EUR 850.00 For Business Accounts Only

Morningstar | Unusually Tight Truckload-Market Capacity a Significant 2Q Tailwind for Top-Tier Brokers Like Echo. See Updated Analyst Note from 25 Jul 2018

Narrow-moat highway broker Echo Global Logistics’ second-quarter organic gross revenue grew a solid 35% year over year on robust spot-pricing gains linked to unusually tight truckload-market capacity, healthy spot-shipment volumes, and continued growth in managed-transportation accounts. Revenue and operating margins both came in slightly above our expectations given the highly favorable operating backdrop. Our midcycle model assumptions remain largely intact, but we are increasing our fair value estimate to $25 after boosting our 2018 revenue growth forecast and because of the time value of money since our previous update.

We expect favorable operating conditions to persist for moatworthy asset-light brokers, as widespread adoption of electronic logging devices among small truckload carriers (soft enforcement of this new requirement ended April 1), coupled with the driver shortage, temper asset-based truckers’ productivity and keep capacity tight throughout 2018. That said, we think the Echo’s shares are modestly overvalued—a common theme across the U.S. asset-light logistics landscape as investor expectations may have swayed a bit too far to the optimistic side.

Echo’s net revenue increased 31% relative to the same period last year on the back of strengthening sell rates charged to shippers and strong 7% truckload volume growth (similar to second-quarter trends). Total gross profit margin (net revenue over gross revenue) fell 50 basis points, to 16.8%, but that’s mostly due to the cosmetic impact of higher fuel surcharge pass-through revenue and an ongoing mix shift to larger LTL-centric managed transportation accounts. Gross margin on truckload business increased about 55 basis points, with help from the healthy pricing environment, especially in terms of sell rates on spot business. While Echo may see additional gross margin noise from mix changes in the quarters ahead, we believe its pricing power will remain solid in 2018 thanks to constrained industry capacity and incremental help from contract rate gains.

We calculate Echo’s total adjusted operating margin (off net revenue) improved to 12.4%, from 4.8% in first-quarter 2017 when the firm was struggling with sluggish pricing conditions and lingering Command integration headwinds. The truck brokerage operating environment has become quite favorable in the first half and Echo’s profitably is seeing tailwinds from better salesforce productivity and leverage from overall net revenue growth.