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Morningstar | Echo's 2019 Growth Will Be Muted as Pricing Normalizes, but Long-Term Growth Opportunities Remain

Since its inception in 2005, Echo Global Logistics has expanded its operations at a healthy clip, supported by salesforce growth and acquisitions along with market share gains from asset-based carriers and less sophisticated highway brokers. The company has worked its way into the ranks of the top players in asset-light truck brokerage. Echo's mid-2015 acquisition of Command Transportation ran into a few integration complications, but it boosted Echo's network scale in full-truckload brokerage, providing greater capacity access and incremental gains in buying scale. The deal also opened up opportunities to cross-sell Echo's managed transportation services to Command customers, and this has proved quite successful.Over the past decade, Echo has been gradually reducing fixed general and administrative costs per shipment as it gains scale. Operating profitability took a step back in 2017 because of Command integration headwinds and gross margin compression from a spike in buy rates in the face of lackluster customer contract pricing during the first half of the year. That said, operating margins recovered nicely in 2018 with help from a highly favorable pricing environment linked to unusually tight truckload industry capacity. 2018 proved a robust year for top-tier highway brokers like Echo thanks to unusually tight truckload market capacity. Truckload supply became quite constrained on the back of robust freight demand, widespread electronic logging device adoption among small truckers, and limited driver availability. This dynamic drove up Echo's sell rates to shippers (on both spot and contract business) and bestowed the firm with significant spot freight opportunities as shippers scrambled to secure capacity, especially earlier in the year. Brokers benefit nicely during periods of supply disruption because they can step in and efficiently secure trucks among their vast networks of small carriers. The capacity crunch eased by year-end 2018, and spot activity has abated, but we expect capacity to remain roughly balanced during the first half of 2019 as the driver shortage has kept carriers from overexpanding their fleets.