Category: KNX

KNX – Knight-Swift (KNX) Up 1.3% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for Knight-Swift Transportation Holdings (KNX Free Report) . Shares have added about 1.3% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Knight-Swift due for a pullback? Before we dive into how investors and analysts have reacted as of late, let’s take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Earnings Beat in Q2

Knight-Swift’s second-quarter 2021 earnings (excluding 6 cents from non-recurring items) of 98 cents per share surpassed the Zacks Consensus Estimate of 87 cents. The bottom line surged 71.9% from the second quarter of 2020, which saw significantly low volumes due to weak freight market conditions caused by the coronavirus pandemic.

Total revenues of $1,315.7 million outperformed the Zacks Consensus Estimate of $1,300.8 million. The top line jumped 24% year over year driven by an increase in revenues in the Trucking, Logistics and Intermodal segments.

Total operating expenses increased 17.3% year over year to $1.12 billion. Adjusted operating ratio (operating expenses as a percentage of revenues) improved to 83.1% from 87.6% in the second quarter of 2020. Lower the value of the metric, the better. Knight-Swift’s adjusted operating income rose 65.1% year over year.

Segmental Result

Revenues in the Trucking segment totaled (excluding fuel surcharge and inter-segment transactions) $882.56 million, up 8.2% year over year. Results were driven by 10.3% increase in average revenue per tractor. Average revenue per tractor was strong in the quarter owing to an18.8% increase in revenue per loaded mile (excluding fuel surcharge and intersegment transactions). Adjusted segmental operating income surged 42.8% to $168.78 million. Adjusted operating ratio (operating expenses as a percentage of revenues) improved 460 basis points to 80.9%.

Revenues in the Logistics segment (excluding inter-segment transactions) amounted to $162.17 million, up more than 100% year over year, due to 55.3% increase in brokerage load volumes and 55.8% (including benefits from the UTXL acquisition) rise in revenue per load. Adjusted operating ratio improved to 91.1% in the second quarter from 95.5% in the year-ago period. Segmental adjusted operating income surged more than 300% to $14.45 million.

Revenues in the Intermodal segment (excluding inter-segment transactions) totaled approximately $115.29 million, up 39.4% year over year as a result of 19.9% and 16.3% increase in load counts and revenue per load, respectively. Segmental adjusted operating ratio improved to 95% in the reported quarter from 105.3% in year-ago quarter. Segmental operating income (adjusted) was $5.81 million in the quarter, against an adjusted operating loss of $4.41 million in the second quarter of 2020.

Liquidity & Share Buyback

Knight-Swift exited the second quarter with cash and cash equivalents of $179.03 million compared with $156.70 million at the end of 2020. During the first half of 2021, the company returned $53.7 million to shareholders in the form of share repurchases and $30.3 million in the form of dividends.

2021 Guidance

Knight-Swift raised its adjusted earnings per share guidance for full-year 2021. It now expects the same to be in the range of $3.90-$4.05, compared with the previous expectation of $3.45-$3.60.The company’s improved guidance is a result of the expected benefits from its recent acquisitions of UTXL and AAA Cooper Transportation as well as improved freight market conditions.

The company anticipates net cash capital expenditures in the band of $500–$550 million for 2021. The amount will primarily be spent on replacements of existing tractors and trailers, investments in terminal network and driver amenities.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended upward during the past month. The consensus estimate has shifted 9.84% due to these changes.

VGM Scores

Currently, Knight-Swift has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren’t focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Knight-Swift has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.

KNX – Trucking M&A deals getting bigger; Knight-Swift takes on LTL

Big M&A deals are starting to roll in for the publicly traded truckload carriers. After months of management teams saying they would look to deploy their strengthening balance sheets on accretive acquisitions, the fruit is finally shaking loose from the tree.

Less than a week after Werner Enterprises (NASDAQ: WERN) announced it had acquired a couple of regional carriers in a $142 million deal with ECM Transport, the nation’s largest TL carrier Knight-Swift Transportation (NYSE: KNX) made a big splash Tuesday, acquiring less-than-truckload carrier AAA Cooper Transportation in a $1.35 billion deal.

Knight-Swift adds LTL to its lineup

The deal represents a big divergence for Knight-Swift, which generates nearly $5 billion in annual revenue from its trucking, logistics and intermodal segments, of which TL represented 80%. Following the transaction, Knight-Swift’s core TL business will only account for 63% of consolidated revenue.

