Trucking: Cowen cuts estimates over ‘growing concerns for carriers’
Incremental capacity, cooling demand and plummeting spot rates were the catalysts for another analyst to reel in expectations for trucking companies. On Thursday, Cowen’s Jason Seidl lowered earnings estimates for the truckload and less-than-truckload carriers he follows heading into the first-quarter earnings season, which starts Monday.
He advised clients to favor large-cap TL carriers versus the smaller carriers, downgrading Covenant Logistics Group (NASDAQ: CVLG) to “market perform” from “outperform.” His new estimates were modeled off the 2019 peak-to-trough cycle in which shares of large carriers like Werner Enterprises (NASDAQ: WERN) and Knight-Swift Transportation (NASDAQ: KNX) significantly outperformed those of smaller fleets.
Seidl maintained the safest bet on the transportation space is the railroads.
TL estimates lowered as market loosens further
The recent sell-off in trucking stocks (between 20% and 40% year to date for most carriers) is the result of investor concerns over declining TL spot rates and broader geopolitical and recession fears.
“In our view, some names are already pricing in a significant economic downturn,” Seidl stated. “1Q earnings season is not likely to produce enough answers for near-term investors, with many management teams likely expressing uncertainty over their outlook or taking down expectations.”
His evidence: an internal pricing model, a carrier survey and recent calls with private fleets, most of which raised concerns around future margins and earnings growth. Respondents to the survey (fleets representing more than 27,000 tractors) said they expect contract rates to increase, but at a slower pace, over the next six months. Seidl said that was the first slowdown in the group’s rate forecast since the 2020 second quarter.
“We watched spot rates tick down every week in March as capacity began to loosen but were cautious on a potential rebound as we approach peak season (produce, beverage),” Seidl continued. “Thus far in April, it appears the sluggish market has continued, which could continue to pressure rates.”
Seidl is calling for contract rates to hold through the second quarter but fall off in the second half and into 2023. Of concern, he said, is that the decline in spot rates, and ultimately contract rates, could be met by cost increases on expense lines like labor and insurance, which will pressure margins.
He lowered his 2022 TL earnings-per-share estimates by 10% on average, taking them roughly 25% lower in 2023. Smaller carriers saw the largest revisions. Valuation multiples were reduced by two turns and sit below their respective five-year averages, “reflecting caution given where we are in the cycle.”
“The vast majority of new entrants into the trucking market were owner-operators over the last two years, mom-and-pop truckers that capitalized on tight capacity and high rates,” Seidl said. “As demand begins to soften, these small fleets are historically the first to drop out of the market, which loosens capacity.”
LTL forecasts not spared
Less-than-truckload estimates were lowered as well. Volume assumptions for the 2022 second half and all of 2023 were lowered but yields are expected to remain level in the near term. Per-pound LTL rates are forecast to hit an all-time high in the second quarter, 41% higher than the 2018 baseline of Cowen’s proprietary predictive rate index developed with AFS Logistics.
“Despite a rate forecast that gives LTL carriers pricing power that should hold steady (and still charging a multitude of fees on bulky freight, fuel surcharges, etc.) the demand side of the equation remains largely uncertain, and as seen in our AFS data and private trucking call, demand appears to be softening,” Seidl added.
Cowen’s EPS estimates for LTL carriers were reduced on average by 4% in 2022 and 16% in 2023. Numbers for soon-to-be LTL pure play XPO Logistics (NYSE: XPO) were lowered 14% and 24%, respectively.
LTL stocks were high flyers throughout the pandemic, garnering lofty valuations given an abundance of freight and less competition, which allowed them to push yields materially higher. However, as data shows the end of the cycle is near, LTL stocks are falling hard. Shares of ArcBest (NASDAQ: ARCB) and Saia (NASDAQ: SAIA) are down roughly 40% year to date.
The first-quarter earnings season starts in earnest Monday when transportation and logistics heavyweight J.B. Hunt (NASDAQ: JBHT) reports after the market closes. Seidl also trimmed EPS estimates for that company by 3% in 2022 and 5% in 2023.
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