Morningstar | Despite Easing Truckload Capacity Crunch, Werner's Dedicated Contract Growth Robust in 1Q
Full-truckload specialist Werner Enterprises’ first-quarter consolidated revenue before fuel surcharges grew roughly 7% year over year, slightly ahead of our forecast thanks to stronger-than-anticipated growth in the dedicated contract fleet. Since our midcycle revenue and margin assumptions are intact, we don’t expect to materially alter our $31 discounted cash flow-derived fair value estimate.Relative to the same period last year, consolidated top-line growth stemmed from robust opportunities for fleet conversions among shippers, benefiting Werner’s dedicated operations. Lingering benefits from strong contractual rate gains in the one-way truckload division also contributed to growth. These factors were only partly offset by difficult growth comparisons and easing spot rates, as the truckload capacity crunch seen throughout much of 2018 eased over the past five months.
Asset-light logistics revenue was flat because of fewer project freight opportunities and normalizing spot rates on truck brokerage business. That said, truck brokerage gross margin (net revenue/gross revenue) improved nicely, probably because rates paid to third-party carriers fell more than pricing to customers--a common dynamic for brokers when truckload market rates soften.
Werner’s adjusted operating ratio (expenses/revenue, net of fuel), which excludes unusual claims accruals that will dissipate, improved a solid 210 basis points to 90.9%, ahead of our forecast due to lower-than-expected maintenance expenses. Relative to the first quarter of 2018, profitability saw tailwinds from leverage from contractual pricing gains over the past year and lower driver turnover.
Market valuations for most of the asset-based truckload carriers we cover have come down into fairly valued territory in recent quarters on the back of resetting investor expectations. The truckload shipping backdrop is normalizing off one of the most robust pricing environments since deregulation. However, Werner’s shares still trade in modestly overvalued territory, in our view, probably because of optimism surrounding the firm’s impressive execution in recent years.
Werner Enterprises is a transportation and logistics company engaged primarily in transporting truckload shipments of general commodities in both interstate and intrastate commerce. The company has two reportable segments: Truckload Transportation Services, which includes the medium-to-long-haul van fleet that transports a variety of consumer nondurable products and other commodities in truckload quantities over irregular routes using dry van trailers, the expedited fleet that provides truckload services, and the regional short-haul fleet that provides truckload van service across the U.S; and Werner Logistics, which is a non-asset-based transportation and logistics provider.
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