EUR 850.00 For Business Accounts Only

Morningstar | Knight Swift's Legacy Knight Segment Capitalizes on Strong 2Q Pricing, but Swift's Performance Lags

In the second quarter, Knight-Swift's revenue before fuel surcharges increased to $1.17 billion from $247 million relative to Knight's legacy results a year ago, on the back of the September 2017 merger of truckload industry leaders Knight Transportation and Swift Transportation. The merger aside, operating conditions across the full-truckload industry are highly favorable, with solid demand growth (positive macroeconomic trends) and historically robust core rate gains linked to unusually tight capacity. These factors are benefiting the operations of Knight and Swift. That said, driver recruiting remains a major speedbump, especially for the Swift segment, which grappled with unseated tractors (pressuring utilization) and the need to reduce fleet size more than we anticipated. Truckload carriers need to expand their tractor count to fully capitalize on healthy freight demand. Additionally, Swift's refrigerated unit underperformed in the quarter. As a result, revenue growth came in below our expected run rate for the year.

That said, we haven't altered our midcycle performance assumptions, and we don't expect to materially change our $35 fair value estimate. We expect truckload capacity to remain tight throughout the remainder of 2018 on widespread ELD adoption, which is tempering productivity for a large swathe of the small-carrier base. This will keep the pricing environment healthy, save for tougher year-over-year comparisons in the second half. We also have confidence that Knight's management team will adapt to driver availability headwinds, while applying its best-in-class operating know-how to Swift's refrigerated truckload unit in the year ahead.

On the valuation front, throughout the past year, we considered Knight's shares to be overvalued as investors appeared to have forgotten the cyclical nature of trucking. However, the shares traded back down in recent months to a more reasonable level and as of July 25, the stock was in fairly valued territory.

Weakness at Swift aside, Knight's legacy trucking segment performed well, with revenue (before fuel surcharges) up 31.5%, reflecting a 21% increase in core revenue per mile, 4% improvement in miles per tractor, and a 6% increase in the average tractor count. Knight's legacy trucking unit operating ratio (net of fuel surcharges) improved nicely to 77.7%, from 84.6% on the back of robust pricing conditions.