Covenant Expects Strong Freight Market For 1st Half Of 2022

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Covenant Logistics Group management expects earnings in the first half of 2022 to be the same or higher as the first half of 2021 but anticipates slower earnings growth the rest of the year.

The Chattanooga, Tennessee-based carrier reported adjusted earnings per share of $1.07 for the fourth quarter after the market closed Wednesday. The result was ahead of analysts' expectations for earnings per share of $1.04.

"We feel that the first-half earnings will approximate the first half of 2021 or higher. We feel good between the combination of commitments from customers and what we see in the market," Joey Hogan, president of Covenant, said on a call with analysts Thursday. "The second half [of 2022], from a modeling and planning purpose, we're anticipating some slowdown in the second half."

During the fourth quarter of 2021, Covenant's total revenue increased 30% year-over-year to $294 million. The company also achieved higher year-over-year quarterly results in its expedited, dedicated, warehousing and managed freight transportation segments.

Covenant's asset-light segments, managed freight and warehousing, contributed 42% of total revenue in the fourth quarter at $108.1 million and $16.2 million, respectively. The expedited and dedicated freight segments saw revenue of $71.7 million and $70.8, respectively.

"First-quarter [2022] margins are starting off really strong, with dedicated and expedited, we've done a good job getting out of the gate on rate increases early in the year," said Paul Bunn, Covenant's senior executive vice president and COO. 

Bunn said the potential for earnings growth during the rest of 2022 could come down to the managed transportation segment and the overall freight market.

Covenant said its managed transportation segment's higher results for the fourth quarter were attributable to a strong freight market, while also executing spot rate opportunities and handling overflow freight from both its expedited and dedicated truckload operations.

"If things stay tight and managed transportation has a year like it had [in 2021], then we'll make more money in 2022 than 2021," Bunn said. "If things soften up a little bit in the second half of the year — you saw the large contribution managed transportation had, especially in the third and fourth quarters — that's where we don't have the full visibility, that's what could determine are we a little bit under this year's earnings or a little bit over this year's earnings."  

Revenue & operating income in millions

Covenant management said the second half growth in 2022 could also be impacted by everything from constrained capacity due to a national driver and equipment shortage; to cost pressure from increasing wages and insurance; to higher costs for equipment, parts, and fuel prices.

Hogan said the cost of purchasing new trucks and trailers keeps increasing every year.

"Pricing is up pretty meaningfully on the truck side, but I would say it's manageable. The trailer side is a different ballgame," Hogan said. "You look at our trailer capacity, it's pretty concentrated in a few years and so our big years to start trading trailers will start in 2023 and it will go on for five or six years."

Hogan said Covenant has contacted trailer manufacturers to get orders placed during 2022, but the supply of trailers remains tight.

"We got zero — I mean, not even a quote of pricing," Hogan said. "Basically, from all the suppliers we hear, ‘We can't commit to anything until late 2022 or into 2023 and beyond.'"

Since the beginning of 2021,'s national spot rate (including fuel surcharges) has increased by 32%. The dry van national spot rate is $3.75. Chart: (SONAR: TSTOPVRPM.USA). To learn more about FreightWaves SONAR, click here.

Covenant also announced that it will initiate a quarterly cash dividend of 6.25 cents per share (25 cents for every 4 shares owned) in the first quarter of 2022. Hogan said the goal is to yield 1% on an annualized basis and that the company's current share count will impact cash flow by about $1 million per quarter. 

"The work over the last few years to deleverage the company and improve our operating model to produce more consistent results led our board to this approval," Hogan said. "Net indebtedness has decreased by almost $240 million over the last two years with a potential to be close to debt free by the end of 2022. We continue to evaluate a full range of capital allocation alternatives to effectively deploy our cash."

The FREIGHTWAVES TOP 500 For-Hire Carriers list includes Covenant Logistics Group (No. 45).

Watch: FreightWaves' carrier update for Jan. 25, 2022



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