The financial markets often serve as a leading indicator for a multitude of economic and financial events.  The valuations of publicly traded companies routinely increase or decrease based on investor expectations of future events.  The financial woes of many European countries were foreshadowed by precipitous declines in the prices of the sovereign debt issued by Greece and Italy.  An analysis of valuation trends in the market often provides evidence of investors’ expectations of future events.

During the period 1980 to 2007, Real GDP increased at a compound annual growth rate of 3.1%.  In comparison, the annual volume of freight shipped via intercity truck increased at an annual rate of 2.8% over the same period.  The associated figure illustrates the correlation between Real GDP and annual ton-miles of truck freight. 

Given the high historical correlation between truck-based freight and Real GDP, we can utilize the market values of publicly-traded trucking companies to provide clues as to investor expectations regarding future utilization of truck freight, and indirectly, the likely economic output.

We often measure the value of entities as a multiple of earnings.  Because net income has a lot of ‘noise’ that makes it difficult to compare two entities, we look at the market value as a multiple of earnings before interest, taxes, depreciation, and amortization (EBITDA).  Prior to the downturn in the economy in 2008, publicly traded trucking companies were valued at about 5 times EBITDA.  In the midst of the financial crisis, this declined to about 3.7 times EBITDA.  By the end of 2009, investors expected a moderate economic recovery, and the share prices for trucking companies gradually began to climb, and valuations remained between 6 and 7 times EBITDA through early 2011.  However, late in the summer of 2011, valuations for publicly traded trucking companies declined to just over 4 times EBITDA, very near the valuations that we experienced in the midst of the economic downturn in late 2008.

The recent share prices of trucking companies provide evidence that investors may be anticipating reduced demand for freight services in the near future, which may be a leading indicator of reduced economic activity.