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Morningstar | Werner Capitalizes on a Robust 2Q Pricing Backdrop for Large Truckload Carriers

Full-truckload specialist Werner Enterprises' second-quarter revenue before fuel surcharges grew a solid 17% year over year, modestly ahead of our expected run rate due mostly to greater-than-anticipated growth in the asset-light highway brokerage division. The flagship asset-based truckload unit was mostly in line, though core pricing is trending slightly above our assumptions. Relative to the same period last year, revenue growth came from strong truckload-market pricing conditions (unusually tight capacity), dedicated services tractor-fleet growth, and solid demand for truck brokerage services. Ignoring a nonrecurring claims-related accrual, Werner's operating profitability is trending slightly above our previous expectations. We are maintaining our longer-term midcycle revenue and margin assumptions, but we expect to raise our fair value estimate by 3%-4% on the time value of money since our previous update. That said, the shares are still trading in overvalued territory--a common theme across our asset-based trucking coverage list.

Capacity tightened materially across the full-truckload shipping landscape by the end of last year thanks to an acceleration in freight demand (solid macroeconomic growth), large carriers' fleet reductions this past year, and the impact of limited driver availability. As a result, top-tier carriers like Werner have seen a solid rebound in pricing power, and previously soft contract rates are now rising as well; shippers are concerned about securing trucks. We expect capacity to remain firm throughout 2018 given the likelihood of healthy demand trends, coupled with widespread adoption of electronic logging devices, which became mandatory as of December 2017 (with full enforcement as of April 1). Because they are more exacting in terms of hours of service enforcement, ELDs are pressuring industry capacity, particularly among small carriers.

Werner's core trucking revenue before fuel surcharges increased roughly 14%, driven by a 13% increase in core revenue per mile and an approximate 4% rise in the average tractor count (bigger dedicated-contract fleet). Miles per tractor (utilization) fell 3% on a mix shift to dedicated business (versus for-hire business), which tends to have shorter miles per trip, albeit at higher rates. Ignoring the non-recurring claims accrual, Werner's adjusted truckload division operating ratio (excluding fuel surcharges) improved nicely to 86.4%, from 89.8% thanks in part to higher gains on equipment sales and leverage from solid pricing conditions.

Werner Logistics' top line increased a robust 33% on the back of spiking demand for truck brokerage services in a tight capacity market. Logistics' OR improved about 190 basis points, to 95.8%, with help from higher gross profit margins rooted in favorable pricing conditions, which are making it easier for brokers to pass along higher buy-rates (paid for third-party capacity) to customers.