NEW YORK (TheStreet) -- The truck cycle is starting to show signs of improvement. Several data points have shown up recently with the most compelling being the ACT Heavy Duty Class 8 Industry wide data showing a 51% year over year increase in January units to 34,7000 vs. 31,800 units in December - the fourth consecutive month above 20,000 units and the largest figure since April 2011. Confirming the trend, Eaton (ETN) recently increased its expectations for the Class 8 Heavy Duty demand to improve 8%, Navistar (NAV) recently noted it expects a 6% increase and Cummins (CMI) reported last week and said its businesses were "at a bottom."
After a treacherous 2013 where most expected a bottoming out, the results were disappointing. But these recent data points are pretty encouraging - and the stock prices have begun to react favorably - although most are below their highs.
I like the truck cycle for 2014 - the low expectations are certainly appealing to me but the replacement cycle continues to be the big tailwind that gets me excited - the fleet is old. Right now the U.S. fleet age is 7 years - this is at 20-year highs. The importance of 7 years is this - after 5 years of age, the maintenance doubles in cost. Also, the industry emission and safety standards have been changing globally, getting much more strict and requiring different and more efficient technology in the engines - another reason for the replacement cycle to have legs.
This plays right into Cummins as the industry leader, with the superior engine technology, dominant market share, and strong balance sheet. Last week it reported its 4Q earnings that were better than expected - Engine revenues rose 2% year over year vs. flat expectation, Power Generation sales fell 1% vs. the 11-15% expected decline, Components rose 21% year over year vs. the 15% consensus and Distribution improved 18% year over year vs. the 10% expectation. All of these figures were encouraging, but if we are truly at the trough in the cycle, there is more to go. And while the stock is up $15 in the last week, the new guidance has been lowered, expectations are muted and it remains the industry leader with #1 market share (at 40%).
Cummins also has new products (especially in Europe) and commentary was encouraging on the call - it believes its end markets have bottomed. Operating margins were softer than expected, the company guided to below analyst expectations and the lower tax rate helped the bottom line. But if this is in fact the trough - the numbers only get better. Plus, gross margins - something in the company's control (on costs) rose 70 bps year over year.
You can take a look at some of the beaten down names - like Navistar, which has a new management team, announced the outsourcing of its engines (to Cummins) and is working on repairing its damaged balance sheet. But they are in early innings with new management, continue to struggle with market share and it could take some time not only to repair its image in the industry, but also on Wall Street. Activist shareholders keep a put on the shares in the low $20s likely in my view. Or Paccar (PCAR) which has always been the industry leader in truck assembly, but always carries a higher than average multiple than the group. Certainly deserved, given its minimal manufacturing exposure, higher operating leverage and ability to reduce its variable costs. Eaton has around 20% of its revenue exposure to the "parts" in trucks, which should also benefit. Or if you really want to get into it and want possible earnings leverage - Wabco (WBC), which does the bulk of its revenues in Europe and China - it just beat and raised guide while doubling down on Europe with today's M&A deal in Transics - a totally forward-looking growth end market for the company. Allison Transmission (ALSN) is more of a play on medium trucks - with 70% exposure to North America - but has plans to expand outside of its core roots and has superior technology that makes it a cut above the rest of its peers.