Echo Global Logistics (NASDAQ: ECHO) reported its financial results for the third quarter of 2019 after markets closed on October 23. Echo posted adjusted earnings per share of $0.39 against a Street consensus expectation of $0.37/share and revenues of $561.4 million, beating estimates of $548.1 million.
The Chicago-based freight brokerage, which sources both truckload (TL) and less-than-truckload (LTL) capacity, performed well in what continues to be a tough freight environment. Net revenue margin compressed sequentially, from 18.2% in the second quarter to 17.3% in the third quarter, but margins actually expanded year-over-year by 10 basis points.
Across the freight brokerage industry, revenue growth has slowed and margins have narrowed as contract trucking rates continue to fall against relatively flat spot rates, which represent a broker’s cost.
A slightly richer mix of LTL freight to TL freight (29.9% to 65.7% this quarter versus 25.8% LTL and 69.1% TL a year ago) helped Echo beat revenue expectations. In a slowing macroeconomy, LTL volumes and prices are typically more resilient than truckload.
Still, it’s hard to make money when shippers have lowered their rates and margins are getting squeezed. Net income was slashed nearly in half, down 48.4% to $4.8 million on a year-over-year basis. Gross revenues were down 12.9% year-over-year, but not as bad as the -15% Wall Street analysts expected.
From the conference call
Echo management’s capital allocation decisions sparked questions about potential M&A in the next few quarters.
One of the most insightful analyst questions came from Susquehanna’s Bascome Majors, who noted that Echo halted buybacks of its stock and convertible bonds in the third quarter. Majors observed that management had the opportunity “to take a couple of shots” at the stock at $20 during the month of August but refrained from doing so, despite the fact that it had bought back stock at $23 earlier.
Echo was building its cash position, but why? Did management want balance sheet flexibility in the case of a recession, or was Echo preparing to acquire a company?
Chief executive officer Doug Waggoner had already said in his prepared remarks that Echo was actively looking for mergers and acquisitions deals.
In response to Majors’ question, president and chief operating officer Dave Menzel said that every quarter the company had to choose how to allocate capital, whether to buy shares, delever the balance sheet, or stockpile cash.
“In this quarter, we chose to build up the cash position,” Menzel said.
Later in the Q&A period in a response to a question from Stifel’s Bruce Chan, Waggoner confirmed that valuations for freight brokerages were moderating after a buying spree by financial sponsors had pushed multiples well into the double digits.
“In the last quarter or two valuations are starting to come in, but seller expectations have to catch up with that,” Waggoner said. “It should be a better market for conducting M&A in the coming quarters.”