EUR 850.00 For Business Accounts Only

Morningstar | Werner’s Operating Backdrop Historically Strong; But Truckload Trends Likely Nearing a Peak

Full-truckload specialist Werner Enterprises’ third-quarter revenue before fuel surcharges expanded 17% year over year, slightly ahead of our expectations due to strong dedicated-segment fleet growth. Relative to the same period last year, total revenue growth came from robust truckload-market pricing conditions (unusually tight capacity), dedicated-contract services fleet growth, and healthy demand for asset-light truck brokerage. Ignoring nonrecurring items, Werner's adjusted operating profitability is largely tracking our expectations. We are maintaining our midcycle revenue and margin assumptions, and do not expect to materially alter our $29 fair value estimate. Market valuations for most of the truckload carriers we cover have come back down to more reasonable levels over the past few quarters, likely because investors realize that growth trends, while robust, are peaking. That said, Werner is still trading in modestly overvalued territory. We note that historically, asset-intensive transportation stocks tend to lead the market on both the upside and downside of the economic cycle.

Capacity tightened materially across the full-truckload shipping landscape by the end of 2017 on the back of accelerating freight demand, widespread adoption of electronic logging devices (full enforcement as of April 2018), and severely limited driver availability, which is constraining fleet growth. Thus, high-quality operators like Werner have enjoyed an unusually strong rebound in pricing power, including historically high spot rates and a very healthy contract-bidding season. Aside from a material pullback in U.S. economic trends, we expect capacity to remain firm throughout the rest of 2018 and into the first half of 2019 as shippers remain concerned about securing trucks. This implies that the early 2019 bidding season should prove healthy, and although year-over-year comparisons will become more challenging, contract pricing should remain at elevated levels.

Werner’s trucking revenue before fuel surcharges was up about 16.5% year over year. Behind this strong growth was a 13.5% increase in revenue-per-mile excluding fuel surcharges and an 6% rise in average tractor count (dedicated-contract fleet growth), partly offset by 3% lower miles per tractor (utilization) due to an ongoing mix shift to dedicated (versus for-hire) business, which tends to have shorter miles per trip. Ignoring legal fees related to an adverse claims-related jury verdict and a favorable property tax dispute resolution, we calculate Werner's adjusted truckload division operating ratio (excluding fuel surcharges) improved to 86.4%, from 90.5%, thanks to leverage from historically strong pricing gains and a nice boost from higher gains on equipment sales.

Werner Logistics' top line increased a robust 24% on the back of robust demand for truck brokerage services in a tight capacity market (healthy spot activity and rising contract pricing). Logistics' OR improved about 240 basis points, to 96.3%, 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.