EUR 850.00 For Business Accounts Only

Morningstar | Echo’s 1Q Top Line Drops As Truckload Capacity Crunch Eases, but Our Long-Term Outlook Is Unchanged

Narrow-moat highway broker Echo Global Logistics’ gross revenue for the first quarter fell 7% year over year; worse than our expected run rate partly because of slower-than-anticipated spot-freight activity. We’ve been expecting spot volumes to pull back given the truckload-market capacity crunch has abated and comparisons are tough, but underlying freight demand have cooled off more than we originally thought. Demand and pricing are not falling off a cliff, but asset-light highway brokers are emerging from an unusually robust operating backdrop (in 2018) and there’s bound to be variability as conditions normalize. On the other hand, total gross margin (net revenue/gross revenue) increased more than we expected--up 100 basis points, to 18.4%--because rates are falling faster than pricing to shippers, and the increase meant net revenue fell only 1%. Echo’s first-quarter profitability was slightly lower than our forecast, most likely because of lost leverage from lower revenue on truckload business--truckload volume and pricing fell 4% and 7% respectively.

Overall, we tempered our top-line assumptions for 2019, but that valuation impact was offset by the time value of money since our previous update and boosting our gross margin forecast. Our midcycle revenue growth and margin assumptions remain largely intact. Thus, we expect to maintain our $24.50 fair value estimate. By the close of the market on April 24, the shares were fairly valued, although this is a much more palatable market valuation compared with most of 2018, when investor expectations for third-party logistics companies were a bit lofty.