Many records were set by truckload carriers during the third quarter, including a line on the income statement often overlooked by industry observers: gains on sale. With truck demand at record levels and new equipment tough to find, values in the secondary market have soared and so too have the gains fleets are booking as they swap out old tractors for new.
Gains on the sale of revenue equipment, normally booked as an offset to operating expenses on the P&L, were some of the highest seen for any quarter. In most quarters, the line usually accounts for only a couple of million dollars, or a couple of pennies in earnings per share, but this go-around a supply-squeezed truck market marked by materially higher equipment values pushed gains several millions higher.
Schneider National (NYSE: SNDR) recorded $29.3 million in profits from selling equipment in the quarter, more than double the amount booked in the second quarter and significantly higher than an undisclosed and likely immaterial amount recorded in the 2020 third quarter. The increase relative to the second quarter resulted in 320 basis points of incremental adjusted margin improvement in its TL segment and an additional 7 cents in EPS, allowing it to beat expectations by a dime.
The TL OR was actually down 120 bps from the second quarter when keeping the line item flat. New business startup costs in the dedicated fleet, incurred ahead of revenue from those contracts being received, were cited as culprits. Schneider’s overall average truck count was down 9% year-over-year in the quarter.
In full, the nearly $30 million in asset disposals in the period aided Schneider’s TL operating ratio by more than 600 bps year-over-year.
Don’t balk at the gains, analyst says
Some investors discount the quality of an earnings report when outsized gains are booked. However, analysts who follow the space give carriers full credit, both good and bad, as the gains and losses are a recurring line item and part of a carrier’s normal equipment replacement schedule.
While the entry was bloated during the third quarter, so were many expense lines.
It’s tough to poke holes in an earnings report with abnormally large gains because so many inflationary increases were seen in the period that were COVID and chaos related. The perk is all part of the current supply chain, which includes potentially transitory headwinds like lower driver/asset utilization due to increased detention at customer facilities, equipment downtime due to parts shortages, driver quarantines and other excess cost burdens incurred by fleets to maintain service commitments.
In a note to clients discussing Schneider’s third-quarter result, Morgan Stanley (NYSE: MS) analyst Ravi Shanker said, “Don’t sweat the gains on sale.” He doesn’t consider Schneider’s huge gains in the quarter, which “accounted for more than all the beat,” as an “asterisk on the result.”
He rationalized that “a) the underlying result was still strong; b) gain on sale is hard to predict/lumpy; c) given truck market dynamics it is likely to remain robust for several quarters; and d) it is higher-quality earnings than real estate gains reported by many other companies, which the market is happy to underwrite.”
In the fourth quarter, Schneider plans to sell less than half of the equipment it sold in the third quarter but operating income should remain steady.
Schneider CFO Stephen Bruffett said on a call with analysts, “We expect quite a bit less gains in the fourth quarter but still expect to put as much operating income on the board as we did in the third. That’s an indication that we think everything else is working really well.”
Structural and short-term cost inflation sinks Werner’s quarter even with elevated gains
The current environment also includes cost inflation on expense lines (wages, driver recruitment/retention, insurance premiums and fuel) that probably won’t be transitory or will at least linger through the medium term.
The company missed analysts’ expectations by 16 cents, posting adjusted EPS of 79 cents even though it booked $15.3 million, or 17 cents per share, in gains on sale (compared to just four cents in the year-ago period).
Supply chain disruptions and parts shortages resulted in 8.2 million fewer miles driven by the carrier in the quarter. Driver sourcing costs, lodging, layover pay and pay guarantees to drivers that were inactive due to downed equipment hit earnings by 10 cents per share. Higher liability and health insurance claims and expenses shaved off another 10 cents.
Werner expects to book $10 million to $12 million in gains during the fourth quarter as it will sell fewer units in the period but expects used equipment prices, and the gains per unit, to remain high.
Other carriers see big gains
Knight-Swift Transportation (NYSE: KNX) used higher gains on sale to blow out third-quarter expectations. Gains on sale of $22.1 million were well ahead of the $1.7 million logged in the third quarter of 2020 and outpaced the $15.1 million posted in the second quarter.
The company’s TL unit reported an adjusted OR of 77.8%, 350 bps better year-over-year. It would have been 80% without the more than $20 million increase in gains. Normalizing gains to Knight’s recent historical average of $5 million per quarter shows the line contributed an incremental 8 cents to adjusted EPS, which was $1.30 in the quarter.
Heartland Express (NASDAQ: HTLD) recorded $15.3 million in gains on disposing equipment in the period, nearly double the amount booked in the second quarter and $9.5 million higher year-over-year. In comparison to the second quarter, the incremental gains resulted in 560 bps of adjusted OR improvement and roughly 7 cents per share in earnings. Without the gains, the company’s OR would have been 86.5% versus the 75% it reported.
The carrier reported 31 cents in EPS, which was 2 cents better than the consensus estimate.
While the group may have made hay at a much higher rate on one line, there were many others that were less kind, making it tough to try to exclude any one item or suggest earnings results were fluffed up by outsized gains. Most expense lines were representative of a chaotic transportation environment and have been negatively impacted by the disruption. The gains logged in the period were just one of the symptoms of the market, this time benefiting the carrier.
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