RBC Still Buying Werner Enterprises Despite Negative Pre-Announcement

RBC has reiterated its Outperform rating on Werner Enterprises, Inc. WERN despite a negative pre-announcement from the transportation company, which was a victim of excess capacity and soft retail demand.

"[W]e believe that the company possesses some meaningful cost levers (fleet age reduction, maintenance costs, etc.) and stands to benefit greatly from the mandate for electronic logging devices (ELDs) industrywide next year," analyst John Barnes wrote in a note.

Barnes said the industry will see a modest uptick in demand after the absorption of excess inventory.

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A Bull Among The Bears

"Further, we expect the capacity dynamic to flip to favor the carrier the closer we get to the ELD mandate (end of 2017)," Barnes highlighted.

The positive comments from RBC comes as the rest of Wall Street is bearish on Werner; some of them have downgraded the stock on weak freight market and margin pressures from the recent driver pay hikes.

Bank of America Merrill Lynch has downgraded Werner to Underperform from Neutral, JPMorgan cut Werner to Neutral from Overweight and Deutsche Bank downgraded the stock to Hold from Buy.

Werner Guidance And RBC's Reactions

Werner sees second quarter EPS in the range of $0.21 to $0.25. Excluding a $0.03 a share gain from a real estate sale, Werner pre-announced second quarter EPS would be between $0.18–$0.22, down 31–44 percent from last year, half of consensus' $0.40 forecast at the mid-point, and well below RBC's $0.41 estimate.

During the quarter, Werner saw a drop in rate/mile due to weak market conditions, while customer rate negotiations have been difficult as spot market rates remain weak.

"Management said that shippers have been very aggressive asking for contractual rate reductions in the 5 percent range. WERN has made the decision to walk away from some of this business and has seen its spot market exposure increase from ~6 percent to ~12 percent," Barnes wrote.

The company is also seeing lower miles/truck along with an increase in deadhead, while it continues to lower the average age of its truck fleet to 1.5 years by year-end.

"We believe that freight demand will continue to remain sluggish until excess inventory is purged. We believe that TL rates will remain under pressure as excess truck capacity is prevalent in the spot market," Barnes continued.

As such, the analyst cut his EPS estimates for second quarter to $0.23 from $0.41, 2016 to $1.10 from $1.56 and 2017 to $1.40 from $1.74. Also, Barnes trimmed his price target to $28 from $32.

At the time of writing, shares of Werner Enterprises were down 9.02 percent to $22.45.