Knight-Swift Earnings: Freight Correction a Headache, but Yellow Diversions a Nice Offset

Diversified trucking and logistics specialist Knight-Swift Transportation’s KNX third-quarter revenue before fuel increased 8% year over year, primarily due to the U.S. Xpress acquisition in July and higher less-than-truckload revenue. But the operating backdrop for the for-hire trucking, intermodal, and brokerage operations remains challenged on scant retailer restocking and the swing to excess truckload market capacity, which has driven a material correction in truckload spot and contract pricing.

On the other hand, less-than-truckload division tonnage and yields were up solidly amid otherwise lackluster industry demand thanks to freight diversions from the failure of former LTL giant Yellow. Management expects LTL revenue (excluding fuel) to rise in the high single digits year over year during the fourth quarter.

Including amortization, Knight’s adjusted operating ratio (expenses/revenue, net of fuel and removing nonrecurring items; lower is better) deteriorated to 94.9% from 84.1%. The firm’s OR was up against unusually strong comparisons a year ago, but it was also hit by the inclusion of lower-margin U.S. Xpress as well as lost leverage from anemic truckload market demand and driver wage inflation. All segments posted margin declines, though the LTL division’s OR deteriorated the least, thanks to the Yellow-driven jump in volume and pricing.

We do not expect to drastically alter our $54 discounted cash flow-derived fair value estimate for the no-moat firm. In our view, the shares are appropriately valued relative to our long-term revenue, margin, and free cash flow forecasts. Management expects adjusted 2023 earnings per share of $2.10-$2.20, including U.S. Xpress, versus $5.03 in 2022.