Following ongoing warnings of the dismal reality surrounding heavy, Class 8 trucking, reality finally hit overnight when trucking and logistics company Werner Enterprises warned that a sluggish freight market and increases to driver pay would hurt its second-quarter earnings, leading to a plunge in its stock price. Werner said it now expects to report a profit of 21 cents to 25 cents a share, which includes a pretax gain of $3.4 million from the sale of real estate; this was nealy 50% below the consensus forecast of 40 cents a share.
Werner also said market conditions have led to “difficult” customer rate negotiations.
The announcement was a confirmation of the company's Q1 warning when the company said market conditions could make it tough to attain year-over-year rate increases during the next few quarters.
Werner was not alone: its peer Knight Transportation and Swift Transportation all saw double-digit profit declines in the first quarter, partly because of rising driver wages. Knight and Swift shares also declined in sympathy in after-hours trading Monday. Werner said Monday that it is focusing on cost-management initiatives. The company is moving toward a goal to reduce the average age of its truck fleet to about 1.5 years by Dec. 31, but it doesn’t plan to expand its truck fleet until freight and rate markets “show meaningful improvement.”
The announcement was enough for Deutsche Bank to change its Buy recommendation on WERN shares to a Hold. This is what DB said:
Yesterday after the close, WERN preannounced Q2 EPS in the range of $0.21-0.25/share (vs. DBe and Consensus $0.40/share), including a pre-tax gain on sale of $3.4 million (~$0.03/share). The company notes that the weaker-thanexpected Q2 guidance is due largely to a challenging freight backdrop which is putting downward pressure on pricing (revenue/total mile), driver pay increases which were implemented in Q1 2016 and Q4 2015, and a soft used truck market. We note that the preannouncement is particularly disturbing given normal seasonality (see Figure 1 below) and bodes poorly for TL Q2 earnings, which will pressure the stock as well as the TLs such as HTLD, SWFT, KNX, and JBHT. For the first time in our model (which dates back to 1999), WERN’s Q2 EPS is poised to decline sequentially from Q1 as a perfect storm (higher driver pay, lower rates, weak tractor utilization, deteriorating mix [increased spot market exposure], and fuel) weighed on earnings. Consequently, Q2 EPS is expected to decline $0.05/share sequentially to $0.23 instead of experience the more normal $0.10/share average increase as illustrated below.
We are lowering our 2016-17E EPS to $1.00 and $1.25 from $1.60 and $1.82, respectively. Our new $22 price target is based on 17.5x multiple our new 2017E EPS. We have raised our target multiple to 17.5x our 2017 EPS estimate (from 16x previously) to reflect our downwardly revised earnings expectations and looming government regulations. Since we believe investors will be looking out to better EPS trends in H2 2017+ we have increased our target multiple to reflect this expectation as we see trucking fundamentals troughing in H2 2016 as supply starts to exit the industry. Our sense is that weather and/or a holiday uptick in volumes could serve to tighten trucking capacity in late 2016/early 2017. Upside risks include: better-than-expected cost performance, improved driving school results, new and/or accelerated government regulation, and the broader economy. Downside risks include: weaker-than-expected rates, used truck prices, higher-than-expected driver pay inflation, and the broader economy.
It appears that the Fed has another secular, not cyclica, concern to worry about.