On May 22, 2013, Tesla Motors announced that it had paid back its $465 million loan to the Department of Energy, nine years before its full loan was due. Tesla was awarded the loan, requiring matching private capital obtained through public offerings, in 2010 as part of the Advanced Technology Vehicle Manufacturing program. This program was signed into law by President George W. Bush in 2008, but the awards were made by the Obama administration. While another electric vehicle company under this program is in trouble (e.g. Fisker Automotive), Tesla is not. Tesla Motors is different for a number of reasons that include: a recent increase in the value of its stock along with the sale of new stock and debt securities earning about $1 billion, way more than it needed to repay the loan, an enviable stash of environmental credits from the state of California that is valued at $250 million for this year, and the deep pockets of Elon Musk, Tesla’s co-founder. The company sold 2,650 vehicles in 2012 and expects to sell 21,000 year end, selling 4,900 during the first quarter of 2013 of its newer, lower cost Model S sedans. For the first time in its 10 year history, the company reached profitability, generating a profit of $11.2 million during the first quarter of this year. Electric vehicles still have a long way to go to catch up to sales of traditional gasoline and diesel powered vehicles. During the first four months of 2013, plug-in cars accounted for less than 1 percent of total vehicle sales. And one thing is abundantly clear from Tesla’s financial experience with electric cars: thus far, this is a market created by the government, and without the government’s powers, it would not exist. To read the full article please visit http://www.instituteforenergyresearch.org/2013/05/24/tesla-motors-specious-rise/.
Thomas J. Pyle is the president of the Institute for Energy Research (IER). In this capacity, Pyle brings a unique backdrop of public and private sector experience to help manage IER’s Washington, DC-based staff and operations. He also helps to develop the organization’s free market policy positions and implement education efforts with respect to key energy stakeholders, including policymakers, federal agency representatives, industry leaders, consumer entities and the media. To learn more about the Institute for Energy Research and their mission please visit http://instituteforenergyresearch.org/.
Roulston Research March 12th Transportation and Logistics Conference Call with Former UPS Executives
March 14, 2013
Roulston Research held a Transportation and Logistics Conference Callon March 12th with two former UPS executives, Marc Schiller and Sheppard Vars. Marc Schiller is currently Managing Partner at Shorter Cycles and former Vice President of Marketing and Strategy at UPS. Sheppard Vars is currently Principal of 5 Horizons LLC and former Senior Director of US Marketing, International Marketing, and Corporate Strategy at UPS. During the call four main players were discussed – UPS, FedEx, DHL and TNT. The first three excelling compared to TNT which is said not to be as strong or developed and is likely to be stepping back in position (they already have pulled out of India). That being said TNT is going to become a regional player while focusing mainly on the European market. FedEx, UPS and FX express are all potential buyers. In the U.S, it is a two horse race between UPS and FedEx. The postal service is 2nd tier compared to these companies due to many marketing and positioning problems. Regionalization was a big factor that was brought up. It will most certainly be a growth area due to factors such as fuel risk, change in demand, declining cost of production and more trade. Globally, smaller regionalized companies are chipping away at the market (Currently control about 5-6% of market in the U.S) due to large advantages in time and transit and it has been proven these domestic players are viable (resulting in fewer profits for larger companies in these regions compared to other areas). Some regional players affecting global players are FX express, Toll Holdings, DPD and GLS. Most of these companies are owned by private equity firms. In the U.S many large retailers are building more distribution centers across the country, creating regional pockets. Market trends show companies trying to get closer to consumers and being able to react to changes in demand.
UPS, FedEx and DHL are very viable and will continue to be leaders in the intercontinental field. DHL is leading in market terms if you exclude the U.S. FedEx has the strongest import to U.S in the world and very strong market in Asia while UPS is very strong in Europe for both ground and air. UPS and FedEx key strengths in the U.S allow them to project this around the world becoming key players in Europe and Asia. There is no market where they are in danger. The U.S is the largest high end express and ground markets in the world causing the international market not to be as attractive due primarily to fragmentations of market, labor and trade regulations. There is not much room for market entry left. Big companies are now trying to develop other aspects such as product portfolios and vertical capabilities. We are now seeing big moves into healthcare, high tech and automotive industries by these companies. In the long term Amazon is a threat to FedEx and UPS. Amazon has product value already, can come in region by region basis; sell multiple products in single sale which gives them big advantages. If you are interested in hearing the podcast of the conference call or engaging Marc or Sheppard in a 1 on 1 discussion please contact info@roulstonresearch.com.
