Strong earnings be damned: trucking stocks are getting crushed Tuesday

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Truckload carrier stocks are getting hammered today, led in part by Werner Enterprises, which had a strong quarterly earnings report a day earlier.

At approximately 3:15 p.m., Werner (NASDAQ: WERN)  was down about $4.40, a drop of a little more than 11%. Knight-Swift (NYSE: KNX), which reports its earnings Wednesday, was down almost 10% at that time though popped back up to a 9% decline.

Broader indices Tuesday are up anywhere from 0.4% to 0.7%.

Marten Transport (NASDAQ: MRTN) was down approximately 7.4%, USA Truck (NASDAQ: USAK) was down 7%, U.S Xpress (NYSE: USX) was down about 6% and Heartland Express (NASDAQ: HTLD) was down about 8.6%. J.B. Hunt (NASDAQ: JBHT) , which also reported strong earnings last week, was faring better, with a decline of about 3.7%.

Other trucking companies that aren't specifically truckload carriers but which are in the same orbit also took hits, but not by as much. Flatbed consolidator Daseke (NASDAQ: DSKE) was down about 1.9%. 

LTL companies also were taking a hit. YRC (NASDAQ: YRCW) was down about 8%, but its relatively low stock price that is now less than $10 means it doesn't take much of a move for the percentage to rise. Old Dominion Freight (NASDAQ: ODFL), long a darling of Wall Street analysts (though Deutsche Bank has a sell rating on the stock), dropped about 6.5%.

What caused the carnage? According to the Deutsche Bank transportation analyst team led by Amit Mehrotra, it's the fear that the strong numbers posted by Werner is a sign that the market has reached a top and probably can't get too much better from here.

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In a mid-afternoon analysis, Mehrotra and his team said the declines are "surprising to even the most bearish investors based on our many conversations today, as “peak cycle” thinking drives capitulation across the TL space (and spreading to LTL with Sell-rated Old Dominion down over 7%)." 

"To be fair, TL cycles are notoriously short and fickle, making today’s move explainable to some degree," Mehrotra writes. "In fact, (year-to-date) moves for most TL stocks look reasonable in light of peak cycle concerns, except for Knight Swift, where the stock’s 20% decline leave us (and many others) searching for answers."

Knight Swift's earnings will be released after the close of trading Wednesday. It will be of particular interest to investors, Mehrotra said, because of the ongoing work to put Knight and Swift together after the former bought the latter last year.

What Knight Swift's stock is now showing, according to Mehrotra, are valuations that were found with Swift pre-merger, and not the Knight valuations. "With KNX shares effectively adopting lower SWFT-like valuation since January highs, Knight Swift management will have to show solid progress in re-rating SWFT margins, and articulate confidence in sustainability of SWFT returns," he wrote. "We’re hopeful we get this, which could allow KNX to claw back its year to date losses relatively quickly."

He added that the shares are now trading at 13 times consensus earnings, and that's right about where Swift was trading at on average for more than 10 years. By contrast, Knight held a forward p/e of 21 during that time.

The only other significant truck-related earnings report Tuesday came from PACCAR, the builder of Kenworth, Peterbilt and DAF trucks.  The second quarter for PACCAR recorded a 50% jump in net income from the second quarter of 2017, up to $559.6 million. Net sales and financial services both set quarterly records, and the after-tax return on revenues was 9.6%.

Still, during the company's conference call, some analysts questioned whether the good times could continue rolling. In a relentlessly upbeat phone call, during which CEO Ron Armstrong described many things as "great," Armstrong added that PACCAR feels "very good about 2019 based on the demand for our products." Both the company's financial services and parts business were "great."

A question about the PACCAR backlog into 2019 led Armstrong to say that the order book was "strong." As far as the solid margins the company reported, Armstrong demurred making specific forecasts except to say that the company will "see what next year brings."

Near the close of trading, Paccar’s stock was up approximately 0.75%.