Knight Earnings: Truckers Navigate Retail Destocking and Loose Capacity

Diversified trucking and logistics specialist Knight-Swift’s KNX first-quarter revenue before fuel fell 10% year over year. Recall revenue swung negative last quarter following exceptional growth throughout 2021 and most of 2022. In short, retail sector restocking has retrenched on elevated inventory levels, and industrial end markets started softening by the end of 2022, thus pressuring volumes across the board. Also, truckload spot rates corrected meaningfully throughout 2022 and contract pricing is now correcting (albeit LTL pricing is holding up better) as the truckload capacity crunch has dissipated. Overall, the current trucking downcycle is not unexpected and we’ve already been baking in a pullback in 2023.

Including amortization, Knight’s adjusted operating ratio (expenses/revenue, net of fuel) deteriorated to 89.8% from 81.6%. The firm’s OR is comping abnormally strong levels a year ago, but softer profitability also stems from fewer higher-margin spot and project freight opportunities and normalizing spot and contract rates, as well as cost inflation, including driver wages, equipment maintenance, and insurance outlays. Along those lines, Knight’s flagship truckload division’s OR deteriorated materially, though its newly acquired LTL division’s OR was roughly flat thanks to successful cost-related synergies and since LTL industry pricing has seen more stability thus far.

We do not expect to materially alter our $54 discounted cash flow-derived fair value estimate. The shares are trading in fairly valued territory relative to our long-term revenue, margin, and free cash flow forecasts. Management expects adjusted full-year 2023 EPS of $3.35-$3.55 (previously$4.05-4.25), excluding the upcoming U.S. Xpress acquisition.