EconomicsMarket Insight

Trucking markets are great, but this analyst thinks Werner is overvalued

The lukewarm view that Wall Street buy side analysts have for some trucking companies was reiterated recently by Morningstar in a report on Werner Enterprises, where the one-star rating given to the company is almost exclusively a function of where the stock is trading, rather than any view of trucking market weakness. 

Morningstar’s fair value estimate of Werner is $28 per share. At approximately 2:00 p.m. Wednesday, the stock was at $38.30, and had not been at the $28 level in the last six months. 

The $28 fair value figure is an increase from $25. Half of that increase came from the expected impact on Werner from tax reform, which the company cited in taking a one-time benefit charge in the fourth quarter. Morningstar analyst Matthew Young said in his report that he previously had assumed a 25% tax rate for Werner. Post-tax reform, it would now be 21%. The other half of the $3 increase in fair value is the time value of money and “modestly” increasing assumed revenues for 2018 and into 2019, because of a “robust rate environment.”

Even with such a low rating–one-star is the bottom of the list at Morningstar–Young had nothing but positive things to say about Werner’s operations. But after heaping praise, he noted: “We caution that the shares are trading in highly overvalued territory–a common theme across our asset-based trucking coverage list.”

“Since our longer-term model assumptions remain intact, we are maintaining our $28 fair value estimate, which we recently increased (from $25) due to incorporating a 21% corporate tax rate and raising our pricing growth assumptions for 2018,” Young said in his report.

His overview of the strong market was succinct: “Top-tier carriers have seen a solid rebound in pricing power, especially for spot rates,” Young wrote. “An uptick in contract pricing, which was weak throughout 2017 because of previously loose capacity, shouldn’t be far behind as bidding season starts. Along those lines, we expect capacity to remain firm in 2018 given the likelihood of healthy demand trends, coupled with widespread adoption of electronic logging devices, which became mandatory as of December 2017 and will temper productivity for a large swath of the industry’s carrier base. We think the stage is set for a season of robust pricing gains.’

Meanwhile, even as Werner carries an Underperform rating from Bank of America Merrill Lynch, the investment bank said it was increasing its price objective on Werner to $41 per share from $36, assuming a multiple of 21 times earnings, up from 20 times. The historic multiple has been 13-20 times, Merrill said, but the increase was justified “given the ramp in rates.” The projection by Merrill is that per share earnings for Werner in 2018/2019 will be $1.95/$2.40, compared to earlier estimates of $1.80/$2.05. 

In its fourth quarter and full year earnings released in late January, Werner said its full-year earnings per share were $1.27, excluding a benefit from income tax reform.

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