Three LTLs get upgraded earnings from Morgan Stanley; only one for something other than tax reform


A healthy outlook for the less-than-truckload market--as well as tax reform--has driven Morgan Stanley to increase its earnings outlook for several key LTL carriers.

The stock rating for Old Dominion Freight Lines, SAIA and ArcBest were all held steady: Overweight for Old Dominion, Equal Weight for ArcBest, and Underweight for SAIA.

In the case of Old Dominion, Morgan Stanley now projects earnings per share of $6.40 in 2018, up from an estimate of $5.13, and that helped drive its price estimate for Old Dominions' stock up to $150 from $99. A little more than a quarter of that estimated increase in price comes from Morgan Stanley's estimate on what tax reform will do for Old Dominion's stock price. The rest is driven by a strong analyst review of the company's operations. A stock price 21 times estimated 2019 earnings "is fair for ODFL's track record of best-in-class organic growth, operating leadership and continue expectation of double-digit EPS growth at least through 2020," the report said. The company's stock is up 36% in the last six months, compared to an LTL peer group of 20%, "reflecting tonnage momentum, and we think (it) can keep up its performance into 2017 as long as the macro holds up," Morgan Stanley added.

In the case of Saia, Morgan Stanley analysts said the company is a "show-me story." A multiple of 20 times earnings is above the historic norm of 20 times earnings, and the Wall Street firm some of that is driven by a recent expansion into the Northeast. "We have been somewhat more skeptical of the ease and pace of the gains from the expansion--and therefore the multiple re-rating--which has kept us underweight on the stock so far," the report said.

Third inning for Saia in the Northeast

Saia's Northeast expansion is only in the "third inning," according to Morgan Stanley, with the company having opened six of a planned 20-25 terminals.  Despite the Northeast expansion, the analysts write, "Old Dominion has actually grown tonnage comfortably faster than Saia. Our view is that it is still too early to reward Saia for the expansion both in terms of EPS and the multiple."

The analysts also said they believed Saia's projection of a 150-200 bps in its operating rate this year would probably come in closer to 160 bps. Its estimate that earnings would increase to $3.60 per share from $2.75 was completely driven by tax reform.

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Old Dominion's strong rating by Morgan Stanley was driven by an estimated multiple north of 20. But the analysts were clear about Saia: "We believe it's too soon to give Saia a high teens/low 20's PE multiple, above ODFL's historical range, given our view that Saia has a long way to go before it achieves ODFL's level of operating efficiency and structural share gain potential."

The subtitle of Morgan Stanley's section on ArcBest is "Right strategy, needs better execution." Morgan  Stanley has an Overweight rating on XPO Logistics, and the report said it views ArcBest as a "mini-XPO as their long-term strategic vision is to build a multi-platform transportation conglomerate with a 50:50 mix of asset-heavy and asset-light businesses achieved through both organic growth as well as M&A." XPO has done it successfully, Morgan Stanley said, but "ARCB's execution has been found wanting, with the multiple platforms so far bringing more operational complexity than diversification benefits, the last-mile rollout running into early issues from mix headwinds that have lagged the rest of the industry." Although applauding the strategy, the report makes clear that before it gives credit to the company's plans that "we will want to see more execution traction before we get off the sidelines."

Similar to Saia, the analysts said their projected increase in earnings for ArcBest was completely driven by tax reform. Estimated earnings were lifted to $2.18 per share from $1.82.

In trading Wednesday, Old Dominion rose $1.33 to close to $136.56. Saia was up 70 cts to $72.80, and ArcBest rose 45 cts to $32.65.