The transportation team at Bank of America Merrill Lynch (BOAML) is bullish on trucking stocks, raising the price objectives on a handful of them by several dollars per share.
The team led by Ken Hoexter based its increase in price objective (PO) on “the inflecting demand and spot rate environment.” It did not increase its buy/neutral/sell recommendation on any stocks.
Getting an upward kick from the BOAML team was Knight-Swift (PO now $49, was $46, stock closed earlier this week at $43.05); Schneider (PO now $27, was $26, stock closed at $24.69); USX (PO now $7, was $6, stock closed at $6.33); ArcBest (PO now $30, was $26, stock closed at $25.84); TFII, (PO now $42, was $35, stock closed at $37.46); and J.B. Hunt (PO now $126, was $121, stock closed at $120.64).
“Current spot rates are still only roughly in line with November 2019 levels, and are almost 20% off the all-time highs experienced during the peak of the freight market in July 2018,” the BOAML team’s report said in regard to its basis for the increases in price objective. “With truckers classified as essential services during COVID-19, we believe the impact on spot rates of a second wave of infections is muted, given the carriers’ majority defensive end-market exposure (discount retail, home improvement).”
And even if spot rates plummet, the report notes that the carriers written about in the report are only about “10% to 15%” exposed to spot rates.
The “top picks” of BOAML are five companies: Knight-Swift, Werner, ArcBest, XPO and TFI International (although XPO and Werner did not have their price objectives increased). The increased price objective was determined by the investment bankers calculating expected multiples of projected earnings per share, which for all of those companies except XPO and Werner was increased.
Some of the highlights of the BOAML outlook for the key companies:
Werner: While the projected multiple was held at 20.5 times earnings, the company’s current strategic overhaul got praise from the Hoexter team. “Werner is in the midst of internal operational improvements, led by CEO Derek Leathers, which should drive margin improvement,” the report said. The current pandemic remains an issue for the company, but “the company’s internal margin focus and Dedicated [dedicated contract carriage] gains should aid relative performance.” Risks to the company spelled out by BOAML are fairly standard for all companies – an economic downturn, rising fuel prices, a severe accident, “rapidly rising costs” and enforcement of the electronic logging device mandate.
Knight-Swift: The company’s target multiple was increased to 23.5 from 22 times earnings. An impact on demand from the pandemic is “offset by improved cost controls, estimates nearing apparent trough, and its Swift integration gains continuing.” One risk mentioned for KNX that wasn’t noted for Werner – “over-expanding or acquiring assets without maintaining its focus on cost controls.”
ArcBest: The target multiple for the less-than-truckload (LTL) carrier was increased to 13.5 from 11.5 times earnings. The report noted that the number is in the middle of the company’s historic average but that more muted number is “appropriate given the slowdown in industrial conditions, and potentially unfavorable supply-demand dynamics in trucking in coming quarters, offset by earnings improvement from its integration plan and its focus on its asset-light segments.” It could be some tough times for ArcBest, according to BOAML, because it has traditionally thin margins and “faces rising cost pressure from its union labor force.” But if the company can get through this, the report said, “the medium- to long-term prospects have improved as the post-COVID world sets up well for carriers who endure through the current adversity.”
J.B. Hunt: Hunt’s multiple was increased by BOAML to 24.5 times earnings from 23.5. The report said it expects the trucking and intermodal carrier to “move off its trough level as intermodal volumes inflect positive, while it ramps up spending for its 360/brokerage segment.” One risk, unique for a company with so much trucking activity – “rapidly falling fuel prices that could encourage freight to stay on the highway,” which would impact its huge intermodal operation.
TFII: The price objective for the Canadian giant was raised to $42 from $35 and the target multiple increased to 14 times earnings from 11.5 times. BOAML sees earnings per share at the company rising 20% next year after this year’s 16% forecasted drop. That rebound, the report said, will be “driven by its diversification across trucking segments and exposure to the secular growth of e-commerce.” The company recently went public and it has “historically been subject to a lower multiple.” However, BOAML says that as a public company, “we believe this trend is set to reverse, with asset-light revenues 25% of the group.”
XPO: The price objective and multiples for XPO weren’t changed. But it remains a top pick for BOAML based on the factors that have long made it attractive to many analysts – its “business composition, growth prospects ad management’s demonstrated ability to drive shareholder value through acquisitions and divestments, partially offset by its elevated debt levels.” Two notable risks for XPO were cited by BOAML. One would be a failure to identify solid acquisition candidates. The second is its accounting practices, which have been an issue for a significant period of time. “We have relied on XPO’s auditor to verify the accuracy of its SEC filings in evaluation the company’s financial position,” BOAML said.
Schneider: Its targeted multiple was increased to 22.5 from 21.5. The truckload carrier will benefit from post-COVID recovery, the report said: “We see a slow inflection into 2H, thus as we approach trough, we look to 2021 normalization.”
The background to the forecast is BOAML’s Truck Shipper Survey Rate Indicator which is double its recent low, “suggesting price expectations continue to accelerate.” The company’s proprietary demand indicator recently posted its biggest year-on-year change since June 2018 – one of the strongest trucking markets in history – and its capacity benchmark dropped to 52, the lowest level since November 2018. “We see the building blocks in place for spot rates to keep rising into the (second half),” the report said.
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