Revenue at Heartland Express, stripped of rising diesel prices and their impact on fuel surcharge income, has now fallen six consecutive quarters, and it has caught the eye of a Wall Street analyst.
In a report from the company’s transportation team led by Brandon Oglenski, Barclays late last month noted that Heartland remains one of the more profitable truckload carriers among publicly traded companies. But its focus on margins and less on revenue has Barclays concerned enough that it reduced its estimate on several forecasts.
Heartland has a limited number of analysts following the truckload carrier and it does not have a conference call with analysts when it releases its earnings.
“Heartland’s fourth-quarter results capped a record year for earnings, but reductions in revenue may cause investors to question the outlook for growth moving into 2022,” Oglenski said in his report. “We remain concerned by revenue outcomes, which have been suppressed by shortages of labor and equipment combined with Heartland’s commitment to industry-leading margins, a phenomenon that will likely continue in this year.”
With fuel surcharge revenues taken out of the revenue number reported as the top-line figure by Heartland each quarter, the slide is striking. Heartland (NASDAQ: HTLD) posted first-quarter revenues excluding fuel of $146.85 million in the first quarter of 2020, right before the pandemic. By the fourth quarter of 2020, that number had declined to $141.92 million. Revenue ex-fuel continued to drop every quarter in 2021 and finished the year with a fourth-quarter figure of $127.57 million.
But Heartland remained profitable throughout the year. Even as its full 2021 ex-fuel revenue was dropping to $531.16 million from $583.53 million in 2020, its full-year operating income rose to $105.4 million from $93.4 million.
Heartland was able to pull that off by cost management and efficiencies that drove the adjusted operating ratio to 80.2% from 84%. Adjusted operating expenses net of fuel declined to $425.76 million from $490.11 million. In the fourth quarter of 2021, the decline in ex-fuel revenue was accompanied by a reduction in operating expense to just over $101 million from $118.15 million in the fourth quarter of 2020 for an improvement in the adjusted operating ratio to 79.2% from 83.3%.
The Barclays report came with reductions to its forecasts on Heartland this year and into 2023. The bank sees revenue, including fuel, rising to $615 million in 2022 and $623 million in 2023 — revenue including fuel was $607.2 million for full 2021 — and it sees operating income declining 9% to $96 million this year and then rising only slightly to $97 million next year.
EBIT margins — earnings before interest and taxes — are projected by Barclays to fall to 15.6% this year and then to 15.5% next year. It was 17.4% in 2021, according to Barclays.
Earnings per share are forecast to drop 2% in 2022 to 98 cents per share and then jump 7% the following year to $1.05. EPS was $1 in 2021, up from 87 cents in 2020.
Barclay’s rating of Heartland stayed unchanged at equal weight. Its price target of $17 also was unchanged. Heartland closed Thursday at $14.70.
Heartland management declined comment on the Barclays report.
One concern that the Barclays report expresses is that the level of Heartland’s revenue from used equipment sales might be challenged. Heartland has a young fleet; the company recently had been reporting its tractor fleet at around 1.7 to 1.8 years, which is less than most other companies. That got even younger in the fourth quarter, dropping to 1.4 years.
But even if the used truck market may be strong now, the Barclays report sees problems continuing the strong revenue Heartland has posted in recent quarters. Gains from sales of property and equipment were as low as a negative number in the first quarter of 2020 and hit its high for that year in the fourth quarter at just over $6 million. But for the last two quarters of 2021, the company posted gains of $15.25 million and $10 million, respectively.
Barclays noted that the figure Heartland reported for fourth-quarter EBIT was more than its forecasts, but only because equipment sales beat forecasts too. Although the report does not spell it out, a possible reason for its concern could be that Heartland, as a company dedicated to keeping a young fleet, may struggle to do so given that the market for new equipment is so tight. But that tight market did not stop Heartland from making its fleet even younger in the fourth quarter.
Heartland made its most recent big acquisition in 2019, when it acquired Millis Transfer for $150 million. The Barclays report describes Heartland’s management as “a thoughtful steward of shareholder capital, electing to pay a special dividend rather than chase acquisitions at elevated rates.” (It paid a special dividend of 50 cents per share in August 2021, far more than its annual dividend of 8 cents per share.)
The Barclays report said Heartland may need to make some more acquisitions if it wants “to compound earnings at a rate similar to large truckload peers.”
If that is a goal, the report said, “the company will likely need to be acquisitive this year, which should be incrementally feasible as the market turns more accommodative and owners are purportedly interested in selling.”
In the prepared statement that accompanied the company’s fourth-quarter and year-end earnings release, CEO Mike Gerdin praised the profitability and efficiency of the company without making reference to its revenue decline.
The results for the quarter and year, he said, “continue to show the consistency of our overall business model in terms of profitability and operating efficiency.” Gerdin cited the age of the tractor fleet, the combined special and regular dividends, and an end-2021 cash stockpile of $157.7 million, up from $113.8 million at the close of 2020.
In its most recent 10-K filing with the Securities and Exchange Commission, Heartland said the Gerdin family, the company’s directors and executive officers own or control approximately 41% of the company’s stock.