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Why it is Time to Dump Knight-Swift (KNX) From Your Portfolio

Zacks Equity Research

Knight-Swift Transportation Holdings Inc. KNX has been lying low for quite sometime now, thanks to persistent softness in freight demand. Consequently, revenues at the trucking segment (major source of revenues) are being hampered. Amid this weak freight scenario, an increased supply of trucks is putting downward pressure on pricing.
 
Stiff competition in the intermodal space is further weighing on the company’s performance. Additionally, high capital expenditures are hurting its bottom line.

Knight-Swift’s recently released (on Oct 23) third-quarter earnings report bears evidence to this dismal picture. The company’s third-quarter earnings (excluding 4 cents from non-recurring items) of 48 cents were in line with the Zacks Consensus Estimate. However, the bottom line decreased 26.2% year over year. Total revenues of $1,200.5 million lagged the Zacks Consensus Estimate of $1,225.7 million and also declined 10.8% year over year.

This weak show is well reflected in the company’s price performance in the past seven days. Over this period, Knight-Swift has gained 2.8%, underperforming its industry’s 3.1% rise.



 

Earnings Report in Detail

Third-quarter results were affected primarily by low revenues at the trucking and intermodal segment. Notably, increased competition in the intermodal space induced 10.3% and 6.8% reduction in volumes and revenue per load, respectively.

Effective tax rate in the third quarter was unchanged year over year at 24.6%. For the full year, the same (before discrete items) is still expected in the 25-26% range.

From the first quarter of 2019 onward, the company started reporting under three segments, namely Trucking, Logistics and Intermodal following the realignment of its segments.

Segmental Results

Revenues in the Trucking segment totaled (excluding fuel surcharge and intersegment transactions) $876.38 million, down 6.4% year over year. Results were hampered by 6.4% decrease in average revenue per tractor (miles per tractor declined 4.1%). Adjusted segmental operating income fell 22.1% to $109.76 million. Adjusted operating ratio (operating expenses as a percentage of revenues) also deteriorated to 87.5% in the third quarter from 84.9% a year ago. Notably, lower value of this key metric bodes well for the company.

Revenues in the Logistics segment (before intersegment transactions) amounted to $83.63 million, declining 24.9% year over year due to 25% fall in brokerage revenues. While adjusted operating ratio deteriorated 470 basis points (bps) to 95.6%, segmental operating income plunged 63.6%.

Revenues in the Intermodal segment (excluding intersegment transactions) totaled $108.76 million, down 16.4% year over year as a result of 10.3% fall in load counts. Segmental adjusted operating ratio of 102.4% deteriorated 980 bps while operating loss came in at $2,652 million against operating income of $9,688 million reported a year ago.

Operating Results

Total operating expenses decreased 8.7% year over year to $1.1 billion. Adjusted operating ratio (defined as operating expenses as a percentage of revenues) deteriorated to 89.6% from 87.1% reported in the year ago quarter. Knight-Swift’s adjusted operating income declined 27.4% year over year to $113.71 million due to weaker segmental revenues.

Liquidity

The company exited the third quarter with cash and cash equivalents of $94 million compared with $82.49 million at the end of 2018. Long-term debt (less current portion) amounted to $364.77 million compared with $364.59 million in December 2018. During the first nine months of 2019, Knight-Swift repurchased shares worth $86.9 million and returned $31.2 million to shareholders through dividend payments.

Outlook

The company expects seasonal improvement in demand during the ongoing quarter albeit lower than previously anticipated. In 2020, it hopes to see a better freight environment.

Negative Estimate Revisions

The pessimism surrounding the stock is evident from the Zacks Consensus Estimate for 2019 earnings being revised 5% downward in the past 60 days.

Given this bleak backdrop, the company’s Zacks Rank #5 (Strong Sell) is well justified and hence we believe investors should discard this stock from their portfolios at the moment.

Key Picks

Some better-ranked stocks in the broader Transportation sector are Alaska Air Group, Inc. ALK, Heartland Express, Inc. HTLD and Saia, Inc. SAIA, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Shares of Alaska Air Group, Heartland Express and Saia have rallied more than 15%, 22% and 88% so far this year, respectively.

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