Q&A: John Larkin, Operating Partner, Clarendon Capital

By Jeff Berman, Group News Editor · October 26, 2020

Wall Street investment analyst John Larkin, Operating Partner, Clarendon Capital, provided LM Group News Editor Jeff Berman with a detailed overview of various aspects of the freight transportation and logistics sectors. Their discussion follows below.

Logistics Management: How do you view the impact of the ongoing COVID-19 pandemic on both the freight transportation and logistics markets going back to mid-March?

John Larkin: If you look at what has happened on sort of a micro basis, we had that hoarding effect, where people thought they were going to be on lockdown for many months and bought hundreds of rolls of paper towels and canned goods and so forth. Many supermarkets were stocking out, and, of course, all of the restaurants were closed, so there was a lot of pressure on the grocery supply chain. That created a flurry of transportation activity. And then once everyone had their 12-month supply things fell off of a cliff for a couple of months, and April and May were pretty ugly, as literally everything was locked down. There was not a lot of freight moving, and then as the economy began to reopen again we started to see a lot of inventory rebuilding and a lot of consumption, particularly through the e-commerce channel. And I think what ultimately has happened is that people who still have respectable incomes still are changing the way in which they spend their dollars, [s
pending] less money on restaurants, professional sporting events, concerts, movies, and vacations. And they are reallocating that money to things like sprucing up their homes or maybe adding a room onto a house, or maybe they decide to move out of Manhattan to upstate New York into a more traditional, suburban-like house, because living in New York City when it is locked down is not fun. Ever since the economy began to spool up again, it has been a very hot and heavy freight market, and that really continues to this day. We have not really seen the holiday surge yet, with things expected to get really nutty between now and the end of the year, and it really does look like demand is outstripping capacity in almost every segment of the transportation world, especially those segments that touch e-commerce.

LM: What do you think have been some of the key lessons learned, to date, stemming from COVID for freight transportation and logistics, as well as the last-mile market, too?

Larkin: There is no question that we have taken a big leap forward, in terms of the percentage of retail activity that takes place through e-commerce, and it is not just things like durable goods or household supplies. You are seeing a lot of people turning to food delivery and getting their groceries delivered. It has been a big shot in the arm to accelerate the e-commerce surge, and that has put a lot of pressure on the various elements of the supply chain. The last-mile delivery component of the supply chain is really in the first or second inning of a nine-inning ballgame, and it is not clear exactly what that is going to look like ultimately. But, yet, we are seeing this huge growth in demand, and there are many people looking out there for the best solution for last-mile delivery be it surface robots, drones, and crowd-sourced delivery capacity, [among others]. It will be very interesting to watch it develop over the next couple of years, and we have seen a huge ste p forward over the last six months.

LM: In terms of possible permanent shifts, what are some of the things that COVID has brought upon us that could be here to stay?

Larkin: A lot of it has to do with the technology that allows many companies to operate without having a large number of people in the office. In the transportation and logistics space, many companies are still operating remotely and the feedback I get is that people are actually more productive working from home than they are in the office, but the downside is you don’t get the benefit of exchanging ideas and sort of the creative energy that is available in an office, where lots of people are trying to solve multiple problems simultaneously. And young people don’t get the benefit of watching it all unfold and having a bunch of mentors around to guide them. This work from home thing is real, and it is going to end up reducing the amount of automobile traffic out on the highways, which is a big problem for the transit networks and a big problem for the people that have invested in commercial real estate in urban areas. I think it changes the consumption patterns and ma kes e-commerce and home delivery an even bigger part of the puzzle. People are working from home, eating from home, want to have a nice home office, and they are spending money on outfitting their home office on technology and furniture and so forth. It has been a big change, and I don’t see it going back except maybe partially in a few cases. I think this e-commerce surge is quasi permanent, as is the work from home phenomenon. There is no question about that, and I think you are also going to see some re-shoring of critical manufacturing and maybe some non-critical manufacturing because we have discovered that these long global supply chains are very difficult to manage, particularly in a pandemic or when your trading partners are not dealing with you in a fair manner. No matter who wins the election I think there are going to be some incentives to bring industry back to the U.S. and I think, at the end of the day, that will generate a lot more freight demand also. The o utlook for freight moving around the United States, at the end of the day, is pretty positive long-term, and it is not clear how we are going to get clear of this capacity constraint we seem to be running up against already.

