EUR 850.00 For Business Accounts Only

Morningstar | Growth Moderates in Echo’s 4Q as the Truckload Capacity Crunch Eases and Comps Get Tough

Narrow-moat highway broker Echo Global Logistics’ fourth-quarter gross revenue increased a modest 6% (up 26% for full-year 2018), slightly below our expected run rate due to softer than anticipated spot-volume on truckload business. Relative to the same period last year, top-line expansion stems from lingering benefits from solid contract rate gains in early 2018 driven by unusually tight truckload-market capacity. Higher sell-rates to shippers on LTL business also contributed, along with a slight boost from the mid-2018 FMP tuck-in deal, which added LTL managed transportation business. Of note, the capacity crunch seen throughout much of 2018 eased during the quarter, and year-over-year comparisons became quite challenging. Thus, pricing and load-volume trends moderated significantly--in fact, truckload shipment volume was flat. For the same reasons, Echo’s revenue cadence will be quite muted in 2019.

We’ve already been baking in a much more normalized operating backdrop for truck brokers into our growth assumptions, but management’s revenue and implied operating margin guidance for 2019 fell short of our forecasts, partly because of a ramp in IT-related spending targeting transaction automation and data analytics. These are good investments, but they will pressure near-term performance. As a result of tempering our profitability assumptions for the next few years on higher investment outlays, we expect to modestly reduce our $25 fair value estimate by 2%-4%, though that could change slightly (to the upside) as we incorporate full-year 2018 financials into our model. As of market close on Feb. 6, the shares are trading at a slight 4% discount to our $25 fair value estimate, making the shares appropriately valued. This is a more palatable market valuation compared with much of last year when investor expectations for logistics firms were a bit lofty. Note there’s a decent chance the shares trade lower on Feb. 7 given management’s relatively muted 2019 outlook.