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News

Covenant Transportation continuing to reshape offering

The carrier sees many new opportunities and wants to position the business to increase freight visibility and lower risk

Covenant Transportation Group Inc. (NASDAQ: CVTI) will continue to allocate more equipment to its dedicated offering in efforts to lower financial leverage and gain more predictability into operations.

On the company’s fourth-quarter 2019 earnings call with analysts and investors, Covenant Transportation’s management team said that they have seen solid results from the company’s dedicated operations and prefer the economics of the business model to that of its solo-driven refrigerated unit, which has been pressured of late.

The company has been significantly increasing its exposure to dedicated for more than a year now.

The Chattanooga-based truckload (TL) carrier reported fourth-quarter 2019 adjusted earnings per share (EPS) of $0.10, below analysts’ expectations for $0.27 per share, after the market closed on Thursday. The result included a $0.02 per share loss associated with a customer bankruptcy at an affiliate.

Covenant Transportation’s Key Performance Indicators

Covenant plans to reallocate roughly 500 tractors to dedicated service in 2020 away from its less predictable offerings like refrigerated. By the time these efforts conclude, Covenant Transportation Chairman and CEO David R. Parker believes the unit could account for 60% of the carrier’s total revenue.

Parker said that there is “lower risk” in the dedicated model as daily capacity and freight commitments are firmer and the contracts are difficult to unwind as the carrier is more embedded in the shipper’s supply chain. Further, shippers typically incur large exit fees when getting out of a dedicated contract.

Management highlighted recent wins in dedicated and managed freight (freight brokerage, transportation management services, warehousing and other offerings). Covenant will be onboarding five new contracts by the end of second quarter 2020 representing approximately $50 million to 60 million in incremental annualized revenue.

The company’s capital commitments are expected to move lower in 2020 as well.

Currently, Covenant has 625 tractors that are expected to be traded in or sold in the secondary market. Management said that a good portion of this equipment is scheduled for replacement, but there could be some attrition in the overall tractor fleet that closed the year at 3,021. The official guide calls for the company’s tractor count to be flat to down 2% in 2020, but Parker said that count could move lower if Covenant wasn’t successful raising rates on a few lower-margined dedicated accounts.

As such, total capital expenditures (capex) for 2020 are expected to run below historical equipment replacement levels. Management guided capex to run in the $20 million to $30 million range for 2020, which includes the proceeds from the sale of two real estate transactions. This is as much as half of what the carrier has spent in past years. With the reduction in spending, the average tractor age is expected to increase to 2.2 to 2.3 years by year end compared to the 2-year average reported at the end of 2019.

Recent optimism

Parker said that so far in January, a good portion of Covenant’s business is up year-over-year, with dedicated “growing pretty fast.”  He believes that pricing in its highway services business “bottomed out,” but said that the company is not asking for rate increases yet. Parker said that truck capacity is leaving the market and that they aren’t “being bombarded” for rate decreases anymore.

However, average revenue-per-mile metrics will likely be down in the first quarter, but not nearly as bad as the 11% year-over-year decline witnessed in the fourth quarter. In the recent period, rates from Covenant’s non peak season core customers were down approximately 5% to 6%. Along those lines, the first quarter is not likely to be profitable and management said that earnings will be second-half loaded in 2020.

Parker was enthusiastic about recent customer meetings. He said that the company is up for many new opportunities in expedited, brokerage and dedicated and that the three-day trip provided the most constructive talks he has experienced in 14 months.

CVTI Stock Price Chart – SONAR: STOCK.CVTI

Tags

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.

10 Comments

  1. We shall see , wishing them the best of luck . For now ,I’m keeping an eye on their chart and if my count pans out , it’ll be a nice candidate for a potential long position . Currently my call is bearish on that one as posted on the prior article which mentions them .

    Currently short the Dow Jones Industrial Average using leverage via DXD since Tuesday this week .

        1. You can protect yourself and hedge . That way if you’re “wrong” then you at least protected yourself against such a possibility without giving up and kicking yourself for pulling the plug too soon .

          Ahhhh these emotions that lead to doubt can be quite a challenge . So eliminate them !

          Now due to the risks involved and since this is being discussed publicly I’ll go further than my typical disclaimer , ie: “In my humble opinion” ,and state that you should consult a professional financial advisor due to the risks involved , and that past performance isn’t indicative of future performance yaddi yaddi yadda , LOL !

          Ok . Here’s an example . You’re holding long but you start to realize , EXAMPLE: that “breath” is weakening and in fact negatively diverging . So you decide that you would like to protect yourself if in fact this is the case and a probable reversal could ensue , however, you’re not quite sure and would be displeased if you jumped the gun and the market continued to extend itself and you missing out on that “potential” continuation .

          Buy insurance !

          What ?

          Get some put option contracts .You don’t have to be aggressive , buy time . Speak about that with your financial advisor . You want to mitigate your risk in case this market takes a hit and weakens your financial gains while still holding your long position by predetermining how much you’re willing to risk, if at all , except for the premium to protect yourself .

          Yes it costs to play . Butter to be safe than sorry . Just like it costs you for fire insurance on your house even though you believe the probability of your house going up in flames is slim to nil , you protect yourself and your asset(s) in case the opposite occurs no matter how confident you may be that it’s highly improbable . You’re being “prudent” rather than “gambling” . Therefore you’re exercising good judgement and wisdom by taking home insurance , thus mitigating your risk exposure in case the “improbable” occurs due to being prudent . By doing so you sleep on both ears at night and you’re not stressed when you’re away from your home due to it being “protected” .

          In my humble opinion ………….

          1. UPDATE !

            Quote:

            “The Dow Jones Industrial average posted its worst drop since October, down 1.6% or 453 points.”

            NICE GAP DOWN ! LOL ! (wink)

            In my “humble” opinion ……….

  2. Reading between the lines… it does not sound good over there… Rates are in the tank, accounts have threatened to leave from the sound of it due to available lower rates elsewhere, rates that Covenant is losing money on. And a few other contracts sound as if they may leave if the rates are pushed up that Covenant cannot afford to realistically service.

    The we have the refer division, just guessing, but they are losing money there due to the overcapacity. That is 500 trucks that will be dissolved over time.

    Then the older equipment, if it is as my XPO salesman stated in regards to truck maintenance, repairs are eating Covenant alive too, as the emission systems age and fail prematurely when compared to non emission trucks of the past.

    I would say Covenant is not the only company in this mess, it was just their turn to be in the spotlight as the earnings call did not meet expectations.

    It looks to me that Covenant is feeling the heat, not quite deep do do yet, but getting there.

    1. It’s always darkest before dawn .

      Remember how people feel during recessions , especially when the recession is on the verge of reversing . People act like it’s the end of the world and that everything is going to hell in a hand basket , it’s off to the dark ages etc etc etc . Just like the opposite at market peaks , it’s the best , it’s different this time , now the Fed is helping out etc etc etc .

      Remember the peak in the trucking industry in 2018 . running to buy new trucks , wages and rates were climbing , couldn’t fill demand fast enough , yaddi yaddi yadda , LOL ! What happened ? Now it’s the opposite , apparently the trucking industry is going to hell in a hand basket , LOL !(wink)

      In my humble opinion ………….

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