The acquisition of Dothan, Alabama-based AAA Cooper gives Knight-Swift an immediate footing in the more than $40 billion LTL market. AAA Cooper runs a regional network of 70 facilities and 3,400 doors spanning from El Paso, Texas, to the Southern East Coast, along with multiple locations in the Midwest.

AAA Cooper is expected to record $780 million in revenue during 2021 and post an operating ratio near 90%. At a 2021 run rate of $140 million in earnings before interest, taxes, depreciation and amortization (EBITDA), Knight-Swift acquired the company and its fleet of 3,000 tractors and 7,000 trailers for less than 10x EBITDA.

AAA Cooper will operate as a stand-alone division of Knight-Swift with current CEO Reid Dove remaining in place. Dove was also appointed to Knight-Swift’s board.

On a conference call with analysts, Knight-Swift management said AAA Cooper is expected to be a high-single-digit growth outlet moving forward, immediately accretive to adjusted earnings per share (13 cents in the second half of 2021 and 29 cents in 2022 excluding the impact of synergies).

Knight-Swift’s current consensus EPS estimates are $3.59 and $3.66 in 2021 and 2022, respectively.  

“We’ve been very deliberate, even patient, to find the right kind of transaction, the right kind of businesses that fit our model,” said CEO Dave Jackson. “We’ve been preparing for a transaction such as this. We’re already preparing for the next transaction.”

Acquisition price $1.35B enterprise value
Combined value ~$9B enterprise value
Target revenue run rate $780M
Acquirer revenue run rate $4.7B
Expected cost synergies TBA
Earnings expectations/accretion $0.13 in H2/21, $0.29 in 2022
Recent acquisitions by acquirer UTXL, Eleos, Abilene Motor Express, Swift Transportation
Financing debt, cash, stock
Table: Company reports

Analysts see deal as ‘transformational’

While not overly needle-moving to near-term results (roughly 14% of total revenue and 11% of operating income), “this is big,” Deutsche Bank (NYSE: DB) analyst Amit Mehrotra told clients in a note on Tuesday.

“The transformational aspect for us is the company’s clear indication of entering, and growing, its LTL presence, which in our view changes the cyclical narrative associated with the company’s Truckload business. This will not happen overnight, but today’s announcement is a significant step in the right direction, in our view,” Mehrotra said.

He sees opportunities for Knight-Swift to cross sell its other three offerings as LTL carriers usually have a much larger customer book than TL carriers. “We also see benefits on driver recruitment and retention, as KNX can now offer a career path for TL drivers (moving to LTL which requires more experience and gets drivers home more regularly),” Mehrotra added.

UBS (NYSE: UBS) transportation analyst Tom Wadewitz said the deal multiple was “very reasonable” at sub-10x EBITDA. He noted differences in the regional carrier to the national carriers he follows, but views the valuation as compelling when compared to that group, which trades closer to 15x enterprise value-to-EBITDA.

He said the addition of an LTL operation provides both organic and inorganic growth opportunities.

“While there is likely room for purchasing and other synergies and OR improvement, we believe the more compelling aspect of the acquisition is that it provides KNX with a platform for future growth in the LTL business through both organic expansion of [AAA Cooper’s] terminal network and also through potential additional LTL deals,” Wadewitz stated.

AAA Cooper’s OR and service performance metrics show it as more of a middle-of-the-pack performer. However, this is an area management believes can be improved to the mid-80% range over the next three years.

The company and management team have a track record of turning around underperforming operators. Knight’s merger with Swift Transportation is the best example of this.

With a highly leveraged balance sheet and severely depressed margins, the carrier was anything but a model fleet when the 2017 deal was struck. However, through an operational overhaul and significant equipment and technology investments the Swift fleet’s performance has surpassed the operations of the Knight fleet, ending 2020 with an OR 80 basis points better at 80.7% on an adjusted basis.

Knight-Swift also has significant integration experience, making several acquisitions in the past like Barr-Nun, Abilene Motor Express and most recently third-party logistics provider UTXL.

The AAA Cooper transaction was funded with $1.3 billion in cash, which came from a new $1.2 billion term loan and existing liquidity, $10 million in Knight-Swift stock and the assumption of $40 million in debt. Knight-Swift’s debt leverage moves to 1.44x following the transaction, up from 0.54x prior but only slightly higher than the 1.24x level that followed the Swift merger.

