June Class 8 truck orders, according to ACT Research, fell 35% year on year and 8% sequentially. In addition, the Cass Freight Index has been showing total freight reductions in recent months, likely driven by continued adjustments in the commodity and retail complex. Net orders of 13,100 units represent the lowest monthly orders since July 2012.
Adjustments like these generally take some time to even themselves out; inventories and capital spending can be volatile in the near term. As the all-important holiday season approaches, fundamentals in pricing and "easier comparisons" in the commodity complex as the market tightens can suggest the above-average probability that this is just a near-term inventory adjustment. Underlying fundamentals of pricing, driver scarcity and faster supply chains can yield a soft landing.
While this is written through a domestic lens, many of the companies in this group, like PACCAR (PCAR), Cummins (CMI), Allison Transmission (ALSN) and my favorite, WABCO Holdings (WBC), also have European exposure. Truck orders in Europe have been resilient of late, but fears of the tepid European economies getting worse, compounded by banking woes that are yet to be substantially defined, are mounting.
Truck orders generally represent a lagging indicator. Leading ones, such as the ISM Manufacturing Index, serve as a look into future truck orders. The ISM has stabilized of late; perhaps a dim light at the end of the tunnel is forming here.
As a result of the June orders, and the trend that began about 18 months ago, earnings estimates have been falling, and so have the stocks recently. Brexit took a giant bite out of the higher quality names like PACCAR and WABCO, names that should have a place in a more diversified portfolio when they are hit hard, like they have been recently.
We'll probably see a few more months of weak orders, and European orders are likely going to follow suit.
It is our job to determine when these cyclical forces negatively coalesce into solid entry points. We still may have a bit to go, but we are closer today than we were six weeks ago.
