Knight-Swift Earnings: Trucking Downturn Persists, but No Major Surprises

Diversified trucking and logistics specialist Knight-Swift Transportation’s KNX decline in revenue before fuel accelerated in the second quarter, at 18% year over year. Revenue had swung negative in the first quarter following robust growth throughout 2021 and most of 2022, rooted in the pandemic-driven freight surge. Retailers have been destocking elevated inventories, and industrial end markets had softened by the end of 2022, pressuring volume across the board. Also, truckload spot and contract rates are correcting meaningfully (although less-than-truckload pricing is holding up better) as truckload capacity has loosened significantly. Second-quarter revenue came in short of our forecast for the legacy Knight and U.S. Xpress operations (acquired July 1), but the overall trucking downturn is not unexpected; we’d already been baking in a pullback this year.

Including amortization, Knight’s adjusted operating ratio (expenses/revenue, net of fuel and removing nonrecurring items) deteriorated to 92.9% in the second quarter from 80.9% a year ago. The firm’s OR is comparing with unusually strong levels last year, but softer profitability also stems from fewer higher-margin spot and project freight opportunities and normalizing industry pricing, as well as cost inflation, including driver wages, equipment maintenance, and insurance outlays. Along those lines, all segments posted margin declines, though the newly acquired less-than-truckload division’s OR deteriorated the least, thanks to cost-related synergies and LTL industry pricing proving more stable thus far.

We do not expect to materially alter our $54 discounted cash flow-derived fair value estimate. In our view, the shares are appropriately valued relative to our long-term revenue, margin, and free cash flow forecasts. Management expects adjusted full-year 2023 EPS of $2.10-$2.30, including the U.S. Xpress acquisition, versus $5.03 in 2022.