Trucking Stocks Plunge on Earnings Warning

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Werner Enterprises’ forecast for sharply lower profits has stoked investor fears that the trucking industry’s downturn is deepening

The Wall Street Journal  /  June 21, 2016

Trucking stocks swooned Tuesday after one of the largest U.S. trucking companies predicted sharply lower profits amid a downturn in the freight market.

Werner Enterprises, Inc., one of the largest long-haul carriers, said weak demand from shippers, rising driver pay and other factors would cut the company’s second-quarter earnings to between $0.21 and $0.25 per share. Wall Street analysts had an average estimate for the quarter of $0.40, according to FactSet.

Late Tuesday, Covenant Transportation Group Inc. announced after the stock market closed that it was lowering its second-quarter profit outlook as well, from a range of $0.28 to $0.33 per share to a range of $0.17 to $0.23 per share. The company cited a weak freight market, lower fuel surcharges and higher costs, among other factors, for the revision.

The trucking business has been plagued by overcapacity and weak demand since early 2015. Although most large trucking companies have stopped expanding their fleets, forecasts like Werner’s raise concerns that it will likely take months or even years for supply and demand to come back into balance.

The second quarter is typically the strongest for trucking companies, so Werner’s negative outlook is particularly worrying, analysts said. It also points to weakness in the spot market is spreading to long-term freight contract rates, where large trucking companies generate the bulk of their profits. That could signal a prolonged slump for the industry.

“We hadn’t really seen that same weakness in the contracted rates for the big truckers, and now we’re seeing those rates come down too,” said Brandon Oglenski, an analyst with Barclays. “Our fear is that for the back half of the year. projections are too rosy. The reality is pricing is coming down now.”

Shares of Werner fell 9.6% to $22.31 in New York trading. Covenant fell 5.3% to $21.97 per share.

Other truckload carriers, which handle shipments for single customers in each truck, tumbled as well. Celadon Group Inc. ’s stock dropped 9% to $10.02, Swift Transportation Co. shares were down 6.9% at $15.74 and Knight Transportation Inc. shares fell 4.3% to $26.66.

Derek Leathers, Werner’s chief executive, said that contract negotiations with shippers this year have been the most aggressive he can remember.

“We’ve seen shipper negotiations that have demanded in excess of 10% in rate reductions,” Mr. Leathers said. “They’re essentially asking folks to operate their business at a loss. Carriers will do that for a period of time, but there are negative long-term outcomes to that.”

Spot market rates – or the price to haul freight on a one-time basis – have been falling since early 2015. But until this year, long-term contracts, which are used by truckload carriers, were stronger. Also on Tuesday, Cass Information Systems Inc. reported that long-haul freight rates fell 1.2% in May compared with the year-earlier month, the third consecutive month of price declines.

Historically, trucking companies report higher earnings and positive outlooks in the second quarter, as high costs and route disruptions caused by winter weather recede. Analysts at Deutsche Bank called the timing of Werner’s earnings outlook downgrade “particularly disturbing.”

Covenant said it has removed trucks from operation because of the soft market, and expects to operate about 2% fewer trucks during the second quarter than it did in the same quarter last year.

Marc Althen, president of Penske Logistics, said there appeared to be as many as 80,000 more trucks on U.S. roads than needed to handle shipping demand.

“It’ll probably be the fourth quarter or into next year to work its way out,” he said.