Mega-carrier bet big on the spot market and won
Today Knight-Swift reported an upside surprise—an adjusted EPS of $0.52—beating the consensus earnings expectation by $0.13 per share. KNX stock immediately surged from Tuesday’s close at $45.35 to over $51 this morning. Adjustments to the earnings per share figures were made for the tax reform benefit ($364.2M), amortization expense related to intangible assets, and a legal reserve. According to the executives on the earning call, last year’s mega-merger is going even better than planned. Morgan Stanley raised KNX’s price target to $60 from $50.
One of the biggest trucking stories in the second half of 2017 was the sky-high spot market, driven upward by hurricanes, driver shortages, and ELD regulations. Carriers like Knight who were in a position to take advantage of the spot rates performed extremely well in Q4. Knight posted an impressive 14.9% increase in revenue per loaded mile YOY after exploiting exploding spot rates in the second half of the year. Knight took a gamble and committed slightly more than 20% of its capacity to the spot market in the fourth quarter, compared to mid- to high-single digits in the fourth quarter of 2016. Knight Trucking’s operating ratio improved 210 basis points to 81.6%; Knight Logistics grew their revenue per load brokered by 17.2% and posted an adjusted OR of 94%.
Swift improved average revenue per tractor by 6.7% by raising rates 9%+ with a 2.5% decline in utilization. Swift's management said they were focusing on fixing its reefer division in 2018 (refrigerated average revenue per tractor grew less than 1%).
“The driver shortage could strain the ability of carriers to increase capacity and combined with the underpinnings of a strong demand environment, we believe we are in the early stages of a multi-year truck cycle,” wrote Kevin Sterling, Managing Director and Senior Equity Research Analyst at Seaport Global Securities.
Knight-Swift’s CEO agreed. “Given the strength in the freight market and the inflationary pressures the industry is experiencing in driver wages, we expect to see rate increases in our contract business in the high single digits to low double digits throughout 2018,” said Dave Jackson during the earnings conference call.
Knight-Swift said the company would move away from leasing equipment and plans net capital expenditures of between $525M and $575M in 2018. The company said it was on track to achieve its $150M synergy goal by 2019.
At the end of 2017, FreightWaves released our 2018 outlook for trucking mergers and acquisitions: industry analysts talked about the diminishing economies of scale in truckload carriers over about $250M in revenue. Significant synergies of size, though, allowed fleets in recent years to operate efficiently around the $2B revenue mark, and the analysts we interviewed said that the Knight-Swift merger represented a big bet that more sophisticated data operations could push that upper limit even higher. Now we’re seeing the first real evidence that the mega-carrier strategy can work, and if analysts’ forecasts about the trucking cycle bear out and we are in the fact at the beginning of a multi-year favorable freight environment, Knight-Swift is positioned to perform extremely well.
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