Sunday, December 22, 2019

Astute readers of the Calcbench blog will recall that last July we had a post about Knight-Swift Transportation ($KNX), an Arizona-based trucking firm that warning earnings were entering a mid-year slump.

Now we have an update: they’re still in a slump.

Knight-Swift filed posted an update on Dec. 19 to its earnings guidance, guiding fourth-quarter estimates of adjusted EPS downward from an original range of $0.62-$0.65 to $0.50-$0.52. Ouch.

Why the mark-down? “The industry continues to be oversupplied with truckload capacity,” Knight-Swift said its release, “which led to more muted seasonal improvement in the freight market from third to fourth quarter... As a result, our sequential third to fourth quarter rate increases were less than anticipated, leading to reduced revenues and lower than expected operating income.”

So the trucking industry continues to be in a slump, so trucking firms can’t raise prices as expected, so revenue is lower and that crimps operating income. Got it.

This is interesting because in an earnings release from July, Knight-Swift predicted a bit of slowness in the third quarter and then a rebound in earnings by now — like, to adjusted EPS range of $0.73-$0.77. Now we’re moving in the opposite direction from those halcyon mid-summer estimates.

What are some of Knight-Swift’s peers saying about an industry slowdown? We decided to take a look.

Werner Enterprises ($WERN) filed its third-quarter 2019 results on Oct. 25, and the word “down” appeared all over the opening paragraphs. Werner also said this:

During the third quarter, freight demand in our One-Way Truckload fleet was seasonally below average and well below the unusually strong freight demand of third quarter 2018, which was aided by two December 2017 mandates. Tax reform incentives strengthened third quarter 2018 freight volumes…

We’ve heard this theory before: that the corporate tax cuts enacted at the end of 2017 put the economy on a sugar high in 2018; and as that sugar high faded in 2019 business activity cooled. Hmmm.

Schneider National ($SNDR) reported “challenging market conditions” in its Q3 report from Oct. 31, and cut its 2019 earnings estimates from $1.30-$1.38 EPS down to $1.24-$1.30 — but also said that much of that cut was due to an impairment charge Schneider was swallowing on its trucking fleet.

Old Dominion Freight Line ($ODFL) said much the same in its Q3 earnings release, too. Third-quarter results “reflect the challenging operating environment. The domestic economy remained sluggish during the quarter…”

Analysts can interpret these statements in a few ways. First, it’s true that the economy had a lot of uncertainty hanging over it at the time: the trade war with China, Brexit, a potential government shutdown, the future of U.S. interest rates. That much uncertainty can give any economy pause.

Well, we have a lot less uncertainty about all those issues, at least for now. So maybe businesses and consumers will keep the party going into 2020, and presumably that means revived demand for trucking as we move goods around.

On the other hand, when you read the earnings releases of these trucking firms, you see lots of talk about “right-sizing” or “repositioning resources” or just flat-out taking impairment charges, like Schneider did. At some point, prolonged softness in the industry will prod individual firms to trim down into better competitive shape — or, as always, “consider strategic alternatives.”

We at Calcbench don’t know when any of those forces might translate into a material change in prospects, for Knight-Swift or any other firm. We do, however, provide the tools that can help analysts monitor those forces over time. The rest is up to you.

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