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Bullish North America Trucking Conditions a Positive For Cummins

Bullish North America Trucking Conditions a Positive For Cummins

ACT Research hosted a seminar Tuesday morning to go over commercial vehicle industry conditions. As expected, build rates are now tracking at about 1,100 units per day, compared with about 1,000 units per day last fall. Based on ACT s projected order rates and extrapolation of May guidance, ACT envisions about 290,000 to 290,500 North America Class 8 commercial vehicles being built in 2014. Previous expectations were in the mid-280,000 range.

Fleets are finally expanding their sizes as larger spot rates, improved utilization, higher fleet age, and pent-up demand have improved industry prospects. Class 8 backlog of about 120,000 units is at its highest level since early 2012. Better weather will improve shipments and reduce inventories in the coming months. According to ACT, not seasonally adjusted orders to support a bullish outlook (300,000 unit SAAR) are as follows: May (24,300), June (22,800), July (20,500), August (22,100), and September (21,600).

Thus, the bar in the coming months is low given the seasonal factors, and we expect orders to trend lower sequentially this summer. Numerous indicators point to a real recovery in trucking demand. Used-truck prices are up about 12% this year, with the average retail price in April sitting at $53,900. ACT had expected used pricing to be flat to down 5% this year, and so far it has surprised to the upside. This could indicate that not every sale is being accompanied by a used-truck trade-in. Instead of a 1-to-1 new-to-used-truck ratio, fleets could be adding more new trucks than they are trading in used trucks.

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Lack of late-model availability should sustain used-truck pricing. ACT is also hearing about tight truck tire capacity and dealers are being put on allocations. This helps support the notion that truck utilization is rising. Data show that truck utilization is climbing. Utilization hovered at about 90% from 2011 to 2013 but has increased so far in 2014. Lastly, larger order sizes (e.g., Celadon 500-unit order) have created longer lead-time visibility in the backlog.

Historically, the amount of Class 8 trucks booked and shipped in the same quarter was about 20% to 25% of total shipments, but during the 2012 and 2013 slowdown that proportion rose to about 30%. It has steadily come down to less than 25%, and ACT s projection for the second quarter is a 15% book-and-ship ratio because of the large backlog. Given tight rail capacity, especially because of higher amounts of oil moving on rail, there could also be a secular argument for North America truck freight demand. The following exhibit points toward good visibility until late in the year. Please see the exhibits on the following pages.

Bullish North America Trucking Conditions a Positive For Cummins

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