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In a report to clients, Deutsche Bank (NYSE: DB) analyst Amit Mehrotra views the outlook for transportation equities as “favorable” heading into the second quarter earnings season.
He said transportation demand bottomed in late April with a slow but steady recovery since. Citing recent conversations with management teams at a dozen transportation companies and a sequentially improving demand backdrop, Mehrotra initiated favorable “catalyst calls” on Werner Enterprises (NASDAQ: WERN), XPO Logistics (NYSE: XPO) and United Parcel Service (NYSE: UPS).
The firm uses catalyst calls when an analyst has a high-conviction belief a stock will outperform or underperform the market over a time period of at least two weeks and not greater than three months.
The catalyst call “buy” rating on Werner stems from Mehrotra’s belief the company will report a “sizable beat” when it releases second quarter 2020 earnings. He raised his earnings per share (EPS) estimate $0.05 to $0.51, significantly ahead of the $0.37 consensus estimate. He believes weakness in the company’s one-way truckload (TL) segment was offset by improving trends in its dedicated unit, which has guaranteed capacity commitments with retailers that have seen demand accelerate during the pandemic.
Further, Mehrotra said weakness in the one-way TL market, which has less stringent contractual agreements, during April was followed by recovery in May and thus far into June. He sees the potential for modest year-over-year improvement in equipment utilization and a lower than expected decline in revenue per total mile in Werner’s one-way segment during the quarter.
Werner’s dedicated business represents approximately 60% of its TL transportation revenue and nearly half of the company’s total revenue.
The near-term expectations aren’t as rosy for the nation’s largest TL carrier, Knight-Swift Transportation (NYSE: KNX). “We’re bracing for a weak 2Q from KNX…but exit rate is most important and possible reinstatement of guidance likely to support shares,” said Mehrotra. He believes Knight-Swift saw an “extremely weak April” given Knight’s spot market exposure (roughly 10%) and Swift’s “disproportionate” retail apparel and automotive customer base. He lowered his second quarter EPS estimate $0.04 to $0.32, a penny under consensus, and noted “potential downside risk” to the revised number.
However, Mehrotra is more focused on how trends progressed through the end of the quarter versus the overall headline number. He thinks positive commentary regarding the exit rate of the quarter and reinstatement of the company’s earnings guidance, which he expects to reveal a “big second half rebound” could buoy the shares. He maintained his buy rating on Knight-Swift’s shares, pointing to improving demand and the expectation that TL capacity will continue to come out of the market.
On the logistics and less-than-truckload (LTL) fronts, he’s positive on XPO and Saia (NASDAQ: SAIA).
He expects XPO to “meet or slightly exceed” consensus in the quarter. He views the adoption of ecommerce solutions by retailers as beneficial to XPO’s growth outlook. He sees the company’s logistics unit as a beneficiary of the growing need for ecommerce fulfillment centers, noting the segment’s warehouse scale and expertise in automation.
Mehrotra’s expecting a big second quarter from Saia with EPS of $0.94 compared to the consensus estimate of $0.86. He believes the company’s cost initiatives during the pandemic will help offset the likely revenue declines the carrier reported during its mid-quarter update.
Saia has cut workforce hours by 16% and implemented a “shared sacrifice” structure, meaning hourly employees rotate their time off. This has been done to maximize hours per employee and minimize furloughs, allowing it to be nimble and bring employees back quickly as demand turns. The company also has a large linehaul optimization program in the works.
He maintained his buy rating on the carrier.
UPS and Norfolk Southern
Mehrotra made a couple of other near-term calls in the earnings preview report. He implemented a catalyst call buy rating on UPS based on the expectation of a more than 20% earnings beat during the second quarter, hence his $1.30 EPS estimate compared to consensus of $1.06.
He believes investors are “overly (albeit understandably) negative” on the freight mix shift from B2B to B2C during the pandemic. He believes weights per package and shipping distances increased sequentially in the second quarter as lockdown mandates eased. He also believes the company has become accustomed to the higher level of demand that has become the new norm and that new CEO Carol Tomé will bring a renewed focus to improving financial returns.
Mehrotra initiated a catalyst call “sell” on Norfolk Southern (NYSE: NSC) based on his expectation for second quarter EPS to decline 55% year-over-year. He’s forecasting a 1,000-basis-point decline in the railroad’s operating ratio on a 30% decline in revenue with operating expenses declining only 20%. Mehrotra believes the railroads will see revenue decline 22% on average with earnings down 33% in the second quarter.
He expects Norfolk Southern to report the “worst” trends out of the railroads. His EPS estimate of $1.24 sits well below the consensus estimate of $1.62.
In total, Mehrotra made very modest EPS changes to the transportation companies he follows. 2020 forecasts were lowered 2% on average and 2021 numbers were cut only 1%.
Shares of WERN (+2.3%), XPO (+3.4%) and UPS (+2.5%) were all higher in midday trading. Shares of NSC (-0.1%) are off slightly on the day.
Click for more FreightWaves articles by Todd Maiden.
This article first appeared on www.freightwaves.com
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