Roulston Research February 20th Rail vs. Trucking Conference Call with Former Roadway and Rail America Executives
February 28, 2013
The conference call dealing with the outlook of the rail and trucking industry for the year 2013 was presided over by David Rohal and Ed Caruso, who carefully assessed the macro and micro economic factors that could affect the two industries. David is currently the President of Rohal and Associates and the former COO of Rail America, VP at Genesee & Wyoming, and GM at CSX Corporation. Ed is the principal of Lakeshore Logistics and former transportation and distribution director of Office Max and former Roadway and Yellow Executive. On the macro front, the year 2013 depicted a mixed picture for the railroads with the growth rate hovering around 1.5% to 2% as pointed out by the esteemed members of this conference panel. A lot of the discussion went into identifying the factors that could create windows of growth opportunity to the railroad industry or also impact it negatively. Growth in the intermodal was a major criterion identified to drive the rail industry in the positive direction. Currently, rail intermodal accounts for over 20% of the railroads’ revenue second in line after coal and it is expected that the contribution will rise given the growing dependence on shippers of intermodal services. Also the surge in shale oil and natural gas catapulted growth in petroleum product shipments via rail based transports. The margins were identified to be higher in these kinds of alternative energy shipments for the rail industry. As per the industry sources, the role of the crude oil as a revenue contributor has grown in leaps from a mere 3% to 30%. Last but not the least the increase in automotive shipments and government initiatives like widening of the Panama Canal was also identified by the panel members to affect the rail industry positively.
The major risk hindering the growth of the rail industry was the lingering worries over the coal demand. 2013 as pointed out by David will see a foreseeable decline in the coal exports. Factors like economic overhang in the European markets, higher stockpile levels and increased exports from Indonesia and recovery in the Australian mines were the major contributors to the expected decline. However, the pricing power enjoyed by the freight railroad operators under the Staggers Rail Act will give the players in the industry huge boost in terms of profit margins. It was pointed out that historically railroads have been hiking their freight rates by nearly 5% per annum on average. The duopolistic market structure positions players like Union Pacific, Burlington Northern Santa Fe (controlling western part of the US), CSX Corp and Norfolk Southern (controlling the eastern part) particularly well for the remaining part of 2013. The trucking industry as pointed out by Ed particularly faces a lot challenges in 2013 to sustain the growth. Under the federal regulations, new hours-of-service rules are poised to create a lot of capacity constraints on the industry. As the capacity tightens, companies will look to build on their sustainability initiatives by switching to intermodal rail from traditional trucking lanes. On the contrary, if the economy grows more rapidly than expected, the truck driver shortage will become a significant problem for the trucking industry looking to sustain a rally. If you are interested in listening to the podcast from the event or engaging David or Ed in a one on one discussion please contact info@roulstonresearch.com.
Notes from Deutsche Auto confrence in Detroit and Auto Show
January 18, 2012
The US auto maker is back. There was no doubt that the new models at the show and some of the most discussed new technologies revolved around US companies and some of their innovation. Last week we discussed VIA and some of their unique retrofitting of fleet trucks. This really is a game changer, as instead of creating a new car they are simply putting their unique drive train technology into GM pick ups and vans for utility and constructions fleets to be much more efficient. Although private, they feature PG and E management discussing $7,000 annual maintenance savings per truck due to primarily braking advantages and millions in gas savings. With only retrofit costs added incrementally to the sticker price of the original vehicle and the portable power generation capability of the vehicle, it changes the paradigm for fleets.
