Investors, Wall Street research firm like Covenant’s bullish forecast

The bullish forecast by Covenant Logistics for its third-quarter operating ratio and freight revenue has sent the company’s stock soaring on the day after its disclosure.

At approximately 1:45 p.m. EDT Thursday, the stock of Covenant was up about 10% to $17.73, a gain of $1.62 on a day when the market overall as measured by S&P 500 was up about 1.2%. 

Other truckload stocks appeared to be getting a boost from the Covenant news, though their gains were not that much more than the broader market. That raises the question of whether the strong freight market, which was widely known long before Covenant’s announcement, had already been baked into the prices of other carriers. 

At that same point in time, 1:45 p.m., Heartland was up 1.92%, as was Werner. U.S. Xpress was up a bit more than 2%. Knight Swift had a significant increase of 3.12%. The biggest truck-related gain besides Covenant appears to be TravelCenters of America, which was up about 8%. 

The transportation equity research team at Cowen issued a report Thursday in which it said the bullish projection by Covenant on Wednesday is a testament in part to the company’s “operational improvement plan.” Cowen is bullish enough on Covenant that it raised its price projection on the company to $27, up from $21 and well above the almost $18 where it stood at following the 10% gain. 

Covenant management said in its second-quarter earnings call that after a weak performance, company restructuring was underway and on track. Cowen agreed in its report Thursday.

“[Covenant has shown] fruits of their operational improvement plan, which involved selling the … TFS business,” Cowen said. “We believe that non-asset-based revenues will be higher in the quarter, given the rapid increase in spot rates and CLVGT’s focus on warehousing and other business complementary to trucking.” 

The sale of TFS to Triumph Bancorp, which takes Covenant out of the factoring business, had been announced in July but not completed because of a dispute. Covenant said Wednesday that the dispute had been settled, though the company is getting less money than it had first projected and continues to be exposed to some risk — but also some reward — as a result of the way the deal is structured.

But Cowen was still satisfied with the transaction, saying that the sale of TFS was part of the plan to improve Covenant’s operations. 

Besides raising the target price of the company’s price, Cowen also increased Covenant’s projected earnings per share for 2021 and 2021. The jump in 2020 is enormous, to $1 per share from 15 cents per share. For 2021, the increase is to $1.85 from $1.45. 

But even with that, Cowen indicated it might be a bit conservative. “We do not believe we have seen peak earnings for CVLG yet,” Cowen wrote in its report. “Indeed, we are impressed with the company’s quick operation improvements while acknowledging that they have also benefited from the strength of the freight market.” 

The “base case assumption” for Covenant, according to Cowen, is that truckload markets continue to get better and economic activity improves. The “upside scenario” to that is the efforts at recruiting drivers “prove more effective than we anticipate” and demand for truckload services “picks up, increasing the carrier’s pricing power.” 

The downside scenario is that freight demand declines but driver pay doesn’t, or continues to increase.

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