as transportation companies seek to optimize on trends towards more e-commerce and higher efficiency demands by consumers who expect instant gratification. TL is better positioned in this pandemic as well as in the long-term with an increased demand for pantry goods, continued up-stream supply chain needs, and more e-commerce activity which still requires long-distance movement between distribution centers. However, this business segment is not immune to such major disruptions and may experience some volatility in revenue but will likely rebound as the economy returns to normal. Alongside that, is the strengthening of the American dollar which could benefit companies that operate throughout North America from Canada because they may experience positive foreign exchange effects and see increased trade as Canadian prices become more attractive which will lessen the effects of an economic downturn. However, the complete effects of COVID-19 and corresponding shutdowns will not be comprehended till after the pandemic has passed and lockdowns lifted, and even then much speculation may remain.
Nevertheless, what can be said with certainty is that those trucking companies that excel in this slowed economy and optimize on these unique circumstances which present potential upsides in participating in the trend towards consolidation will be the companies that achieve success in the years to come.
As Canadian and American governments start to lift “stay at home” mandates and oil steadily climbs to higher levels, companies need to start thinking about what they may have missed in the last boom and what they may want to do in the next. Even though valuation multiples have dropped off in most industries, research by Raymond James shows that asset-based trucking, LTL, and forwarding and logistic companies’ multiples may have been hit less than most. The data exhibits that May 2020 valuations of public American transportation companies are only slightly below the historic median and this likely is true for private Canadian companies in the industry as well. However, as lockdowns were not implemented until later into Q1, the future quarters will only confirm if these multiples will hold up.
Though some M&A activity and CAPEX may have been put on hold during the pandemic and other disruptions due to so much uncertainty, business owners wishing to sell, set up succession plans, or even expand their businesses may be faced with opportunities soon and will want to be prepared. It is also interesting to note that several transactions that were inflight pre-virus were completed during the turmoil. These include CRST International’s purchase of NAL Group who provides last-mile services in Canada and the United States, TFI International’s March acquisition of R.R. Donnelley’s Courier Services Business, and the acquisition of Stagecoach Cartage and Transportation by J.H. Rose Logistics at the beginning of April.
Distinct Capital Partners is an independent investment bank that has many years of experience providing advisory services to middle-market companies in a wide range of industries including transportation. Distinct Capital recently helped to raise capital for a company that was experiencing working-capital difficulties and was unable to obtain financing from their bank. If this, succession planning, restructuring, or any other investment banking service is something that you would like to discuss with a professional please contact us at (905) 827-1880 or info@distinctcapitalpartners.com.
Sources:
Carlos Mieles, “IBISWORLD Industry Report 48412CA: Long-Distance Freight Trucking in Canada,” October 2019.
Landstar Agent, “How Fuel Prices Affect Truckers,” https://www.nonforceddispatch.com/fuel-prices-affect-truckers/.
Raymond James, “Executive Freight Trends Insight,” May 2020.