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Morningstar | Tight Truckload Capacity a Tailwind in 2018 for Echo and Its Logistics Peers

Since its inception in 2005, Echo Global Logistics has expanded its operations at a healthy clip, supported by salesforce growth, acquisitions, and share gains from asset-based carriers and less sophisticated logistics providers. The firm has worked its way into the ranks of the top players in the asset-light truck brokerage space. Echo's mid-2015 acquisition of Command Transportation ran into a few integration complications, but the transaction boosted Echo's network scale in full-truckload, or FTL, 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 have been recovering nicely in 2018 with help from a highly favorable pricing environment linked to unusually tight truckload-industry capacity. The highway brokerage landscape proved mostly unfavorable between mid-2015 and mid-2017 because of loose FTL capacity--highway brokers perform better during periods of supply disruption because they can step in and efficiently secure trucks among their vast networks of small carriers, which constitute most of the FTL capacity base. However, capacity firmed in the second half of 2017 and we expect Echo's broad capacity relationships and buying power to remain highly valuable to shippers given long-term secular constraints on truckload supply growth, particularly the stubborn driver shortage. On top of that, widespread electronic logging device adoption in 2018 is tempering productivity for a large swath of the small truckload-carrier base, and that will keep capacity tight on many lanes into early 2019.