Roulston Research recently made the trip to Detroit for the North American International Auto Show to see VIA Motors press conference and reception. VIA Motors has developed the first extended range electric powertrain capable of replacing the V8 engine and they will be introducing the world’s first line of eREV Trucks, Vans, and SUV’s. The E-REV powertrain enables larger 4WD vehicles, including SUVs and light trucks, to drive the first 40 miles in all-electric mode with near zero emissions, and a full range of 400 miles on a single fill-up. Since it is electric the vehicle will also be able to be a power export so if you are on the go you can have electricity whenever you need it. Chevy Volt creator and VIA Board member Bob Lutz and COO Alan Perinton presented to a full crowd in attendance. To learn more about VIA Motors and their product offering please visit here and to see Bob Lutz’s recent interview about VIA on CNBC follow http://video.cnbc.com/gallery/?video=3000065343.
Roulston Airline Partner Vaughn Cordle on American Airlines Bankruptcy: The Endgame Solution
December 5, 2011
The airline industry’s long and winding road from deregulation to sustained profitability is not complete with the bankruptcy of American (AA), and the industry still has much more work to do before it is fit for long-term investment. In my estimation, this effort will require more uneconomic capacity pulled out of the system. American will likely reduce its domestic capacity by 10-20% as it restructures in an effort to achieve economic sustainability.
Regardless of the ugly nature of merging two suboptimal business models and different unions, American’s best option is to merge with US Airways. This further consolidation will effectively move the industry’s structure to one that can price the product at a level that can potentially attract and maintain shareholder support. My best guess is that US Airways will present a reorganization plan that produces a value that will exceed that which is presented by AA management if it attempts to remain independent. If AA management has the creditors’ best interest in mind, it will present a plan that includes a merger with US Airways and one that brings in Doug Parker to run the new airline that emerges.
The benefits of deregulation, to the air-transportation consumer, are reflected in the $70 billion (inflation-adjusted) net losses the industry reported over the 2000-2010 period. In other words, the value produced by the industry went to the consumer (and employees), not the owners of the assets. The legacy airlines competed on price to maintain market share, which was effectively bought at a loss. This focus on market share over profits is why the industry produced 8-10% too much capacity, on average, in the industry over the last 10 years.
Legacy airline managers had to maintain market share because of the belief that shrinking would raise unit costs more than it would benefit revenues. Moreover, the changing composition of the industry, as so-called low-cost airlines made up an ever-growing share of the market, drove down average fares and unit revenues, making that perception of the cost penalty vs. unit revenue tradeoff of shrinking capacity even harder for legacy airline managers to justify. In addition to depressing unit revenues, faster-growing airlines lower [relative] unit costs and, in turn, increase the cost disadvantage of those airlines that do not grow or shrink over time. It’s a prisoners’ dilemma for the industry in game theory terms.
This change in industry composition has resulted in an industry concentration that is too low for these overleveraged and high-cost airlines to earn their capital costs. The solution has included mergers and [alliance] joint ventures that produce cost and revenue synergies that would not exist otherwise. Given the massive restructuring that has occurred since 9/11 and will continue with the bankruptcy of AA, a case can be made that the industry will, over the next 10 years, enjoy its highest level of profitability since deregulation. This is why we have recently made the case [to our fund clients] to buy the networks and several of the LCCs near their recent 52-week lows.
Many, especially airline employees, blame management incompetence for the failures of their airlines when the structure − bad industry fundamentals − is what really creates the bad economics. Hence, the structure had to change via mergers and consolidation. Even the very best CEOs could not produce profits at the big network airlines over the last two decades − outside of bankruptcy.
Against the backdrop of all of the above factors, AA and US Airways have become disadvantaged against the more profitable United and Delta, who were able to use bankruptcies and mergers to reduce their competitive problems. As a result, they are left with too much leverage, inadaquate investment in competitive resources, and a workforce that is demoralized because it feels unfairly compensated. Unhappy employees hurt the top and bottom line of the business, resulting in a loss of market share over time as customer service quality suffers.
American risks being broken up and sold piecemeal if unions are unwilling to accept concessionary agreements that allow the airline to emerge from bankruptcy as a viable business worthy of investment. Alternatively, if the company emerges without the required cost structure, it risks a second bankruptcy at some point in the future as stronger competitors move to increase share at AA’s expense. A merger with US Airways would make American a larger, lower-cost, more appropriately leveraged airline that can profitably retain market share. Without a merger, it will emerge from bankruptcy as a much smaller, still-high-cost, and over-leveraged competitor that will continue to lose market share over time. The go-it-alone strategy risks further demoralizing employees because they will be at the bottom of the industry’s list in terms of total compensation. This resulting outcome would be a continuation of poor management and labor relationships and sets the stage for another showdown during future contract negotiations.
