Knightmare Or Knightlight? Why Knight-Swift Could Be Bottoming

seekingalpha06-20

Monitoring Knight-Swift Transportation is crucial for economic growth insights and trading opportunities.The trucking industry is facing challenges with declining freight shipments, but signs of ...

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Why Knight-Swift Could Be Bottoming","media":"seekingalpha","content":"<div>\n<p>Monitoring Knight-Swift Transportation is crucial for economic growth insights and trading opportunities.The trucking industry is facing challenges with declining freight shipments, but signs of ...</p>\n\n<a href=\"https://seekingalpha.com/article/4700149-knightmare-or-knightlight-why-knight-swift-could-be-bottoming\">Source Link</a>\n\n</div>\n","source":"seekingalpha","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Knightmare Or Knightlight? 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Why Knight-Swift Could Be Bottoming\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-06-20 22:15 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4700149-knightmare-or-knightlight-why-knight-swift-could-be-bottoming><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Monitoring Knight-Swift Transportation is crucial for economic growth insights and trading opportunities.The trucking industry is facing challenges with declining freight shipments, but signs of ...</p>\n\n<a href=\"https://seekingalpha.com/article/4700149-knightmare-or-knightlight-why-knight-swift-could-be-bottoming\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"KNX","symbol_name":"Knight Transportation Inc","start_time":0,"source_url":"https://seekingalpha.com/article/4700149-knightmare-or-knightlight-why-knight-swift-could-be-bottoming","article_id":"2444193245","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1194754936/image_1194754936.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2444193245","pubTimestamp":1718892939,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"What's Up With Trucking As most of my readers may know, I recently bought a full position in Old Dominion Freight Line , which is one of America's largest less-than-truckload  transportation companies. What sets ODFL apart is that the LTL industry comes with high entry barriers, as it is very hard to run an efficient LTL business. ODFL has achieved superior services through its own network of distribution centers, allowing it to operate with an operating ratio  of close to 70%, which is truly unprecedented in its industry. Truckload  or full-truckload  is different, as it relies on longer trips with more competition. It also focuses on just one customer per shipment.   A2Z Market ResearchMost TL companies have operating ratios in the high 90% range, which often results in very volatile earnings and losses during tough economic times. Speaking o","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"KNX":"Knight Transportation Inc","LU2362541513.USD":"WELLINGTON NEXT GENERATION GLOBAL EQUITY \"A\" (USD) ACC","BK4585":"ETF&股票定投概念","ODFL":"Old Dominion Freight Line","BK4504":"桥水持仓","BK4533":"AQR资本管理(全球第二大对冲基金)","BK4588":"碎股","LU2362540622.SGD":"WELLINGTON NEXT GENERATION GLOBAL EQUITY \"A\" (SGDHDG) ACC","BK4566":"资本集团","BK4232":"货物陆运","XPO":"XPO Logistics","LU2362541273.HKD":"WELLINGTON NEXT GENERATION GLOBAL EQUITY \"A\" (HKD) ACC","BK4022":"陆运"},"translate_title":"骑士魔还是骑士之光？为什么奈特-斯威夫特可能触底","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"XPO":1,"KNX":1,"ODFL":1,"US12M.BOND":0.73,"US7Y.BOND":0.73,"US6M.BOND":0.73,"US5Y.BOND":0.73,"US3Y.BOND":0.73,"US30Y.BOND":0.73,"US2Y.BOND":0.73,"US10Y.BOND":0.73,"US912797FS14.BOND":0.6,"US912797GB79.BOND":0.6,"US912797GK78.BOND":0.6,"US912797GL51.BOND":0.6,"US912797GW17.BOND":0.6,"US912797HE00.BOND":0.6},"content_text":"Monitoring Knight-Swift Transportation is crucial for economic growth insights and trading opportunities.The trucking industry is facing challenges with declining freight shipments, but signs of recovery with rising pricing component and container volumes.KNX is in a good spot to grow and boost profitability in the years ahead. The problem is that the company is highly volatile and prone to steep declines.   Sundry PhotographyIntroduction Buckle up! It's time to discuss trucking. I'm not sure if I have ever told people this, but I love to watch YouTube videos of people driving scenic routes. Most of these videos take multiple hours. While I don't watch the whole thing, I like to watch it in the background or when I'm too tired to focus on the plot of a movie/series. This includes trips like Los Angeles to Las Vegas or the Pacific Coast Highway from San Francisco to Los Angeles. The relaxing effect of simply watching a car drive is hard to beat. Anyway, the reason I'm bringing this up is because whenever I watch these videos, I notice countless trucks from Knight-Swift Transportation (NYSE:KNX), one of America's largest transportation companies. Although I have little interest in owning a trucking company, I believe monitoring the company is crucial for a number of reasons:  KNX tells us a lot about the state of the economy, as its size makes it one of the best proxies for economic growth on the market. Due to its cyclical behavior, it makes for a great trading vehicle. Back when I was a much more active trader, I loved these stocks, as I traded them both long and short.  My most recent article on this company was written on July 24, 2023, when I went with the title \"Knight-Swift: Running On Hopium, Caution Advised.