Stock pick: Rush Enterprises Inc. (RUSHA) could accelerate as truck sales pick up

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Chart showing trailing 12-month stock performance of Rush Enterprisese

The trucking sector may not seem like the most exciting industry, but one Bank of Montreal analyst thinks it’s one of the best places for people to put their money.

It’s taken a while for demand to pick up after the recession, wrote Joel Tiss in an April 1 trucking industry report, but he points out that many trucking retailers have seen big stock market gains since the sector’s 2011 bottom and it’s likely that will continue.

The industry is now seeing double-digit volume growth, while most fleet utilization rates are exceeding 91%. That’s significant, he says, because historically, when utilization rates exceed 89% trucking companies have to put more vehicles on the road—about 35,000 for every 1% above that threshold.

Demand for new trucks should exceed 300,000 units this year and next, he said.

One of the big beneficiaries of an increase truck demand is New Braunfels, Texas-based Rush Enterprises Inc. (NASDAQ: RUSHA), the largest owner of commercial dealerships in the U.S. Given his trucking outlook, Tiss raised his target on the company from market perform to outpeform.

He’s bullish on some of the recent acquisitions the company has made. For example, in January it bought three Chicago-based dealerships for $145 million and in 2013 it bought 34 dealerships in six states. These buys will be good for the bottom line.

“The combination of expected operating efficiencies, a recovering truck market, and a bunch of new dealer locations and geographies could allow Rush’s results to become more visible over the next few quarters,” he writes.

Rush, which is the largest independent dealer of Navistar trucks, also thinks it can “play a meaningful role” in getting Navistar to trade in older model trucks, refurbish those trucks then sell them through its dealers.

Reselling older model trucks means Rush’s results would continue to improve even if new truck sales flatten out, writes Tiss.

Here’s another reason to consider this stock: it has a 10-year compound annual growth rate of 15% and that should continue for another two or three years at least.

“That makes it the fastest growing trucking-related name in our universe,” says Tiss.

While the stock is up 13% year-to-date—it’s currently trading at $33 a share—the BMO analyst thinks it could hit $36 over the next 12 months. Other analysts think it could hit $38.

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