ArcBest (NASDAQ: ARCB) reported Q3 revenues of $826.2M and $40.8M in net income, translating to $1.44 adjusted earnings per share, beating Wall Street’s consensus estimate by 32 cts. ABF Freight, the asset-based side, grew its per-day revenue 12.2% year-over-year, while its operating ratio dropped 400 bps to 91.4%. The LTL carrier achieved an impressive improvement in operating efficiency by delivering fewer shipments (-1% YOY) which were heavier (+1.6%) and more expensive (+10.1% revenue per hundredweight).
ArcBest shares jumped 15% Friday morning on the company’s positive results.
The asset-light side also performed well, but is still working through compressed margins due to a “limited availability of competitively priced equipment capacity,” though ArcBest CEO Judy McReynolds reported that the capacity situation has improved since the first half of 2018. The asset-light operation grew its per-day revenues 7.9%, but only grew adjusted operating income 5.8%, implying a larger, but slightly less efficient logistics business.
David Humphrey, VP of Investor Relations, President, Chairperson, and CEO Judy McReynolds, and David Cobb, VP and CFO, presented the results to investors and analysts in a conference call this morning, and answered pre-submitted questions.
In response to questions from Chris Weatherbee at Citi and Morgan Stanley’s Ravi Shanker about the demand outlook for Q4, McReynolds said that the national inventory to sales ratio is trending downward, which is favorable for transportation companies and that the fundamentals of the macro economy remained strong, though housing has disappointed.
“In the case of a macro slowdown, how would it affect you as a diversified company?” Shanker asked.
“Our logistics organization provides customers multiple solutions and works equally well in any economic environment,” McReynolds replied. In a note on ArcBest dated October 30, Bank of America Merrill Lynch analyst Ken Hoexter disagreed with McReynolds’ assessment, noting that in the most recent down year for transportation 2016, Old Dominion’s net earnings were flat, while ARCB’s net earnings contracted by 45%.
McReynolds noted that pronounced pull-forward freight from ArcBest customers could soften Q1 2019 and have an impact on the company, but she also gave positive guidance on ArcBest’s ability to maintain its excellent operating ratio in future quarters.
“We have laid a good foundation,” McReynolds stated. “We feel good about the finalization of the union contract, and a reasonable level of cost increases. We expect our efforts to provide the solutions our customers need. We have a tremendous market growth opportunity, especially in asset light,” McReynolds said, noting that ArcBest research estimated that the company had a $3B market opportunity among its existing customer base on the asset-light side.
Cobb guided down capex for 2018 to $145-50M from a previous estimate of $155-65M due to shifts in the timing of expenditures to 2019. Still, ArcBest has been able to reduce the total cost of ownership of its trucks by keeping its fleet young (average road tractor age was just 16 months) and adding safety and productivity-enhancing technology to its vehicles.
In response to a question about ArcBest’s expectations for e-commerce in this year’s peak season, McReynolds said that ArcBest took some yield action with a few of its e-commerce customers, and subsequently some volumes contracted, but that “we still maintain a primary position and are confident in organic growth opportunities… it’s an area of strength for ArcBest.”
Notably, ArcBest executives either were not asked or did not answer any analyst questions about off-book pension liabilities related to the Central States Pension Fund, the subject of a now-notorious Off Wall Street short report last month. In our view, the company missed an opportunity to clarify how investors should think about ArcBest’s downside risk when the pension fund becomes insolvent.
The market seems a little confused about what to do with the company. The stock popped on quarterly results much improved from 2017, but analysts were hesitant. BoAML’s Hoexter downgraded ArcBest to a sell, with a price target at $38.
“To us, ArcBest has done a solid job of executing in recent quarters,” Hoexter wrote. “We credit management with recognizing the problems in its operating model and moving to a more logical dimensional pricing model, culling its business to focus on account profitability over volume growth, and expanding its brokerage business. Nevertheless, it remains encumbered by a union model, with union carriers sacrificing significant share over the past decade. Additionally, its narrow margins give it less flexibility in a downturn.”
Between last night’s release of the numbers and this morning’s conference call, Will Milby from Seaport Global issued a note maintaining his ‘Neutral’ rating for the stock.