\" Since then, shares have fallen 15%, lagging the S&P 500's 21% return by a huge margin. Data by YChartsHence, almost a year later, it's time for an update, as we need to talk about the health of the trucking market, the risk/reward of buying KNX at these levels, and how I'm positioned in the transportation industry. So, let's get to it! What's Up With Trucking As most of my readers may know, I recently bought a full position in Old Dominion Freight Line (ODFL), which is one of America's largest less-than-truckload (\"LTL\") transportation companies. What sets ODFL apart is that the LTL industry comes with high entry barriers, as it is very hard to run an efficient LTL business. ODFL has achieved superior services through its own network of distribution centers, allowing it to operate with an operating ratio (operating expenses/total revenue) of close to 70%, which is truly unprecedented in its industry. Truckload (\"TL\") or full-truckload (\"FTL\") is different, as it relies on longer trips with more competition. It also focuses on just one customer per shipment.   A2Z Market ResearchMost TL companies have operating ratios in the high 90% range, which often results in very volatile earnings and losses during tough economic times. Speaking of the economy, on June 17, FreightWaves published an article on the health of the freight market, noting that \"Freight shipments and total freight spend remained under pressure again in May.\"  Moreover:  Shipments in May were flat with April but down 5.8% year over year (y/y). The y/y decline was 1.8 percentage points more pronounced than in April, and when adjusting for seasonal trends, the shipments index was off 3.1% sequentially to a 46-month low. The Monday report noted “ongoing softness in for-hire demand” as loads normally pegged for the for-hire market are being insourced by private carriers. It also said shippers consolidating less-than-truckload shipments into single truckload moves is weighing on the index. - FreightWaves  FreightWavesThe good news is that while current conditions are poor, we're seeing some green shoots. For starters, the pricing component of the Logistics Managers' Index rose to 57.8, a new multi-year high (the Fed won't like this as it's inflationary).   Logistics Managers' IndexMeanwhile, container volumes bound for the U.S. are back to 2021 levels, as FreightWaves founder Craig Fuller noted earlier this month. According to him, this is driven by stronger retail confidence in a consumer recovery, making a trucking recovery in the second half likely, as ocean freight ends up in trucking and intermodal with a lagging effect. FreightWavesSpeaking of the impact of ocean freight on trucking, the chart below shows tender rejections out of Los Angeles, which is home to two of the biggest ports in the United States/world - Los Angeles and Long Beach. Tender rejections are leading, as they impact pricing. If demand is high and truckers can be picky, the tender rejection index goes up. If demand is weak and truckers fight for loads, the index does the opposite. FreightWavesI believe this also explains the surge in the LMI pricing component I just showed. So, what does this mix of data mean for Knight-Swift and its investors? A Closer Look At Knight-Swift With a market cap of roughly $7.6 billion, KNX is one of America's largest trucking companies, offering services like truckload, less-than-truckload, intermodal, and complimentary services. Since the 2017 merger between Knight and Swift (and 24 other companies since its inception in 1966), the company has become so large that it operated roughly 21,000 trucks/tractors last year in its truckload segment alone. In its much smaller LTL segment, it operated 3,200 tractors. Intermodal covered 639 tractors. Moreover, as of 1Q24, 67% of revenues came from the truckload segment, followed by LTL with 15%. Knight-Swift TransportationAs we already briefly mentioned, these operations come with fierce competition. Essentially, Knight-Swift competes with thousands of full truckload carriers, many of which operate very small fleets, and a wide range of national and regional LTL carriers - including Old Dominion Freight Line and XPO Inc. (XPO), both of which are fast-growing and efficient operators. The company also faces competition when it comes to hiring drivers, independent contractors, and management employees. In times of economic booms, this can be an (expensive) issue. Moreover, the intermodal and logistics segments also face competition from railroads, other motor carriers, logistics providers, and others. And, to make matters worse, the entire industry is prone to factors like economic cycles, regulations (emission guidelines, etc.), driver shortages, insurance, fuel prices, and equipment prices/availability. In order to battle these headwinds, the company uses its network, good customer service, cost control, and technology implementation to improve its services and compete on efficiencies. Because of its size and network, the company is able to secure larger freight volumes than many peers, which sets it apart in this industry - although the surge of advanced truck brokers also allows small operators to become much more efficient. This is what its network looked like after the merger: Knight-Swift TransportationThe goal is to focus on high asset utilization, control costs, and mainly operate in high-density freight lanes to maximize