“We are positioning ourselves to be a provider that can provide tremendous value to a supply chain,” said Jackson. “To not just look at things within the walls or silos that the industries kind of operate but we can look to try and create efficiencies for customers that work for us and that work for them as well”

New investment dollars continue to flow into LTL space

In January, Canadian trucking and logistics provider TFI International (NYSE: TFII) announced it was acquiring UPS Freight (NYSE: UPS), now TForce Freight, in an $800 million transaction. TFI is now in the process of integrating the unit. Part of those initiatives includes repricing nearly $3 billion in freight, much of which was tied to bundled services contracts with clients that were priced at below-market LTL rates.

Downers Grove, Illinois-based Roadrunner (OTC: RRTS) announced in March it closed a $50 million private placement with proceeds to be used for technology investments to improve its LTL offering. The company has been involved in a turnaround aimed at unwinding years of non-LTL, asset-heavy acquisitions. The company’s goal is to create a less capital-intensive structure focused primarily on LTL.

Forward Air (NASDAQ: FWRD) has been increasing its exposure to LTL for a year now. The Greeneville, Tennessee-based asset-light trucking and logistics company’s growth strategy has focused on building out its intermodal and final-mile offerings, in addition to increasing LTL service outside of its legacy airport-to-airport network. The company’s focus on LTL received a nudge when an activist investor group pressed the issue during a recent proxy battle.

Those not involved in M&A like Old Dominion Freight Line (NASDAQ: ODFL) and Saia (NASDAQ: SAIA) have capitalized on their past success by continuing to invest in their networks through terminal additions and technology upgrades. These carriers continue to benefit from the flywheel effect as improving ORs fuel increased cash flows, which are reinvested in the business, driving ORs lower and returns higher.

Click for more FreightWaves articles by Todd Maiden.

KNX – Knight-Swift grabs majority stake in driver software Eleos

Knight-Swift (NYSE: KNX) has taken a majority stake in a provider of driver-directed software, Eleos, which will continue to operate as a stand-alone company. 

It is not a move that Knight-Swift normally engages in, according to Knight-Swift CEO Dave Jackson. Jackson, in a phone interview with FreightWaves, said there had been precedents for such acquisitions, such as its purchase of a majority stake in trailer blade manufacturer Strehl several years ago. But it’s not a regular approach the truckload carrier takes. 

Eleos, based in Greenville, South Carolina, competes in the marketplace for driver software that operates on transportation management systems and phone-based apps. Kevin Survance, one of the founders of Eleos and its CEO, said in the joint phone call with Jackson that the Eleos system can be used not only in the truck cab with its TMS system but “can be taken out of the cab and the driver can have the convenience of using it wherever they are.”

Jackson said one of the key attractions of the Eleos product, and why it took a majority stake in the company, is that Eleos is not sharing its data with third parties that view the data as a source of revenue. 

“Many technology companies backed by venture capital … make a play to investors that are going to disintermediate the market,” Survance said. But Eleos is “not in that game and we never have been,” Survance added, noting that he believes that is one reason for the company’s success.

Jackson said, “We hope the industry looks at this that we are the largest truckload carrier, we stepped up and we put a chunk of coin down to make sure all of our data stays private.” 

The price of the transaction was not disclosed.

Eleos has approximately 2,000 customers. Jackson described them as “some of the most forward-thinking businesses that are seeking a very positive digital driver experience.” And one part of that, he added, is to maintain the privacy of the customer data. 

The Eleos platform is open, meaning that users can modify it for particular aspects of their business. For example, Survance said among the Eleos customers is a company that hauls RVs and trailers to their final destination. The requirements that a company like that has would be significantly different than a truckload carrier, so the open platform of Eleos can be built on to meet those specific needs. 

Jackson said the open platform is “the best thing we have seen.” Since it can be modified to meet the needs of a specific customer, Jackson said it doesn’t hurt Knight-Swift competitively “and in fact does open up third-party opportunities for our business.”

Survance will remain CEO of the company and will “have autonomy to pursue business objectives that they’ve been successful at so far.” Survance said the sellers of the stake in Eleos came from the original group of investors. 

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KNX – Knight-Swift puts up the Q3 analysts were expecting

The nation’s largest truckload (TL) carrier, Knight-Swift Transportation (NYSE: KNX), on Wednesday posted third-quarter results closer to what analysts and onlookers were anticipating.

