Universal Truckload Services, Inc. (NASDAQ: UACL) is a trucking company that provides dry van and flatbed operations, which are on-the-road shipping services, as well as shipping by steamship and rail, to shippers in the U.S., Ontario and Quebec. The company operates a network of 3,400 tractors and 3,400 trailers. The company earned $503 million in revenue and $4.9 million in net income in 2009.
The firm has faced rising costs in some of its primary inputs, along with a decrease in demand for its services due to lower retail and industrial production. The largest development impacting the company is the economic downturn; for example, since exports to the US have declined, this directly translates to lower shipping volume. Company costs are highly dependent on volatile oil prices, which have increased since the mid 2000s. Competition has increased significantly due to lower demanded shipping volume. However, this has forced many companies to exit the industry, with 3000 companies exiting since 2008.
Universal Truckload Services uses a non-asset based business model, which means it's more oriented towards providing services and doesn't hold a lot of assets, such as tractors and tailors, on its books. Most of the tractors and two-thirds of the trailers are owned by others. This is an advantage, as the firm doesn't have to own a lot of facilities and spends a lot less on capital expenditures compared to its competitors. On the other hand, since they don't own a lot of their facilities, this limits their growth potential in good economic climates because they can't dictate how fast to expand. The firm does offer some assets, such as its intermodal depot facilities and management information systems, and so it greatly reduces the need for large cash outlays in order to expand. This also increases their average return on assets ratio compared with rivals who use an asset-based model. In the last fiscal year, the company had a 7.1% return on average assets.
Universal relies heavily on its contractor network of agents and owners-operators, who provide the link to customers and are responsible for delivering the services and equipment. The former is responsible for attracting and doing business with shippers, as well as locating freight. Agents focus on a particular market segment and are able to better serve that specific sector's needs compared to a company that targets a wider segment. These agent networks also provide services to owners-operators, including dispatch and terminal services, as well as aid in their recruitment. There are no formal long-term guarantees for future business, however, between agents and Universal. The latter, owners-operators, provide the transportation services to the clients and provide and finance the necessary equipment, such as the majority of the trailers and most of the tractors. They also pay for other costs they incur, like fuel. The firm is divided into several subsidiaries: NYP of Michigan, Inc., Universal Am-Can, Louisiana Transportation, Mason & Dixon Lines, Economy Transport, Great American Lines, CrossRoad Carriers and Mason Dixon Intermodal.
Revenues for the company come from three general segments. Universal Truckload concentrates its business on flatbed and dry van operations, truck brokerage services and rail-truck and steamship-truck intermodal support services.
Since Universal Truckload Services is a shipping company, gas prices are one of the greatest contributors to cost, especially when fuel prices are not as stable. Even the smallest increase in the price of diesel fuel has a large impact on the trucking industry; the American Trucking Association estimates that expenses on fuel increase by $391 million annually if fuel increases by just one cent. It's clear that unpredictable fluctuations in fuel prices can cause costs - and therefore earnings - to be volatile. A large portion of the fleet is owned by owners-operators and not by the company directly, which means United itself isn't taking on large debt; however, if fuel prices are too high, these high costs will significantly cut into the profits of owner-operators, and they will be forced into bankruptcy, as has already happened to some firms. This will hurt United because it will then be harder to find new owner-operators to replace them. Some owners-operators have already chosen to leave the sector, causing Universal and its rivals to compete for these scarcer resources. Universal is forced to constantly search for and hire new owners-operators.
Due to the financial crisis, the truckload sector is moving towards consolidation, meaning a few larger companies will dominate the sector, squeezing out smaller firms. It's likely that this will continue because some smaller firms are forced out by competition by larger firms or combine with others. Since 2008, over 3,000 firms in this sector filed for bankruptcy, which translated into about 7% of trucks carrying freight. The reasons include the instability of inputs like fuel prices, tougher government environmental regulation and the fact that it is harder to obtain financing during a down economic cycle. Also, large firms are able to provide customers with all necessary services, a one-stop solution, with which smaller firms are finding it hard to compete. If this continues to happen, this trend will be advantageous to Universal Truckload Services, as it is a large provider and has the opportunity to capture more market share and customers as smaller competitors continue exit.
In the years leading up to the economic downturn there has been a significant shortage of truck drivers, which are an important input in the trucking industry. The shortage is caused by changes in demographics and labor market participation, lower wages and a significant number of current drivers retiring. The labor market for this segment is overwhelmingly male, about 60% white; the majority of truck tends to be less educated and is mostly between ages 35 and 54. The American Trucking Association predicts this age group will decrease by over 3 million people by the year 2014. Many current truck drivers will retire in the next 10 to 15 years, which will shrink this labor market. In addition, there are many regulatory hurdles candidates have to overcome to be certified as truck drivers, including the English language requirement, training, more thorough background checks, and immigration laws. As the economy recovers and begins to grow again, there will be an increased demand for more truck drivers. Wages have fallen and many firms, already under pressure from the recession, cannot afford to raise pay for truck drivers, exacerbating the problem. As freight companies compete for a smaller pool of workers, the American Trucking Association predicts wages will begin to increase in order to close the supply and demand gap in the labor force.
In the trucking industry, prices charged for shipping services are influenced and determined by fuel rates, equipment availability - how many trucks are on hand for services, the overall economic climate, as well as competitors' prices. There are about a quarter of a million trucks that have excess capacity to deliver freight, which means increased competition and smaller profit margins. Universal's key competitors are: