Overview
The Class 8 tractor market has experienced rollercoaster peaks and valleys the last 3 years, and some stability – return to normal – is likely to return soon. 2019 saw over 900 trucking companies file for bankruptcy in the hangover following the huge boom years 2018-2019, with an average of 30 trucks per company that is over 28,000 trucks off the road and for sale entering 2020. Then the pandemic saw a sudden halt to shipping in the first half of the year which reduced tractor demand and values further. Then in the second half of 2020 freight rates went through the roof and demand for new and used trucks skyrocketed. Finance and leasing companies had trouble keeping up with this market and lots of portfolio managers were at a loss. Valuation of tractor assets has been extremely challenging in the last year.
Class 8 Tractor Market – Summary and Outlook
The Class 8 heavy truck market is led by Freightliner (36% market share in 2019), Peterbilt (15%), and Kenworth (15%), followed by International (13%), Volvo (9%), Mack (8%), and Western Star (3%). U.S. customers bought 276,348 heavy duty trucks in 2019, up from 250,545 in 2018.
The Class 8 tractor market is currently booming, fueled by the recent rapid ascent in freight rates with increasing demand and lead times for new trucks. In 1H 2020 the Class 8 truck market was still suffering from a hangover from the freight boom of 2018 and 2019, which led operators to purchase a lot of trucks. Class 8 market capacity was up 7% during 2019, with freight volumes growing at 1% and the resulting freight recession happening in Summer 2019. The growing supply of trucks then collided with sliding freight volumes in US distribution channels. Manufacturers such as Peterbilt, Kenworth, and Freightliner were still working through lengthy order backlogs but the oversupply of trucks in early 2020 was apparent.
As of mid 2020 the tractor market continued to suffer with overcapacity and pricing pressure on new and used trucks. Over 900 trucking companies went bankrupt in 2019, pushing over 28,000 used trucks onto an already overcrowded used market, leading to price declines over the existing price declines of the last year. Spot prices for freight fell over 25% from early 2019 to early 2020, but have recovered dramatically to higher levels than a year ago; FTR Truck Intelligence projects that utilization will accelerate into 2021, pushing freight rates higher than the 10 year average by next summer. The sharply higher freight rates has had the inevitable effect of increasing strength in new Class 8 vehicle demand. The result is that 2020 is going out with a bang, a surge in Class 8 demand leading into 2021. North American Class 8 orders surpassed 50,000 for the second consecutive month. Full year orders reached 278,400 compared with 180,995 during 2019. This compares with the recent demand boom year of 2018, when Class 8 demand reached an all-time high of 490,100 orders.
Used truck prices were flat in mid 2020, but spiked up with the dramatic increase in freight rates. Sales reached 20,200 in September, down slightly from 20,500 a year ago, but up from 18,500 in August. YTD through 9/30/20 sales of used trucks amounted to 176,300, down a bit from 187,500 for the same period in 2019. Although the average used price has increased for 4 consecutive months, it has declined for 17 consecutive months on a year-over-year basis. Tractor demand and pricing had been experiencing heavy downward pricing pressure due to the decline in international shipping and in particular due to the slowdown of the world economy in the current coronavirus outbreak, but the recent sharp increase in freight rates is causing used truck prices to increase at the end of 2020. Most industry observers expect capacity rebalancing to happen soon, as the current market slowdown has been expected for two years and industry participants have had time to plan. Many signs in the trucking industry are pointing to strong demand returning, but individual fleets are finding it difficult to expand due to the difficulty of hiring drivers – many older drivers are retiring, and younger drivers are having difficulty passing drug tests or are attracted to other blue collar manufacturing jobs. Retirement accounts for 54% of the driver shortage.
Class 8 Tractor Values – Critical Features
The value of a used truck depends on OEM, features and year; and on mileage and condition. The highest used values will be realized with leading trucks such as Freightliner Cascadia, Kenworth T880, Peterbilt 365, with high quality engine and transmission and standard cab/spec configuration. Then slightly lower values for Tier 2 Volvo, Mack, and International tractors or for trucks with suboptimal engines.
The highest value engines which support the highest truck values are as follows:
- Cummins X15 Efficiency, Productivity, Performance Series
- Cummins X12, X12N
- Detroit Diesel DD13, DD15, DD16
- Mack MP8-415C 415HP
- Caterpillar 1693, 380
- Caterpillar C15, C16
- Paccar MX-11, MX-13 (Peterbilt or Kenworth trucks)
Detroit Diesel is owned by the same company as Freightliner and Western Star.
Other important features and specifications for tractors include transmission, upfitting, and cab configuration.
Tractor Mileage
Average miles/year for Class 8 tractors:
- Sleepers – 125,000 – 135,00
- Day Cabs – 60,000 – 75,000
The secondary market will pay more for used trucks with at least some warranty remaining. Warranties are often good for the first 500,000 miles.
Market Analysis – Used Truck Value
The value of an asset is determined by three methods, according to the Uniform Standards of Professional Appraisal Practice, the primary methodology in practice in the professional appraisal industry, as promoted by the American Society of Appraisers.
The three approaches to value according to USPAP:
- Income approach: present value of the future economic benefits of owning the property;
- Cost approach: current replacement cost new, less loss in value caused by physical deterioration, functional obsolescence, and economic obsolescence;
- Market approach: adjust the prices paid for comparable assets to the subject asset, equating the comparables to the subject
Here is how the three approaches might be applied to valuing a used truck, and then we will discuss what method works better than the others. We will use these methods to value a 2016 Freightliner Cascadia tractor, original price $150,000. These examples are simplified for clarity and to demonstrate the approaches.
Income approach
The income generated by a truck can be calculated by multiplying the freight day rate x average utilization. There are a lot of assumptions and variables built into this analysis – we will explore the income method in greater depth in future blog postings.
Cost Approach
The cost approach begins with the replacement cost new, which is easy for a popular truck like the subject Freightliner Cascadia. The truck has many options, but a common Cascadia today might cost $150,000. Then deductions are made for physical deterioration, based on a useful life of 20 years and a salvage value of 15%. Functional obsolescence occurs when newer products which come along in the next five years are more efficient or better at doing the job. Economic obsolescence occurs when forces external to the asset make the subject asset worth less. If you believe there is a 100% chance that diesel trucks will be banned in the US and only electric trucks will be permitted to operate, then the economic obsolescence would be 100%. This cost approach leads to an estimate of $68,694 for a 5 year old Cascadia
Market Approach
The market, or sales comparison, approach to value uses examination of current sales, sales listings, and auction results to determine the value of a five year old Cascadia tractor. For the tractor market, it is easy to find hundreds of current sale listings, offering prices, and hundreds of recent auction results, for this very popular tractor. These listings are easily accessible on truck sales marketplace websites like commercialtrucktrader.com and truckpaper.com. Using these resources you examine the market sales listings and adjust them to the subject. If you find a 2016 Cascadia tractor with 800,000 miles listed for sale for $70,000, you adjust this value to the subject five year old Cascadia with 500,000 miles by increasing the comparable sale upward, to, say, $80,000. This is the “adjusted” value in the right column of the example “market comp” table. This approach yields an estimated value of $51,304 for a five year old Freightliner Cascadia tractor.
So the three approaches to value have resulted in the following FMV estimates:
- Income approach – $ 86,169
- Cost approach – $ 68,694
- Market approach – $ 51,304
The market approach to value is the preferable method to use when good market data is available, when there are an adequate number of comparable sales of comparable assets to the subject. This is because the market is where you have to sell your collateral, and the market does not lie, if you know how to analyze the comparable market sales and make correct adjustments.
The income approach is used when the market approach is not possible due to lack of data and when income can be assigned directly to the subject asset. This is rarely possible, as the asset being valued is often just one machine in a long assembly line and income cannot be assigned specifically to the subject asset.
The cost approach is commonly used when the market approach and income approach are not possible due to lack of data. The cost approach has value because a prudent buyer will not pay more for a property than the cost of acquiring a substitute property of equivalent utility.
The best way to assess the value of a used tractor is to examine the market and see what your subject truck is selling for and has sold for, and this comparable sales data is readily available for trucks. It is useful to verify values by comparing the income approach and cost approach when they make sense.
Mr. Nugent is an Accredited Senior Appraiser of the American Society of Appraisers. He holds a BA in Statistics from the University of California, Berkeley, and an MBA from Santa Clara University.
BlueChip Asset Management is an appraisal and asset management services company which serves the ABL, banking, equipment finance, legal, and turnaround industries. Members of TMA, and CFA. Contact us for asset valuation assistance at 415-515-1110, www.bcamasset.com, or schedule a free 15-minute consultation.