LM: Shifting to Peak Season, import numbers out of the West Coast ports are really strong, with those numbers serving as a proxy for retailers making bets on holiday shopping and inventory replenishment efforts. Where do things stand on those fronts now, with shopping expected to really heat up soon?

Larkin: It seems like a lot of elements of the supply chain are sold out, in that it is very difficult to get space on a ship, and you will see some overflow in the air. As for imports, ports are congested, with the ever-larger ships. The railroads are putting surcharges in place for small- and medium-sized customers. There are not a lot of boxes (containers) in the right places, and chassis are in the wrong places at the wrong time. There don’t seem to be enough draymen out there to dray all of these boxes so it is going to be a very intense and long peak season and it could drivel on beyond the holidays, in my opinion.

LM: How do you view the current state of M&A (merger and acquisition) activity in the freight transportation and logistics space?

Larkin: If you were to analyze some of deals made in 2020, you would find that many of them are private equity-driven. There is a huge amount of capital that has flowed into private equity over the last 10-to-15 years, and unlike the situation we faced 15 years ago there are an awful lot of private equity firms that are either dedicated to transportation and logistics or have a silo of people that are dedicated to transportation and logistics. There is a fair amount of activity there and a lot of interest and a lot of money to be put to work, and it just seems to me that this trend will continue. We are also seeing some blurring of the lines between private equity and venture capital, where venture capitalists are investing in much larger deals, with hundreds of millions of dollars out there, for companies that are not making any money yet. Convoy is an example. And you are seeing private equity firms taking the plunge into investing in companies that are not making any m oney yet, like Greenbriar’s investment into Uber Freight.

LM: With the election rapidly approaching, can you please shed some light on what that would mean for freight transportation and logistics, depending on how things play out?

Larkin: I don’t think the polls are worth much, and it is not clear who is ahead or behind, especially in the swing states. If it is anything like the last time around, they are heavily slanted to the Democratic Party’s side just by virtue of the way they do the polling. But whether it is different or not this time, we don’t know. If Joe Biden wins, I think we are probably going to have higher income taxes, especially for business people, and I think the capital gains tax rate could go up, which could stifle business investment. There is a good shot we could see increase regulations, particularly in the environmental area, which can be very costly, with minimal benefits. I do worry that the economic recovery from COVID-19 could stall and maybe reverse. If Trump wins, he is very pro-business. If anything, taxes will go down even further. We are talking about a 15% capital gains tax rate; that stimulates a lot of investment activity. The low corporate income tax rate does stimulate the movement of manufacturing to the U.S., with the U.S. more competitive from a tax point of view than it was before. If we can get a vaccine out together here quickly, reach herd immunity and get Trump re-elected, I think the sky is the limit on the economy in the next couple of years, to be honest. With all of the positive trends that are working in the freight arena, I just don’t know where the capacity is going to come from. We may need to rethink whether longer combination vehicles make sense or double-bottom 33s make sense or whether the railroads ought to be thinking about much larger investments to increase their intermodal capacity, because we really could have sort of the Golden Age of domestic freight movement here, if Trump gets re-elected. It is not like the world is going to fall apart if Joe Biden gets elected, but I just don’t know if it is going to be as quite as robust.

LM: With earnings season upon us, most think things will be much different than the second quarter, which had the COVID-19 effect baked into results. Is it fair to say things will be better for the third quarter?

Larkin: One of the bellwether stocks is J.B. Hunt, which recently reported results, and they talked about how great demand is and how frustrating it was not being able to serve all of the demand because of congestion at intermodal facilities, difficulty in recruiting and training drivers. I have heard that same message over and over again. There is plenty of demand, not enough capacity and no easy solution to the driver shortage at the moment. Many carriers are taking their pay up, and it is not clear that pay is really the magic bullet to solve that problem. Pricing, I think, did not really move up all that much in the third quarter. Earnings should come in pretty strong, because that you do have properly manned are going to be highly productive, but the prices are still going to be a little depressed. I think the pricing is moving up now on the contract side, and the fourth quarter could really be much stronger than the fourth quarter, and I think that guidance could be sort of transmitted loud and clear during the earnings calls and announcements.

October 26, 2020