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Morningstar | Schneider’s Top Line Growth Still Very Healthy; But Market Conditions Likely Nearing Peak

Multi-modal transportation specialist Schneider National’s revenue before fuel surcharges showed another solid increase, rising 15% year over year in the third quarter. While the total average truckload fleet fell more than we originally anticipated, overall top-line trends largely met our expectations given very strong core-pricing conditions across all segments--asset-based trucking, intermodal, and highway brokerage. Relative to the same period last year, higher revenue stems from healthy growth across the entire portfolio, driven by solid demand improvement and unusually tight truckload-market capacity this year, which has materially boosted Schneider’s pricing power.

The adjusted total operating ratio (expenses/revenue, net of fuel surcharges) improved 170 basis points to 91.5%, as rate gains across all segments more than offset persistent driver-related cost inflation and elevated outlays associated with the firm’s relatively new Final-Mile delivery offering. Consolidated profitability didn’t deviate drastically from our expectations as solid leverage from revenue growth more than offset near-term margin pressure in the final-mile delivery unit, which grappled with inefficiencies management is aggressively addressing.

Since the firm’s performance is roughly tracking our expectations, we maintain our midcycle revenue growth and margin assumptions. We do not expect to materially alter our $24 fair value estimate. Market valuations for most of the truckload carriers (and logistics names) we cover have come back down to more reasonable levels over the past few quarters, following more than a year of most names hovering in what we considered to be highly overvalued territory. We think easing market valuations stem in part from investors recognizing that industry growth trends, while still healthy, are peaking (especially in terms of core pricing, which will face very tough comparisons in 2019). Schneider’s shares are now trading in fairly-valued territory.

In terms of our outlook, while truckload-industry capacity is showing some signs of adjusting to ELD-related disruption thus far in the fourth quarter, it remains tight from a historical perspective and underlying demand trends aren’t raising any red flags. Management noted that the peak season hasn’t quite revealed itself yet, but most industry participants and shippers seem to still be expecting a decent showing this year. Overall, we continue to believe the operating backdrop for Schneider, especially in terms of truckload-segment pricing (including contract rates) and intermodal truck-to-rail conversion activity (Schneider is investing materially in its container fleet), will remain favorable for the remainder of 2018 and into the first half of 2019, though growth comparisons will certainly become more difficult.