A “sell” rating is reaffirmed on Heartland Express, and earnings disappoint

While reiterating “buy” ratings on the stocks of three other trucking companies, research firm CFRA has again put a relative Wall Street rarity—a “sell” rating—on the shares of Heartland Express.

CFRA’s rating on Heartland has fluctuated between strong sell and sell since 2016. And the report, issued Sunday, February 10, came a day before the company announced earnings that fell short of consensus projections. Fourth quarter earnings of 7 cts per share, excluding non-recurring items, were less than the S&P CapitalIQ consensus of 11 cts per share. Revenues were up to $165 million, but that’s less than the approximately $190 million CapIQ consensus.

Heartland’s stock tumbled in response. At noon, it was trading at $20.18, a decline of approximately 2.09% on the day. But it plummeted at the open to $19.38 after the earnings first were released.

Still, even with that decline, the stock exceeds what CFRA says is its current worth of $19.22. Additionally, CFRA analyst Jim Corridore said in his report: “While HTLD’s focus on premium service and operational efficiency has resulted in returns on capital consistently exceeding those of peers, the current valuation for the stock is above HTLD’s five-year average even as the industry operating environment has worsened.”

The trucking-related “buy” ratings that were reiterated by CFRA were on J.B. Hunt, Knight Swift and Landstar.

The infrequency of “sell” ratings

Sell ratings are rare or infrequent on Wall Street, depending on the defining line between the two. Last year at this time, one estimate put them at about 6% of all ratings; more recent data is difficult to come by. As a story on Marketwatch said in its title, “Wall Street really hates giving any stock a sell rating,” one of the reasons CFRA’s rating on Heartland sticks out.

But in the case of Heartland, CFRA is not alone. According to a Wall Street Journal summary page, there are five “sell” ratings from equity analysts, seven “hold” ratings, and one “underweight.” That has not shifted much in recent months.

Heartland, a short- to medium-distance hauler based in Iowa, is undergoing a spiking operating ratio. In the quarter ended December 31, Its operating ratio/adjusted operating ratio was a high 94%/93.1%; a year ago in the corresponding quarter, it was 85.1%/83.3%. For the full 2017, it was 89.5%/88.1%, versus 86.0%/84.6%.

Integrating IDC

What happened in the interim was the acquisition of IDC in July 2017.  In a statement accompanying the fourth quarter earnings, CEO Michael Gerdin said the fourth quarter saw Heartland focusing on the IDC integration, including “operational investments and decisions that resulted in short term increased operating expense. This also required current and future cash investments which we feel will reward us in long-term operational improvements.” That featured  what Gerdin called a “consolidated pay package across all our operating areas” to help retain drivers.

IDC, according to Gerdin, had an operating ratio near 105% when it was acquired. The legacy IDC business is expected to return to profitability in the fourth quarter of 2018, and through the changes being made at IDC and elsewhere, “we believe these efforts will better position us to focus on our goal of returning to a low-80’s operating ratio,” Gerdin said.

As far as CFRA, its sell rating appears to be tied largely to the company’s forward price/earnings ratio. “Our 12-month target price (for Heartland) of $20 is based on a forward P/E of about 23X our 2017 EPS estimate,” CFRA writes. “This is in line with peers and below HTLD’s 5-year average, reflecting challenges we see HTLD facing.”

In the fourth quarter, Heartland took a positive income tax benefit of $32.8 million, or 39 cts per share on overall earnings per share of 46 cts. The benefit was related to tax reform legislation. Heartland consistently reports tax exposure near 35%, offering up the possibility of a benefit under the new tax law.

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