Step To The Sidelines In Knight Transportation, Covenant, Werner, Avondale Says

Avondale Partners’ Donald Broughton expects lower demand, pricing power and utilization as well as dramatically lower or no gains on sale to pose serious headwinds for truckload carrier companies like Knight Transportation KNX, Covenant Transportation Group, Inc. CVTI and Werner Enterprises, Inc. WERN.

The ratings for the three companies has been downgraded to Market Perform. “We see the recent bear market rally in valuations as an opportunity for investors to step to the sidelines,” analyst Donald Broughton wrote. Softer demand and high capacity are expected to lower the pricing and utilization abilities of the various players in the segment.

According to ATA figures, January truck tonnage declined 0.3 percent sequentially on a seasonally adjusted basis. “While the strength of the U.S. Dollar and the Fed's recent rate increase suggest that tonnage and loads will be weaker through the back half of 2016. Other macro factors, such as weakness in factory output and lower fracking activity should also
continue to weigh on future truck freight volumes,” Broughton stated.

The analyst believes that deterioration of used truck values would lead to “little to know gains on sale for most trucking companies.” This is likely to act as a headwind to achieving earnings growth over the next four to eight quarters.

Knight Transportation

The price target for Knight Transportation is at $27. The company reported better-than-expected EPS for 4Q15. The company is expected to post FY16 EPS of $1.15 on revenues of $1.3 billion, with revenue per mile expected at $1.84 per total mile.

Covenant Transportation

The price target for the company is at $20. Covenant Transportation reported 4Q15 EPS of $0.73, ahead of expectations. The company is expected to record FY16 EPS of $1.75 on freight revenues of $731.7 million. “We estimate EBIT to be ~$62.5M (previously $122.5M) with expected OR of ~91.5% compared to an OR of 89.4% in FY'15,” Broughton added.

Werner Enterprises

The price target for Werner Enterprises is at $28. The company reported better-than-expected 4Q15 earnings. Werner Enterprises is expected to post FY16 EPS of $1.70 on revenues of $2.1 billion and EBIT of $195.5 million.