Another Truckload Carrier Announces Earnings Warning

Add Covenant Transportation Group CVTI to the group of truckload (TL) carriers that won't be able to meet analyst expectations for the second quarter of 2019.

Earlier today (July 17, 2019), Knight-Swift Transportation Holdings, Inc. KNX modestly lowered its earnings outlook for both the second and third quarters of 2019 and provided a fourth quarter 2019 guidance range that was in-line with analyst estimates. Last week it was a different Chattanooga-based TL carrier U.S. Xpress USX that said it failed to meet its previous operating ratio (operating expenses as a percentage of revenue) target laid out in its initial public offering roadshow and later reiterated on its first quarter 2019 earnings call.

The tone from all three was the same. Lack of a seasonal uptick in freight demand, excess capacity weighing on TL rates and excess inventories have been the primary reasons voiced in the negative pre-announcements.

In its 8-k filing with the U.S. Securities and Exchange Commission, Covenant said that it now expects adjusted earnings per share in the range of $0.34 to $0.35 ($0.32 to $0.33 per share prior to adjustments). This is lower than the current consensus estimate of $0.45 per share and considerably lower than the company's prior guidance, which called for second quarter 2019 adjusted earnings per share to be "fairly consistent with the prior year quarter" in which it reported $0.54 per share in adjusted earnings.

"Contrary to normal seasonal patterns, the truckload freight environment remained sluggish through most of the second quarter. We attribute the softer freight environment to factors such as continued excess inventory levels, a soft produce season and the extra capacity of Class 8 tractors that entered the U.S. market over the last nine to 12 months," said Covenant's Chairman, President and Chief Executive Officer David R. Parker.

These earnings warnings have been expected for a few weeks now. Most equity analysts took the shears to their estimates a few weeks ago, lowering earnings estimates and in a few cases their stock ratings on TL carriers. The data has been largely negative for the group for the bulk of the year with little sequential improvement seen in the second quarter which is very atypical. Further, some public companies openly lamented eroding fundamentals at investor conferences in early June. Now that the books have closed on the quarter, evidence of what the data was suggesting all along has been realized.

Excess capacity added over the last year was a result of peak conditions in the spot TL market in mid-2018 when capacity was in short supply and TL rates soared. This provided many carriers the cash flow necessary to invest in incremental capacity. Originally, many thought that severe and extended inclement winter weather was the reason for sluggish volumes at the start of 2019. Spring came, winter weather lingered and the typical seasonal uptick in demand didn't occur. The combination of volume weakness, excess capacity, declining rates and formidable year-over-year earnings comparisons have resulted in the public carriers finally waving the white flag and acknowledging that 2019 will be a struggle.

Covenant said that consolidated freight revenue will be approximately 14 percent higher year-over-year primarily due to the previous acquisition of warehouse and logistics provider, Landair. That said, the favorable revenue comparisons have ended as Landair was acquired in July of 2018.

Parker concluded, "We are starting to see the early favorable impact on freight availability of the marginal correction of overcapacity and expect capacity reduction to continue throughout the remainder of 2019. Our contract logistics' customers have maintained steady freight for the first half of the year and we expect their business to remain steady through the end of the year."

Shares of CVTI were off more than 3 percent in today's session.

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