There was a time, not so long ago, when the Dow Jones Transportation Index was keenly watched and tracked to gauge the state of the economy. With the tech space, specifically, the MAG7 now leading the charge when it comes to the S&P 500, the Transportation Index has taken a sort of back seat. However, the value of that index has not diminished one bit.

One of the components of the Dow Jones Transportation Index is J. B. Hunt—the largest intermodal transportation company in the US. In December 2024, there was a healthy discussion about the state of the freight market, with many leading voices in the logistics space forecasting a turnaround. However, I took the other side of the debate and predicted a continued freight recession in 2025 and issued an underperform rating for JBHT. The following is the key quote from JBHT’s Q3 2024 earnings call that made me issue the underperform rating.

While that call on JBHT has been playing out like a charm, the uncertainty around tariffs has only gone on to strengthen my view of continued problems in the logistics space. Even though I was being openly negative about JBHT, I dithered from issuing an all-out underperform rating on PACCAR (PCAR)—the truck maker of America—as I was unsure about when the bankruptcies would hit the smaller carriers. Well, the bankruptcies have started rolling in slowly, and with the ongoing tariff drama, it will only accelerate from here.

The simplest way to gauge the state of the freight market is to look at the Class 8 truck orders.

Pretty self-explanatory. 2025 orders are tracking well below 2024 orders. Also, do note that Class 8 truck orders have a seasonality to them, and the 2024 pattern is how it has been historically. Hence, when analyzing quarterly numbers for PCAR, one should always do a Year-over-Year comparison and ignore the fast-moving sequential Quarter-over-Quarter change.

Again, pretty self-explanatory. There is a marked deterioration, and the weakness also shows up in the FCF.

Now, to appreciate how tariffs can impact global trade and the freight market, I would request that you read up on the Smoot-Hawley Tariff Act of 1930. It will give you a broad roadmap to work with as details filter in. I leave the debate to the economists; however, there is one consensus about the Smoot-Hawley Tariff Act: It caused international trade to slow down meaningfully and exacerbated the Great Depression.

Sticking to facts and not getting into a debate, here is what is happening at the major ports.

Essentially, if stuff is not coming to the ports, carriers like JBHT have fewer orders, and if the uncertainty persists, orders for PCAR will suffer. Some people may have a different view—it is their right to have an opinion—that is what makes a market, doesn’t it?

Verdict

PCAR’s outlook (refer to pages 31 and 32 of the Q1 2025 10Q) has been abysmal. Truck sales are expected to be flat to down 12% for 2025 compared to 2024. Parts sales have been holding up steady and are expected to be up 2%-4% for 2025 (older trucks are plying longer).

The financial services division makes up 7.6% of revenues and is holding up. For now, things are holding steady, but if a wave of bankruptcies hits, there could be a meaningful impact, as it has exposure to 19,755.9 million in loans, finance leases, dealer financing, and other lease receivables.

Given what I discussed here, I would expect PCAR to underperform meaningfully over the next six months. One would need to reevaluate in Q4, as optimism in the freight market is at its highest during that period.

PCAR, like JBHT, has a solid balance sheet and enough liquidity to weather any brewing storm. With a Current Ratio of 5.8 and a Quick Ratio of 4.8, there are no immediate liquidity concerns. Hence, this is a short-term tactical call.

Random Thoughts

As companies work through the inventories built up before Liberation Day, time is running out for them to hold down prices and manage costs in the face of ongoing uncertainty around tariffs. Debating the entire tariff situation is a pointless exercise, as it is beyond the control of companies. All companies need to know is what the tariffs are and then work within those parameters. Yes, there will be winners and losers; that is part of life. The longer the uncertainty lingers, the economy will eventually face headwinds. Given what we know at this moment, the second half of the year should see price increases and earnings uncertainty.

As President Trump provided relief on the tariff front in the middle of April, the markets have rallied smartly and how. The long-term readers of this blog, specifically, Premium Subscribers, got to ride it with me. However, the time has come to start raising cash. I would sell TMDX (awesome trade since January, no?) and UBER. WPM remains a hold as I remain bullish on gold. The long positions with a 5+ year timeframe remain a hold, even if some tactical trimming may be done to raise cash.

I remain confident in short positions in WM, TSCO, BJ, AGCO, and DUOL. As we head into Q2 earnings season, hopefully, there are going to be some fireworks with some of these names.

Customary request: Please, no trading with short-term options.