US Airline Pilots Association, America West pilots at US Airways, and Allied Pilot Association pilots at American are the three pilot groups that will have to deal with seniority issues that arise if there is a merger between American Airlines and US Airways. These three pilot groups, when combined, will enjoy a much higher level of total compensation via a merger between American and US Airways than would be the case if both companies remained independent. If the pilot unions, whose leadership struggles to lead effectively because they have to reflect the views of the majority of pilots who elect and direct them, could internalize a combination that creates more value for all stakeholders and the industry, they would support a plan that helps their members and the business that must be profitable if it is to support their livelihoods.
The majority of pilots and employees in general are unsophisticated by way of corporate strategy and finance and narrowly focus their leaderships’ efforts on achieving leading industry wages and benefits. This myopia inhibits the creativity and out-of-the-box thinking that encompasses a more holistic approach and takes into account what the business needs to be competitive within the broader marketplace. If costs are too high, the business cannot grow, yet growth is required to survive over the longer term. If debt levels are too high, growth is not possible, because the required level of profitability cannot be attained. These descriptions fit both American and US Airways.
AA’s new Chairman and CEO, Tom Horton [and the Allied Pilot Association] should work toward an endgame solution to American’s competitive problem by developing a restructuring plan that includes a merger with US Airways. If he does not, US Airways’ Doug Parker has an opportunity to present the winning plan that solves both companies’ competitive problems, and at the same time, increases industry concentration to a level necessary for it to cover capital costs over a full business cycle. It is not clear what Horton’s feelings on this subject are at this point, but a case can be made for a reorganization of American Airlines that can turbocharge future stakeholder returns if it includes a merger.
Vaughn Cordle is Managing Partner and Chief Analyst at AirlineForecasts. AirlineForecasts provides investment research and analytical support for institutional investors and money management firms in the U.S. and around the world. In short, they help their clients profit by keeping them on the cutting edge of what’s happening in the airline industry. Their exclusive focus is the airline industry, particularly the forces and factors that drive investment decision making. They provide the analytics, forecasts, and valuations required to formulate winning investment strategies in order to beat the market and the competition.
Roulston Transportation Partner McKee Stewart on the New Fuel Efficiency Standards for Commercial Trucks
August 19, 2011
Roulston Research Partner McKee Stewart wrote about the recent announcement by the Obama Administration for new fuel efficiency standards for medium and heavy trucks. This is the first time that there has been fuel efficiency standards set for heavy duty vehicles, which is part of a larger set of standards enacted by the government recently. In July, they announced an increase to the Corporate Average Fuel Economy (CAFÉ) standards that require passenger cars to get 55.4 mpg by 2025. McKee states that the commercial trucking industry has extremely tight profit margins and constantly is looking for ways to reduce costs. The industry doesn’t need regulations because it makes fiscal sense to move in this direction. However, McKee says the new regulations have the potential to stifle innovation and increase compliance and paper work costs. To read McKee’s full posting to see his opinion on how the industry will be affected by the new regulations please go to his website at http://hmstewartjr.wordpress.com/2011/08/14/regulatory-state-run-amok-edition-927687125987213/
McKee Stewart is founder and Principal of Stewart Management Systems LLC which is a consulting practice focused on Financial Planning and Analysis, Yield Management, and Business Intelligence. He previously worked for over 20 years with Roadway Express in a variety of Senior Level Positions.
Roulston Research Transportation Partner McKee Stewart recently commented on FedEx Freight’s announcement that they are having a general rate increase (GRI) of 6.8% effective on September 6, 2011. This is consistent with what most other LTL (Less than Truckload) carriers have announced earlier this year including UPS Freight, Con-Way, ABFS, YRC and Estes. In this industry only the weighted average of the rate increase and carriers vary their increases by class of commodity, sector, etc. To understand what these changes mean to UPS, FedEx and the smaller LTL Carriers you can read McKee’s full posting at http://hmstewartjr.wordpress.com/2011/08/04/the-new-august-gri-season/.
