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Covenant Expects Softening Demand To Take Toll On Q1 Earnings

Covenant Expects Softening Demand To Take Toll On Q1 Earnings

Covenant Transportation Group, Inc. (NASDAQ: CVTI) warned analysts on Monday that economic headwinds could depress its earnings.

After posting record earnings for the fourth quarter of 2018, the company is expecting its first quarter earnings to take a hit from lowered demand in the early months of 2019.

The company expects to post adjusted net income in the range of $3.4 million to $4.9 million, or 18 cents to 26 cents per diluted share for the first quarter of 2019, compared to adjusted net income of $4.4 million, or 24 cents per diluted share for the first quarter of 2018.

Analysts expected earnings of 36 cents per share, which potentially means a big miss for Covenant.

"The truckload freight environment has been weaker this year from late January through mid March," Covenant CEO David Parker said in a news release. "We attribute the softer demand to factors such as late 2018 inventory growth in advance of the perceived impact of tariffs, the effects of the partial government shutdown on spending and extended periods of inclement weather that impacted the timing of shipping seasonal goods, as well as our ability to safely dispatch our equipment."

Covenant reported a 34.9 percent climb in consolidated freight revenue for the two months of 2019, compared to the same period in 2018. Much of that growth was attributed to the company's 2018 Landair acquisition.

"Excluding the freight revenue recognized at our Landair subsidiary, which was acquired in July 2018, consolidated freight revenue has increased 5.5 percent compared with the prior year period," Parker said in a news release.

The company reported shrinking fleet numbers, as well as falling freight revenue per tractor, which was attributed to a decrease in average miles per tractor.

Covenant's fleet size has decreased 47 trucks, or 1.5 percent, since the beginning of 2019. Average freight revenue per tractor saw a year-over-year drop of 4.8 percent, and average miles per tractor decreased 11.6 percent in the first two months of 2019. According to the release, average freight revenue per total mile increased 7.7 percent.

"The differences in miles per tractor and average freight revenue per total mile were impacted in part by the July 2018 acquisition of Landair, which generates higher revenue per mile and lower miles per tractor than the average of our other operations," Parker said in the release.

The company expects quarterly operating expenses to increase year-over-year on a per mile basis, according to the release.

"Salaries, wages and related expenses are expected to increase significantlyq primarily due to professional driver employee pay adjustments since the first quarter of 2018 and the Landair acquisition, while year-over-year net fuel expense has also been trending upward as diesel fuel prices have been increasing over the last few weeks," Parker said. "In addition, casualty insurance and claims expense per mile is expected to increase on a year-over-year basis to a level consistent with our experience in the third and fourth quarters of 2018."

In the managed freight segment of the business, Covenant saw a year-over-year freight revenue increase of approximately 165.6 percent in the first two months of the year. Excluding the managed freight revenue brought in by Landair subsidiary, the company's managed freight increased 36.8 percent.

The company anticipates quarterly managed freight profit margins to improve on a year-over-year basis.

"The stated goals of our capital allocation strategy are to become increasingly embedded in our customers' supply chains, to reduce the cyclicality and seasonality of our business and financial results, and to enhance our long-term earnings power and return on invested capital," Parker said. "While we expect our first quarter financial results to reflect less impact from lower demand than in historical periods, we still have meaningful work ahead to achieve our full potential."

Chart: FreightWaves' SONAR

Chart: FreightWaves' SONAR

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