Knight-Swift Cuts Its Outlook A Day After The Truckload Carriers Rally

A day after truckload (TL) carriers' stocks rallied on the not-as-bad-as-expected earnings report from J.B. Hunt JBHT, Knight-Swift Transportation Holdings, Inc. KNX negatively pre-announced its earnings expectations.

July 16 Trading (TLs) – Seeking Alpha

In a press release, KNX said that it now expects second quarter 2019 adjusted earnings per share to be in the range of $0.57 to $0.58, lower than the previous guidance range of $0.62 to $0.64 and the consensus estimate of $0.61. Additionally, third quarter 2019 earnings per share guidance was lowered to a range of $0.54 to $0.57, down from the previous guidance range of $0.62 to $0.66 and lower than the consensus estimate of $0.62. Lastly, the carrier said that fourth quarter 2019 adjusted earnings per share will be in the range of $0.73 to $0.77, which brackets the current consensus estimate of $0.76.

The company attributes the lowered outlook to preliminary results achieved in the second quarter, which were highlighted by the oversupply of capacity in the TL freight market driving revenue per loaded mile (excluding fuel surcharge) lower. The company said that it expects these trends will continue "through the back half of the year."

The fourth quarter 2019 outlook is more positive; the company believes the current downturn in TL freight fundamentals will be short-lived. From the press release, "Our expected adjusted EPS range for the fourth quarter of 2019 assumes that the freight market remains more challenging than a year ago, though we expect sequential seasonal improvement from the third quarter to the fourth, consistent with historical trends. We believe the correction of the truckload capacity oversupply appears to be well underway and will continue over the coming quarters, which we expect will lead to a positive rate environment as we move in to 2020."

The July 17, 2019 announcement from KNX is later than expected, as many analysts already prepped investors for weaker results a month ago. Transportation equity analysts lowered their earnings estimates for TL carriers in early and mid-June after receiving two months of softer than expected volume and pricing data.

In a note out to clients today, Morgan Stanley equity analyst Ravi Shanker said that the lower guidance from KNX was a "much better outcome than the market was anticipating." Further, he noted last week that there was the likelihood of future earnings cuts from the group, but that they weren't likely to be as severe as the one reported from Chattanooga-based TL carrier U.S. Xpress USX on July 11.

July 17 Trading (TLs) – Seeking Alpha
 

In the USX press release, the carrier lowered its second quarter and full-year 2019 outlook, citing a lack of seasonal improvement in demand and excess capacity that is weighing on pricing. The negative pre-announcement drove USX's shares nearly 20 percent lower in trading the following day. However, shares of USX have recovered more than half of that loss since, now down 7 percent since the announcement.

Shanker went on to say that this result is a positive read-across for the TLs as KNX expects 2020 pricing to be positive compared to investors, who he believes are of the mindset that rates will decline in 2020. Shanker has been a proponent of a "second derivative trade" for the TLs wherein once the dust settles (earnings expectations and forward multiples on their shares are lowered) the group becomes more attractive from an investor perspective.

Shares of KNX are off roughly 2 percent, down 4.5 percent pre-market open, and the TL group is off in a similar range.

Dry van carrier P.A.M. Transportation Services' PTSI shares are trading lower for the second day on its earnings report in which it beat second quarter 2019 analyst expectations, but acknowledged that its customers were coming to them wanting to lower rates to pre-2018 levels potentially pressuring future margins.

KNX Stock Chart – SONAR

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