revenue and lower non-revenue miles as much as possible. After all, smaller truckload companies often have a lot of miles without loads. Companies with a larger customer and distribution network can limit these headwinds. Knight-Swift TransportationWith that said, the company's challenges are reflected in its operating ratios. Again, the operating ratios calculate how much it costs to run the business (operating expenses/revenues). The lower, the better. As of 1Q24, KNX had the following operating ratios:  Truckload: 97.3% LTL: 90.0% Logistics: 97.1% Intermodal: 105.6%  As these numbers show, there's little room for error, as margins are razor-thin. It also does not help that recent industry challenges have pressured its operations, as truckload revenues per mile declined by 2.5% sequentially in 1Q24. Year-over-year, revenue excluding fuel surcharges and the acquisition of U.S. Xpress declined by 11%. The good news is that the company saw tailwinds, including \"positive volume and yield trends\" in its LTL business. Knight-Swift TransportationMoreover, despite the company's belief that it is in one of the deepest freight recessions, it believes its multi-brand portfolio allows it to anticipate shifts in supply and demand before they become obvious to the broader industry, allowing it to gain a competitive edge. Speaking of multiple brands, because of the acquisition of AAA Cooper and MME, it now sees a path to a $2 billion in annual revenue LTL business. Since 2021, it bought 56 LTL properties. It brought seven locations online in 1Q24 and expects to activate 25 more service centers by the end of this year, as it seems the company is slowly expanding toward the Pacific coast. Knight-Swift TransportationMoreover, the company maintains a strong balance sheet, targeting an optimal leverage position of 1.0 to 1.5x EBITDA, which provides flexibility in a cyclical industry. According to the company, this approach allows it to capitalize on M&A opportunities without significantly increasing leverage, which has worked out well so far with deals like AAA Cooper and U.S. Xpress. Knight-Swift TransportationMoreover, it has the goal to maintain consistent dividend growth. After hiking its dividend by 14.3% on February 2, it currently pays $0.16 per share per quarter. This translates to a yield of 1.4%. This dividend comes with a mid-50% payout ratio, a five-year CAGR of 20.1%, and four consecutive annual hikes. Data by YChartsI'm not surprised the company hiked quite aggressively in February, as it is upbeat about its future, expecting sequential truckload growth in both 2Q24 and 3Q24, with at least 12% year-over-year growth in its LTL business. Analysts agree, as they expect 2024 EPS to bottom at $1.20, potentially followed by a steep surge to $3.63 in 2026. FAST GraphsUsing the company's normalized P/E ratio of 22.6x, it would imply an $82 longer-term stock price target, roughly 80% above its current price. The problem is that this relies on a number of factors, including the Fed's ability to lower inflation without hurting the economy too much. It also means current signs of bottoming TL and LTL demand need to be correct. As my recent investment in ODFL shows, I am willing to bet on recovery, using current weaknesses in some of my favorite transportation companies. While I will give KNX a Buy rating based on favorable demand developments, I will not be a buyer, as the TL business is simply too risky for me. Moreover, although I believe the company's increasing focus on LTL will bear fruit, I prefer to buy a proven LTL operator instead of rolling the dice on KNX at this point. KNX could be a great investment, but only for investors who are familiar with the cyclical risks of the TL business and the stomach to deal with the stock price volatility that comes with it. Takeaway Trucking tells us a lot about the economy, and Knight-Swift is a prime indicator. Despite its recent underperformance and the tough freight market, KNX's massive size and strategic acquisitions offer potential upside. However, the razor-thin margins and cyclical nature of the truckload segment keep me cautious. While I see green shoots indicating a potential recovery, I prefer more stable bets like Old Dominion Freight Line. Nonetheless, for those who can stomach the volatility, KNX could be a rewarding ride. Pros & Cons Pros:   Strategic Acquisitions: The company's acquisitions, like AAA Cooper and U.S. Xpress, strengthen its market position and expand its LTL business.  Potential Growth: Analysts project a significant EPS rebound, which could drive the stock price up by at least 80% in the long term.  Dividend Growth: KNX has a history of consistent dividend hikes, offering a 1.4% yield and a mid-50% payout ratio.  Macro Green Shoots: Although I am cautious about the economy, trucking seems to be bottoming.   Cons:   Cyclical Risks: The truckload segment is highly cyclical, leading to volatile earnings and stock price fluctuations.  Thin Margins: Operating ratios in the high 90% range leave little room for error, making profitability challenging during economic downturns.  Economic Uncertainty: Recovery depends on the Fed managing inflation without hurting the economy (soft/no landing).  Competitive Pressure: Intense competition in both TL and LTL segments could limit growth and profitability.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.28.1","shortVersion":"4.28.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2444193245"}