EUR 850.00 For Business Accounts Only

Morningstar | Demand and Rates Normalizing Off the 2018 Capacity Crunch, but Knight-Swift’s 2Q Execution Solid

In the second quarter, no-moat Knight-Swift’s consolidated revenue before trucking fuel surcharges fell 5.7% year over year--slightly below our expected run rate due to greater-than-expected declines in truckload-segment utilization (miles per tractor) and softer-than-anticipated pricing in the asset-light truck brokerage business. Relative to the same period last year, we suspect the flagship truckload segment, which reflects both the Swift and Knight segments, saw utilization headwinds due in part to softer freight demand as shipper inventory levels are elevated this year. Total fleet count declined, as well, due to previous efforts to rightsize Swift’s for hire and refrigerated operations. That said, average tractor count increased sequentially, pointing to stabilization. Core truckload segment pricing remained positive, despite steep spot-rate declines, thanks to previous contract rate increases, though gains are slowing as rates normalize off the historic 2018 capacity crunch.

The firm’s total adjusted operating ratio net of fuel (including amortization, but excluding nonrecurring items) improved 80 basis points to 88.8% on increased truck brokerage gross margins and ongoing efficiency gains at Swift. We note that the highway brokerage operations were able to benefit from rates paid to third-party truckers falling more than pricing to customers. Overall, our midcycle revenue growth and margin assumptions remain largely intact, and we don’t expect to materially alter our $36 fair value estimate. Throughout the latter half of 2017 and the first half of 2018, Knight’s shares traded in what we considered to be overvalued territory. That said, valuations across the trucking space became more reasonable over the past several quarters as investors recognized that the historically robust pricing backdrop would normalize in 2019. Shares are currently trading in fairly valued territory.

The legacy Knight division enjoys a history of industry-leading execution, and management has been working diligently to bring Swift’s performance more in line with Knight’s standards since the 2017 merger. The firm has made good progress this year, as overall truckload division profitability has gradually improved. We currently bake in midcycle total revenue growth (before fuel) of 4%-4.5%, with an operating ratio, net of fuel, near 87.5%-88%, which reflects our belief that management will continue to bring Swift’s trucking-segment performance closer to that of Knight’s legacy operations.