After a couple of lackluster third-quarter reports from TL carriers, Knight-Swift reported a third-quarter beat and a 2020 guidance raise, and it didn’t contain its exuberance over current TL market fundamentals, issuing better-than-expected full-year 2021 guidance. Usually carriers wait until the release of fourth-quarter results in January and February before providing the new year’s guidance.

The Phoenix-based company cited the expectation for “strong freight conditions to continue” as a basis for issuing full-year 2021 adjusted earnings per share (EPS) guidance of $3.20 to $3.40 a full three months ahead of schedule. The outlook compares favorably to the current consensus estimate of $2.90, which increased several times heading into the Wednesday print.

The report also pointed to “inventory restocking” and “low double-digit contract rate increases” during 2021 as supportive of expectations. The carrier did caution that headwinds around recruiting and retaining drivers “will continue and lead to additional driver wage inflation.” The pool of drivers has been constrained recently over COVID-19 fears, the impact of the Drug & Alcohol Clearinghouse and limited driver school enrollment during the pandemic, which has further tightened truck capacity in the market.

The company also used a 15-cent third-quarter earnings beat to increase its full-year 2020 EPS guidance to a range of $2.68 to $2.72 compared to the prior range of $2.15 to $2.30 and the current 2020 consensus forecast of $2.39. Knight-Swift expects “strong project business” during the fourth quarter of 2020.

Third-quarter results highlight strong TL market

The company posted third-quarter adjusted EPS of 79 cents, ahead of the consensus estimate of 64 cents and the 2019 third-quarter result of 48 cents. Gains on the sale of tractors and trailers presented an operating income headwind in the quarter, down approximately $7 million year-over-year. This was partially offset by a $4.2 million increase in gains from the company’s portfolio of investments.

The adjusted EPS result excluded 11 cents per share in amortization of intangible assets and legal accruals from before the Knight and Swift merger.

Knight-Swift’s key performance indicators – consolidated

Revenue in the TL segment increased 3% year-over-year excluding fuel, to $903 million on a 5% increase in revenue per tractor. Loaded miles were flat in the quarter but revenue per loaded mile excluding fuel increased 5%. Strong demand and tight truck capacity drove the division’s adjusted operating ratio (OR), operating expenses expressed as a percentage of revenue, to 81.3%, 620 basis points better year-over-year.

Management noted a “focus on cost control” as a reason for the improvement. The combination of salaries, wages and benefits expense, and purchased transportation expense as a percentage of revenue declined 80 basis points year-over-year, with operations and maintenance expense (-130 basis points) and rental expense (-80 basis points) declining as well. Swift’s adjusted OR was 77.9% with Knight operating at an 80.1% OR. Improvement in the company’s dedicated and refrigerated segments was also referenced.

Knight-Swift’s key performance indicators – TL

The logistics segment, mostly brokerage, saw 180 basis points of margin erosion at a 97.4% adjusted OR. Tight truck capacity forced spot rates higher, resulting in a 300-basis-point decline in brokerage gross margin to 11%. The release noted “margins began to stabilize and subsequently improved throughout the third quarter of 2020.”

Knight-Swift’s intermodal unit squeaked out an operating profit in during the quarter, a far better result than the $4.4 million adjusted operating loss posted last quarter. Revenue fell 9% year-over-year on fewer loads and lower revenue per load. Excluding fuel, intermodal revenue per load was up 3%. The 6% year-over-year decline in loads was worse than the 2% increase in intermodal container movements reported on the U.S. railroads. “We continue to develop our Intermodal network and cost structure and expect to continue to see improved results in the fourth quarter,” the press release stated.

Knight-Swift’s key performance indicators – logistics and intermodal

Knight-Swift closed the third quarter with $855 million of available liquidity, including $240 million in unrestricted cash, and net debt of $642 million, down $118 million from the 2019 close. Free cash flow for the first nine months of 2020 was $379 million, which includes a $93 million cash settlement related to the classification of independent contractors.

The company has lowered capital expenditures (capex) further. Net capex is expected to be in a range of $380 million to $405 million in 2020, down from $500 million to $525 million. The carrier plans to finance approximately $120 million of this year’s equipment purchases “in order to keep our leverage from falling below our target range and to take advantage of historically low medium-term fixed interest rates.”

The average age of the tractor fleet at the end of the third quarter was 2.1 years, up slightly from 2 years in the third quarter of 2019.

Net capex in 2021 is expected to range from $430 million to $480 million.

Shares of KNX are up more than 1% on the day compared to the S&P 500, which is off slightly.

Click for more FreightWaves articles by Todd Maiden.