Stifel Nicolaus analyst Larkin provides perspective on what is happening in logistics

In this industry, it is always good to talk to people that know much more about things than you do. This is done for multiple reasons, but the biggest reason—for me anyhow—is to learn about what is really going on in the freight transportation and logistics world.

That line of thinking led me to calling John Larkin, Managing Director of Stifel Nicolaus Transportation & Logistics Research Group. John has been a great friend and source to LM through the years, and I recently spoke with him to get some of his insights as we approach the halfway point of 2013, or at least get a little closer to it.

One of the first things I discussed with him was the current state of the freight economy.

“I would say things are mediocre at best or sideways to slightly up with a few green shoots here and there,” said Larkin. “In fracking-intensive areas, things are certainly hopping, and you are starting to see some building materials-related activity perk up, and now that the weather is breaking the auto sector is also doing pretty well, with the trans-border business in and out of Mexico looking pretty good. Those are the good areas everyone wants to talk about, and on the railroads the big story is moving crude by rail.”

In addressing the latter point, Larkin noted how a year ago roughly 0.9 percent of rail carloads were comprised of crude by rail, with it maybe tripling in the coming years. But at the same time he said it will never replace the amount of coal loadings that have been permanently lost.

How long the crude by rail story continues remains to be seen though.

“Once you get all the loading facilities in the ground and buy all of the tank cars, then all that cost is sunk,” he said. “And then the decision between rail and pipeline is all of the sudden different. It is not like you are starting with a clean sheet of paper, because if you are you will always choose pipeline. But now you have the embedded investment in a higher cost alternative it is not necessarily a higher-cost alternative because to get access to the low cost alternative you have to shell out a whole another set of capital. The experts are telling us that 40 percent of the crude moved by rail can occur ad infinitum, and the reason is flexibility of destination, which you don’t have with pipeline.”

Shifting over to the general economy and how it is impacting the freight economy, Larkin made it clear that the consumer is “beaten up” and trying to de-lever, as prices rise and leave little money left over as consumers took a tax hike, regardless of their tax bracket.

And on top of that there are still very few jobs being created overall, he said, due to the private sector’s concern over the American Healthcare and Affordability Act, the “demonization” of capitalists, which Larkin said has created a conservative attitude among the private sector when it comes to hiring people. Instead, he explained the private sector is more likely to keep its head down and its balance sheet clean and pay down debt and hope for better days.

“We continue to sort of limp along at a 1.5-to-2 percent GDP growth rate, which is about one third of what you might expect in a normal recession, akin to what we experienced in 2008-2009,” explained Larkin. “It has been a very muted recovery. If you round up job growth numbers to 150,000 per month while we are losing 500,000 per month, unemployment number comes down but the raw number of people employed also comes down and that is not a good thing. Still, we are growing a little bit thankfully and better than Europe for certain. The Fed is doing all it can do to keep things lubricated and stimulated, but until we give the private sector a reason to feel confident, which might take a revision or simplification of the tax code, or until we are serious about reining in the federal budget deficit this year to upwards of $700 billion, it is still too much. We need to be more serious about that and end this silliness in Congress.”

Another way that can be addressed is through an energy policy that would say in ten years the U.S. will be energy self-sufficient would likely go a long way, too, noted Larkin. But that path is tempered due to things like fracking not being permitted in New York and Maryland.

Shifting from energy back to the freight market, I asked Larkin about the ongoing proliferation of brokerages making a play to step into the ring with the “big dogs” in that space, including non-asset based 3PLs like C.H. Robinson Worldwide, XPO Logistics, and Echo, among others.

These types of players are deeply involved in how capacity is viewed and approached by shippers in addition to hectic spot market activity, too.

“The interesting thing is that for a long time C.H. Robinson was the lone big player in that market,” said Larkin. “They had a lot of people, offices and a system and when a small trucker got to Harrisburg, Pa. and needed to get back to Des Moines it would contact CHRW to get a [modest] load so the trucker could at least cover its fuel expenses on the backhaul. Now, there are more places to call because there are not a lot of barriers to entry in this business. There are a number of large and rapidly-growing companies out there like Coyote, TQL, and Blue Grace Logistics. These are all very good companies with very good entrepreneurial management and sometimes backed by private equity; they are getting their nose under the tent in a pretty big way. The sustainable part of what they are doing is convincing customers to maybe let them take over their transportation and logistics functions as only about one-third of shippers outsource any of their traditional traffic management functions. But the larger companies are going to have better people and better systems and better buying clout than a smaller-sized shipper would have. You are seeing a lot of that go on.”

Larkin added that based on data from Armstrong & Associates close to $45 million of domestic transportation management out of a market totaling $600-$700 million is closing faster than the balance of the market because of the outsourcing phenomenon, coupled with the fact that more shippers are seeing more value out of outsourcing as well. What’s more, going forward, Larkin said he expects that less of this type of business will be transactional and more and more will be of the enterprise/outsourced variety going forward. 

As you can see, conversations with people like John Larkin help us all gain additional perspective into the markets we live in and cover on a daily basis. This conversation was no exception. Based on Larkin’s observations, there clearly is a lot going on in the logistics world, which should clearly pave the way for an interesting rest of the year and beyond.