Using Predictive Technology to Forecast Truck Values in a Volatile Market
by By: Scott Lubischer Jan/Feb 2020 2020
Market instability, such as that experienced by the trucking industry in 2019, has a major impact on values, which affects sales, purchases and leases. Sandhills Global’s Scott Lubischer explains how predictive technology can help finance and leasing companies know when the market will drop, at what rate, how long the recession will last, and when it will recover to write leases with terms that minimize risk.
Based on the cyclical nature of the trucking industry, the downturn of 2019 was bound to happen. After nearly two years of economic expansion throughout 2017 and 2018 in the freight market — coupled with matching demand for trucks — the market predictably slowed in 2019, just as it did with down cycles in 2008, 2013 and 2016. The current market cycle also coincided with a confluence of negative conditions, the most obvious factor being supply and demand in the market. The volume of new and used trucks purchased in the peak years of 2017 and 2018 created an overcapacity for haulers. Combined with reduced freight demand, the result is less of a market for those extra trucks. Additionally, finance companies that continue to write standard leases take substantial risks when those leases fall within these predictive troughs.
From the Bottom To The Top & Back Down Again
2017 and 2018 produced a top phase of the market cycle thanks to several positive trends in the transportation market. A variety of favorable economic conditions promoted growth in trucking, with demand for moving goods over the road generated by consumer spending, construction and manufacturing output. At the same time, the number of orders for new trucks increased dramatically because there were fewer used trucks available to fill the need. However, since the beginning of 2019, many of the new trucks have been delivered, lease returns are coming back, and freight demand has decreased, leaving the used market with an excess of trucks available.
The overcapacity situation isn’t new. And despite the substantial volume changes, the truck industry’s supply and demand curves look similar when the data is analyzed over a long period of time. OEMs have further contributed to the problem over the years as they look to maintain market share and expand the volume of new trucks without regard to the market. It’s exactly these types of events that future-casting technology can track and predict. Beyond keeping a pulse on the market, next-level valuation technology incorporates historic trends and economic factors that will impact value down the road.
In looking at economic trends over 2019, it’s clear that key freight generating sectors show a continued weakness in 2020. Notably, key foundational market metrics, such as rail volume and common indexes for less-than-truckload (LTL) and shipments show that the supply chain continues to trend downward. The Cass Freight Shipments Index, for example, reports that shipments dropped 3.3% year-over-year in November 2019 — marking the 12th straight month of negative year-over-year shipment volumes. The American Trucking Association’s advanced seasonally adjusted For-Hire Truck Tonnage index was similarly disappointing at the end of 2019. The index fell 3.5% from October to November 2019, marking the third decrease in the previous four months, and the index was down 7.2% since July 2019.
Market instability has a major impact on values, which, in turn, affects sales, purchases and leases. Major trucking firms, for example, are likely to delay the expansion or replacement of their fleets until truckload shipments rise and there is more certainty about freight capacity. Lessors and finance companies, in turn, must stay well-informed about the transportation market, truck values and the economic landscape to finance trucking assets when carriers and truckers are ready to purchase — and know the market at the time when those leases might end.
Monitoring & Forecasting the Market
Future-casting the market requires more than just an in-depth understanding of the truck industry. Predictive technology demands the largest pool of data possible to accurately forecast truck values in two-to-three years. And although leasing and finance companies’ data is significant, it would not be scientifically considered a “big data” pool. Worse, existing data might lead you in the wrong direction — toward negative dividends.
Third-party data is typically necessary to give lessors and lenders enough data to make the best decisions and get the biggest returns. Ideally, this data should include both new and used transactions across a wide variety of retail, auction and wholesale marketplaces. Truck Paper data, for instance, has served as a strong indicator of truck values. During the transportation downturn in 2016, we saw the rate at which used truck inventory was added to the marketplace begin to decline in Q1/16, with used inventory levels peaking during Q3/16.
Used prices, however, were slow to react, with prices not bottoming out until Q1/17. Truck dealers, not surprisingly, are less than enthusiastic about taking a loss on a sale. It’s understandable, as no one wants to voluntarily mark down equipment, at least until the hard numbers show they are taking additional losses and risk as the asset ages. During the previous used inventory surplus, for example, average truck values dropped around 20% from the prior year. A lease returned and sold early during this period — let’s say at a 5% loss — was a relative win.
Leading up to the current downturn, the rate of truck inventory leaving decreased around Q2/18, with used inventory levels reaching lows in September 2018. Used pricing maxed out in January 2019 and has been trending downward since. From January to December 2019, the average truck was valued $7,000 less. Because everything in the truck market factors individually, lenders can use predictive technology with access to a vast third-party database and take into account different scenarios to write shorter or longer term leases, mitigating what would otherwise be a major risk in the trucking industry.
The Forecast for 2020
Going forward, we predict — as supported by the data — that the used truck supply will continue to grow throughout the early part of 2020. With that noted, we are seeing some indicators that the rate of trucks being added will slow down. Overall, we expect used truck values to remain under pressure the first half of 2020 due to amount of used trucks available in the market place and estimate freight demand. Used pricing will stabilize in the second half of 2020 and rebound in 2021.
As before, when there was an oversupply of used assets, the truck market’s exact recovery time will vary based on many factors. The strong U.S. dollar is a good example of a presently negative variable, as foreign markets are less likely to buy off the excess truck supply. This is one many key trends to monitor. Other big factors in 2020 include tariffs and the presidential election, to name just a few.
Write Leases with Predictive Technology
By using a data-driven approach and technology to both track and future-cast the truck market, lessors and lenders can avoid the risks that come with standard lease terms where return times can fall in the troughs. Tools such as FleetEvaluator can predict future market conditions using real-time, real-world data points, while also instantly providing the current value based on health-of-the-market circumstances like supply and demand, interest rates, foreign policy, commodity prices, and economic indicators that directly and indirectly impact the market demand and value for the asset in question.
Too many finance and lease companies rely on their own data, which generally lacks the size and structured content, to make an accurate current value and prediction on equipment. Using data outside of your organization — and believing in that data and the technology behind it — opens the door to true future-casting where you can confidently know when and how long to write lease terms.
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