Morgan Stanley: Echo Global Logistics Undeserving Of Elevated Multiple Amid ELD Volatility

Transportation solutions provider Echo Global Logistics, Inc. ECHO's high spot exposure leaves it somewhat better positioned than contract-exposed peers, according to Morgan Stanley. 

The Analyst

Morgan Stanley analyst Ravi Shanker downgraded shares of Echo Global from Equal-weight to Underweight and raised the price target from $15 to 20, primarily due Echo's 20-percent earnings per share increase from tax reform.

The Thesis

Echo Global has a defense model relative to peers, but it still faces volatility courtesy of the electronic logging devices mandate from the Federal Motor Carrier Safety Administration, as well as secular headwinds, Shanker said in a Friday note. 

ELDs will pose a challenge to all brokers,and prices are likely to escalate further in the late February-to-March as produce season begins, the analyst said.

Morgan Stanley projects another inflection after April 1, when the ELD mandate goes into full effect with enforcement.

Brokers that buy capacity in the spot market and sell at contract rates are likely to see a significant margin squeeze due to spot rates rising faster than contract rates, the analyst said. The analyst expects shippers to most likely reduce their reliance on brokers altogether in 2018, prioritizing acquisition over price.

This will result in business flowing from brokers to asset-based carriers, Shanker said. 

Morgan Stanley sees potential for M&A at Echo Global over time, although it said it may not be imminent. 

The Price Action

Echo Global shares were up about 19 percent over the past year through Thursday.

Shares were down 1.19 percent at $27.02 at the time of publication Friday. 

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