Class 8 downturn could be deeper than expected: Analysts warn

NEW YORK — Heavy truck orders during 2006 were “astonishing” considering weakening truck fundamentals and falling freight tonnage in North America, according to New York transportation equipment market experts at Bear Stearns.

That means, says the consulting firm, the pre-buy phenomenon of 2006 was a far bigger driver of truck sales than actual market conditions demanded. The firm therefore believes the commercial vehicle downturn for 2007 will be deeper and longer than the market expects.

Retail sales of class 8 heavy-duty trucks topped out at 285,000 in 2006, a 12.3 percent increase over the 250,000 sold in 2005. Many truck OEMs and industry suppliers are predicting a 30 to 35 percent drop in 2007.

Jan HD orders were lower than experts expected;
Feb and March won’t likely be better.

Preliminary January numbers show net new orders were the lowest since November 2002, and the largest year-over-year decline on record. The 11,000 units ordered (down 75% from Jan. 2006) are even lower than the “mid-teens” the firm was predicting.

Going forward, Bear Stearns guesses that February and March orders will likely be flat to down sequentially from January.

Bear Stearns says the numbers validate what it has been warning about since last summer — that the effect of the ’06 pre-buy was being severely underestimated by the industry last year.

“We think our long-held cautious fundamental thesis on what 2007 truck demand was going to look like is starting to play out,” the firm states. “However, the truck equipment stocks have ignored most fundamental signals for over six months, as we think a lot of investors are afraid of ‘missing’ the perceived (second half of 2007) rebound.”

Accordingly, that positive sentiment could turn increasingly favorable for heavy-truck sales as the year progresses, even “into a flat to modestly weakening freight environment.”

Meanwhile, Bear Stearns says class 5-7 orders are inline. Preliminary January numbers show 14,100, down 46 percent y/y. “Arguably, class 5-7 orders are a ‘purer’ measure of economically-derived demand,” since there was a smaller pre-buy in medium-duty sales than in class 8, the firm suggests.