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Trucking stocks could see a rebound in the months ahead if an historical correlation between the Institute for Supply Management’s manufacturing composite readings and stock performance holds true, according to a Wachovia analyst.

The ISM Index, particularly the manufacturing composite, has proven to be a fairly reliable indicator for truckload and less-than-truckload share performance, Justin Yagerman wrote in a note to clients Tuesday.

The most recent manufacturing composite reading shows a slight increase, to 48.6 from 48.3, in February.

Over the past 12 years, TL and LTL stocks have typically rallied on average by around 44% and 29%, respectively, within five months of two to three consecutive months of ISM readings below 50–versus an average 14% rise on the S&P 500, Yagerman said.

The index reading for January was 50.7.

Other analysts have also seen encouraging signs for the trucking sector.

Stifel Nicolaus analyst John Larkin sees improving industry fundamentals in the second half of 2008 and improvement in supply and demand conditions in 2009 and 2010, which, he said, should enable carriers to regain pricing leverage that has been lost with excess industry capacity.

The second quarter of this year “may provide the opportunity to buy a number of high-quality transportation companies at more attractive valuations after what we expect will be yet another weak round of quarterly earnings reports for trucking companies this month,” he wrote in a note to clients Wednesday.

Key Banc analyst Todd Fowler was encouraged by stabilization in several sector indicators, including an improvement in the American Trucking Association’s most recent truck tonnage figures.

But truckers aren’t out of the woods yet. There’s still the seasonal weakness of the first quarter to get through as well as the challenges to the sector of the broader economic environment, including, Larkin noted, a “precarious” U.S. economy and rising diesel prices.

Larkin downgraded J.B. Hunt Transport Services, one of the most profitable trucking companies, to hold from buy on the stock’s valuation, arguing that the improvement ahead is already priced into the shares.

“Basically, costs continue to rise while rates fall, which will most likely offset the majority of the benefits from stabilizing demand,” Fowler said of truckers more generally.

“[G]iven easier monetary policy, more realistic earnings estimates, and marginally tighter capacity given limited fleet expansion by carriers, we sense a recovery is closer with every passing month,” he said. But, he added, “the road to recovery is not going to be without a few bumps.”

There’s also the question of what the ISM manufacturing index says about the overall health of the economy. The most recent reading completes the weakest quarterly performance for the U.S. economy since the second quarter of 2003, according to the ISM.

Merrill Lynch research analyst David Rosenberg noted Wednesday that the slight uptick in the index for March was driven largely by an increase in export orders, while domestic orders actually fell to 46.5, the lowest level since October 2001. This recession isn’t about the capital goods sector but about housing, financial institutions and an overextended consumer, he said.

Rising fuel costs are nudging trucking companies toward a type of partnership some carriers once vowed would never work - sharing hauls with railroads.

Diesel reached an average per-gallon price of $3.66 this week, up more than $1 over a year ago, according to the Energy Information Administration. And if high prices continue, truckers could see a difficult period ahead. Fuel costs are the second-highest line item for truckload carriers after salary-related costs, one analyst has noted.

The move to rail intermodal doesn’t necessarily signal carriers are developing substantial brokerage operations. But it does illustrate how truckers are increasingly fine-tuning their operations to avoid driving routes that demand more empty miles or involve hauling loads that are primarily backhaul, Stephens analyst Thom Albrecht wrote in a note to clients Thursday.

“Increasingly, carriers are brokering this out to fleets more conveniently located to the load,” he said. “In imbalanced lanes or medium-haul lanes (700 to 1,100 miles), scores of carriers are starting to use rail intermodal.”

High fuel prices have also prompted shippers to move toward a more regional distribution model to lower transportation costs, according to Wachovia analyst Justin Yagerman.

“These efforts have caused shippers to reposition distribution centers across the country to minimize transportation moves,” Yagerman wrote in a research note Wednesday.

The shift in distribution centers has altered the pattern of truck routes as carriers shrink their lengths of haul Among many carriers the average length of haul is currently around 550 miles, he said.