Morningstar | Despite Moderating Top-Line Trends, Knight-Swift Posts Solid Profitability Gains
In the first quarter, Knight-Swift’s consolidated revenue before fuel surcharges fell roughly 4% year over year--slightly below our expected run rate due to greater-than-expected declines in truckload-segment utilization and the impact of adverse weather conditions and Class-I rail network congestion (related to Class-I precision railroading efforts) on the intermodal business. Relative to the same period last year, the flagship truckload segment, which reflects both the Swift and Knight segments, saw utilization headwinds and a smaller fleet count due to right-sizing Swift’s for hire and refrigerated fleet, though core pricing remained nicely positive thanks to previous contract rate increases.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. In our view, the firm has made good progress over the past several quarters, as overall truckload division profitability has seen solid improvement. Consolidated profitability also improved nicely and came in ahead of our forecast for the quarter with help from robust gross margin expansion in the asset-light truck brokerage unit. With the truckload-market capacity crunch easing over the past quarter, 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.
Knight-Swift Transportation Holdings is a truckload carrier and a provider of transportation solutions. The company provides multiple truckload transportation, intermodal, and logistics services using a nationwide network of business units and terminals in the United States and Mexico. In addition to its truckload services, the company contracts with third-party capacity providers to provide a range of truckload services to its customers. The company operates company tractors, independent contractor tractors, and trailers within its Knight Trucking, Swift Truckload, Swift Dedicated, and Swift Refrigerated segments. Additionally, the company operates tractors and intermodal containers within its Swift Intermodal segment.
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