McKee Stewart is founder and Principal of Stewart Management Systems LLC which is a consulting practice focused on Financial Planning and Analysis, Yield Management, and Business Intelligence. He previously worked for over 20 years with Roadway Express in a variety of Senior Level Positions.
>Roulston Transportation Partner on How Higher Oil Prices Have Affected the Rail and Trucking Industries
June 17, 2011
>Roulston Research Transportation Partner McKee Stewart Jr. gave his take on how higher fuel prices have affected the railroad and trucking industries. He expalined, “With the recent run up in fuel prices the great “Road vs. Rail” debate is being rekindled. Over the course of the last year, national average highway diesel fuel prices have increased by roughly 35%. For a truckload or full container shipment, add on fuel surcharges can increase the costs of transportation by 40 – 50%, depending on the carrier, the mode, and the economic clout of the shipper to negotiate rates. Combined with the recession, shippers are looking to cut transportation costs wherever practicable.
From a shipper’s perspective, there are obvious issues that drive the choice of transportation mode, including service / transit time requirements, the quantity and nature of the goods to be shipped, cost drivers such as distance to and from the railhead, the overall distance that the shipment needs to move. As overall distance increases, rail becomes much more competitive against trucking based on the inherent efficiency associated with its advantage of low fuel consumption per ton mile.
The real question isn’t train vs. truck, it’s about how and when intermodal moves make sense. Rail carriers have been improving service, and have cost advantages over trucks. Combined with the trucking industry capacity issues revolving around driver retention and hours of service, intermodal will continue to gain share, especially in the 1,500 mile length of haul category.
These trends clearly benefit the railroads, particularly the Class I group of carriers like Burlington Northern Santa Fe (a Berkshire Hathaway company), Union Pacific, CSX, and Norfolk Southern. However, on the trucker’s side, rail can be a very helpful partner. Long haul carriers like JB Hunt, Schneider, Werner, ABF, Con-Way, FedEx and UPS generate enough loads to get favorable rates, have over the road options to hold their rail vendor costs down, and have extensive relationships with small and medium shippers that historically haven’t had much negotiating clout with the railroads.
Over the long term, as intermodal transport continues to gain share, the ‘hidden’ beneficiaries may well turn out to be regional carriers such as Con-Way. The more obvious beneficiary to the increasingly complicated supply chain may well turn out to be third party logistics companies like CH Robinson.”
McKee Stewart is founder and Principal of Stewart Management Systems LLC which is a consulting practice focused on Financial Planning and Analysis, Yield Management, and Business Intelligence. He previously worked for over 20 years with Roadway Express in a variety of Senior Level Positions.
>The Tale of Two Economies
January 19, 2011
>As we close the book on 2010, we can’t help but sense a growing frustration politically, economically and socially. Yes the market had a good year, as we continued to see a rebound in consumer spending and business profitability off its trough of 2008-2009. But the housing bubble and subsequent monetary and fiscal response has itself created new issues. Worldwide debt has now become a focal point. We see a ten year plus period of government-induced growth combined with fiscal and monetary irresponsibility can create. Now we have to see if this realization can lead to some soundness in responsibility.
What so many businesses are realizing is just how bad it got and many have still not forgotten their experiences from the last (technology) bubble of 2001. This has caused businesses to hoard cash and protect balance sheets. Over two trillion dollars are on the sidelines frozen by fear of domestic tax policy and government regulation and general lack of incentive to spend. Without clarity, much of this money lies in overseas accounts of multi national companies unwilling to repatriate the asset in the U.S. due to inefficient tax and regulatory policy.
The consumer (70% of the economy) dipped its collective toe back into the spending marketplace in late 2010. But increasingly this sector is reflecting the two tiers of those who have it and those who don’t. Not only do we maintain a high unemployment rate but clearly 20% of the labor force today is unemployed or underemployed. This is a great weight, unlike past recoveries which have tended to see unemployment trend lower much quicker. This is reflective of companies not spending and hiring and not certain of how to allocate assets to grow.
