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Covenant focuses on improving results in downside of cycle

Q2 earnings ahead of expectations, H2 to step higher

Fleet reduction drives improved results at Covenant (Photo: Jim Allen/FreightWaves)

Management from Covenant Logistics Group (NASDAQ: CVLG) said on a call with analysts Thursday the company expects earnings in the back half of 2021 to be higher than the first half of the year.

The Chattanooga, Tennessee-based carrier reported adjusted earnings per share of 96 cents for the second quarter after the market close Wednesday. The result was well ahead of the consensus estimate of 67 cents per share.

The improvement was brought about by a hot freight market highlighted by tight truck capacity and soaring rates. Additionally, the company’s emphasis on dedicated and expedited transportation and decision to exit solo-driven refrigerated operations, which produced lumpy results at times, aided the performance.

The truckload segment recorded a 92.7% adjusted operating ratio, which was 730 basis points better year-over-year. An improved per-unit revenue profile along with expense management produced the result.


TL revenue (excluding fuel) was up 8.5% year-over-year to $145 million even though the company operated 369 fewer tractors on average (2,451 in total) in the quarter. Covenant’s focus on improving freight mix and raising margins was evident in a 24.8% increase in revenue per tractor per week ($4,551) as miles per tractor increased 13.9% and revenue per loaded mile (ex fuel) was up 10.1% to $2.24.

The expedited fleet recorded a 43.3% increase in revenue per tractor per week ($6,692) and an adjusted operating ratio of 86.4%. Revenue per truck in the dedicated division ($3,382) was up 10% from the first quarter and 17.4% year-over-year. The division recorded a 99.4% adjusted OR.

Table: Covenant’s key performance indicators

Raising the trough of the cycle

The dedicated group has completed the process of merging three different fleets under the same management team and to one operating system. Management said the performance in the quarter “is giving us great confidence toward reaching our mid- to high-90s OR target for the third quarter” and low 90s over time.

The guide is for margins to remain steady throughout all of its division with dedicated continuing to improve sequentially over the next two quarters.


Covenant is entering into longer-term partnerships with a number of customers to ease volatility in the model. The process also allows its customers to procure transportation capacity longer term. Management said it’s costing the company revenue currently but it is the best long-term path for sustained results.

On plans around fleet growth, management said the company would like to expand the dedicated fleet in certain accounts but “the driver market continues to be a challenge” even after it installed its second pay increase of 2021 during June. Further, equipment constraints are hampering growth plans as the wait for equipment and some parts is about one year on average.

Covenant got contributions from other segments as well. Managed freight posted $7.5 million in operating income after a slight loss last year and its equity investment in Transport Enterprise Leasing yielded an additional 12 cents in EPS compared to the year-ago quarter.

On the chances of earnings growth in the next year, management said they feel really good about what the year could produce but that it’s too early to make a prediction.

“We’re probably more focused not on whether earnings are up or earnings are down next year, it’s more on keep improving that low-water mark,” said Paul Bunn, senior EVP and COO. They want the model to be able to perform throughout the cycle at a higher low-water mark than in past cycles when it struggled to stay profitable.

Covenant reduced net debt by $35.2 million in the quarter to $88.1 million, lowering debt-to-total capitalization to 21.9% from 48.1% a year ago. Management expects free cash flow generated to dip modestly in the back half as Covenant takes delivery of equipment and pays down debt. While M&A activity has shifted to high gear throughout the industry, Covenant, which has been an active acquirer in the past, plans to stay the course and focus on executing the transformation.

Shares of CVLG closed the day up 3.9% on Thursday compared to the S&P 500, which was up 0.2%.

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Todd Maiden

Based in Richmond, VA, Todd is the finance editor at FreightWaves. Prior to joining FreightWaves, he covered the TLs, LTLs, railroads and brokers for RBC Capital Markets and BB&T Capital Markets. Todd began his career in banking and finance before moving over to transportation equity research where he provided stock recommendations for publicly traded transportation companies.