Our in-depth note today (11/17/2017) includes 1) the evolution of electric vehicles, 2) a cost-benefit analysis of electric vs. diesel trucks, 3) our expectation for very low adoption rates by over-the-road truckers, and 4) longer-term implications for truckers, rails, and truck OEMs.
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We spoke with a small, private TL carrier and truck broker about recent TL pricing and capacity trends. On the brokerage side, our contact saw TL acceptance rates fall to the low 70s right after the hurricanes. Since then, the market has loosened up somewhat but is still very tight due to peak season, Thanksgiving produce inventory stocking, and the iPhone launch. Given tighter capacity, our contact is seeing a material acceleration in brokerage volumes, with volumes up 5%-7% in September, up 9% in October and up 10% so far in November. On the rate side, this shipper is currently seeing spot rates at a 20% premium to contractual rates, down from the 100-200% premiums right after the hurricanes. He is expecting TL rates to increase 10% y/y in C18, up from his prior expectation of low- to mid-single digit increases prior to the hurricanes.
The STB released Oct. headcount data for the U.S. rails earlier today (11/16/2017). Total rail headcount declined 3.7% y/y in Oct. vs. -3.8% and -3.6% the prior 2 months. Total headcount fell 0.2% from September to October, the 7th straight month of sequential declines. CSX, NSC and UNP each reported lower sequential headcount this month, while CNI, CP and KSU reach reported higher U.S. headcount.
Transport stocks underperformed for the second week in a row with our WR Transport Index down 1.9% last week vs. the S&P 500 which was down 0.2%. TL stocks (-3.5%) continued to underperform after both KNX and SNDR missed expectations, while EXPD was the best stock after reporting a large beat this week. The Rails (flat) were also relative outperformers last week.
Pasted below, please find our Friday Freight note. We distribute this product via email each Friday mid-day, so clients have some freight reading material to make their weekends truly worthwhile! Your feedback is always appreciated if you have any suggestions.
GWR hosted its first Analyst Day in ~8 years in NYC yesterday. The company guided to 5%-10% organic revenue growth, $300M of M&A annually, a high-70s consolidated OR, and 15%-20% annual EPS growth the next 4 years (ex. short-line tax credits). It seems easy to dismiss GWR’s long-term guidance since mgmt. has badly missed its guidance the past few years and generated just a 6% EPS CAGR from 2011 through 2016. That said, if we go back to 2014 before the commodity downturn, GWR generated 5- and 10-year EPS CAGRs of 24% and 17%, respectively.
AAWW’s stock is down 6% the past 2 days since missing 3Q EPS expectations and lowering full-year guidance. On Tues. morning (11/7/2017), AAWW reported 3Q EPS of $1.08 vs. our estimate of $1.11 and Cons. of $1.16. AAWW also lowered full-year guidance and now expects around 10% net income growth this year, down from mid-teens previously. This implies 4Q EPS of around $2.20, in line with Cons. which has come down 2% since the report.
SNDR’s stock fell 3% yesterday after reporting adjusted 3Q EPS of $0.23 vs. Cons. of $0.25 and our estimate of $0.24, and missing expectations for the 3rd straight quarter as a public company. TL missed our model by $0.05, partially offset by better Intermodal results, better other income, a lower tax rate and lower interest expense. SNDR cited a $0.01 drag from hurricanes and we estimate a $0.01-$0.02 drag from driver recruiting costs as SNDR added 550 drivers in 3Q.
EXPD popped 8% today after reporting 3Q EPS 10% above Cons. and 6% above our expectation. Net Rev., EBIT and EPS increased 10%, 12% and 11% y/y, each big improvements from +2%, -11% and -11% last qtr. Air and Ocean net rev. growth missed our expectation yet again, but Customs brokerage/other continued to materially beat our expectations. Net op. margins were also ~200bp better than we expected.
KNX reported adjusted 3Q EPS of $0.25 vs. Cons. of $0.29 and our estimate of $0.28. We mistakenly included a full quarter of SWFT results in our model, but 3Q only included 22 days of SWFT, and we estimate this was a $0.02-$0.03 drag vs. our model. Comparisons to our SWFT expectations aren’t material, but KNX’s stand-alone EBIT missed our forecast by <2% with better Logistics but weaker TL margins.
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