Add to this the economic reality now facing government. Around the world we see the hangover of politicians who have not taken responsibility for funding social programs and spending over the last few decades. It is catching up with them. Starting with Europe where social spending has been the most aggressive the debt burden is the harshest. Without the ability to print money the way the U.S. Federal Reserve can produce, the sovereign debt of many in the European Union is going to be under pressure for years until spending can be right sized to revenue. It remains to be seen how this can be done ,but in the U.S.A. we have a similar issue with our states and municipalities. They also can not print themselves the cash to pay for the benefits and programs promised to public employees and retirees as well as to fund programs currently planned.
Domestically, the focus has been on the federal debt and although this will be a large concern the more immediate problem is our state and municipal spending issues. We will be watching closely as this is we believe the biggest risk looming in the next 12 months and how our government spending and revenues trend. Government has to start spending on infrastructure and job creation. Spending on social stimulus and tax creativity does not create jobs. The most important measurements to watch on this front are household formations and business formations. This will affect unemployment on a more permanent basis.
In 2011 the consumer is not going to grow enough to bailout the government. Key indicators to watch for the consumer are disposable income and savings rates. As long as these two can maintain the current high levels relative to the past few years, we should see stability. The overwhelming issue to the consumer is housing. With regional exceptions, primarily in affluent areas, housing has changed the landscape for a generation. No longer is real estate the sanctum of growth so many had based their retirement and savings plans upon.
This has changed confidence and shaken our banking system. The hangover is by no means over. Without government policy to change the overhang of inventory and the approximately 20% of homes in America in foreclosure or default the banking system will teeter on this issue indefinitely. This risk is real and creates a logjam for further spending, bank lending and overall consumer confidence. Unemployment will remain frustratingly influenced by this issue. Bank lending reluctance is in large part directly influenced by the housing and commercial real estate portfolios of the financial system locked up by underwater valuations. The impact to mark to market assets that make up a crippling percentage of bank balance sheets must be addressed for any significant change in consumer growth or bank credit availability. Banks are only aggressive now to the good credit customers. To others the doors are and will remain closed. The tale of two economies.
For the markets we are watching for guidance of these indicators we mention above. In general, the institutional invest has been bullish but the individual investor remains in large part on the sidelines. Although in the past this has been a positive indicator, we believe today it is more indicative of the uncertainty of consumers and their confidence in their government leadership. The recent elections created some short term stimulus if in nothing else but hope. The results remain to be seen. Clearly many bonds have become an unattractive alternative to stocks except in the municipal and higher corporate risk sectors, but only for those who understand these markets. We believe the fixed income market today is best exposed if done through hedging and more aggressive asset management. We believe this lowers risk and volatility.
In equities we see a two tier market reflecting the two tiered economy. As we have seen value outperform growth in general over the last decade, it is quite revealing of the tech bubble in the early part of the decade and the financial bubble more recently. It helps explain the impact of compounding to those who monitor performance closely. International exposure has helped earnings and performance in particular in the last few years, and we believe that will continue to be the case. Sectors with higher international exposure include Technology (54%), Materials (43%), Industrials (35%), Consumer Staples (33%) and Energy (29%). It is interesting to note these sectors are all doing relatively well. Despite the fact that Health Care also has (29%) international exposure, its performance among groups, strong return is noticeably absent. This is very reflective of the government regulatory uncertainty we mentioned earlier continuing to drag on the economy.
The economy is split. Those industries exposed to international customers, commodities and industrial growth are excelling. The U.S. farmer and miner as well as the trucker and locomotive engineer are busy. Factories in capital goods (especially overseas) are chugging along well. China is continuing to be the engine of growth as do some of the other emerging economies. We don’t see this changing without a significantly greater debt problem either in sovereign debt or the U.S. banking system, which does still create the potential of significant volatility. We like the general valuations in the market. At the same time, diversification and hedging are key ingredients to deal with the uncertainty that any of these unknowns might influence.
The world markets have become more volatile. Faster flows of information and media hyperbole have been discussed many times by us as having significant impact to the markets and not all good. But the reality is right now that in large part the individual investor fled the equity markets in the last few years and now has watched the appreciation of the last cycle mostly from the sidelines. A lot of cash is in money markets and low yielding savings. Mutual fund flows have moved out of domestic equities (reflecting mostly individuals) for over 18 months. We will watch the measurements we discuss here very closely in 2011, as well as the government and investor response. An asset advisor needs to be rotating to respond to this environment and we intend to be engaged.
The Collaborator 