We wrote about Schneider National (NYSE:SNDR) back in late December of last year and stated that shares were closing in on a multi-month buy signal. The cross-over on the MACD signal came in January of this year and shares have been rallying aggressively since then. Shares of Schneider are now up approximately 23% since we penned that piece.
Given the cyclical nature of how Schneider trades, there is every possibility that shares will rally up to their 2018 highs before then turning over once more. We state this because this has been basically the trend in this stock for many years now. Suffice it to say, the 10-week moving average should be the support level swing traders should be watching out for. When this support level gets breached, we should also see a corresponding bearish crossover on the MACD indicator. We already have a slight divergence in the RSI momentum indicator on the weekly chart which means upside momentum has been tapering off somewhat in recent sessions.
Long term investors (who are prepared to maintain positions throughout any potential changing cycle) should continue to monitor trends in profitability, cash flow as well as the valuation. Earnings growth is essentially what drives shares higher. Therefore let's look at Schneider National at its present share price ($25.49) and with 2020 behind us to see how its profitability metrics, cash flow numbers as well as valuation multiples stack up at present.
When we compare 2020 to 2019, we see that sales came in approximately 1% lower when fuel surcharges were excluded. This trend gave way to operating income of $305.2 million for fiscal 2020 which was just over $43 million shy of the same metric in 2019. Suffice it to say, EBIT margin was slightly lower in 2020 which caught analysts' attention on the latest earnings call. Management's intentions with respect to driving margins higher are increasing the truck count to 6000 units, increasing driver retention as well as getting a better return on the company's assets to name a few. Schneider's return on assets presently comes in at just over 6% over a trailing average. This number look very attractive when compared to the industry (3.26% average), although it is running slightly lower than the firm's 5-year average (6.56%).
Adjusted earnings (buoyed by an expected strong Intermodal recovery) are expected to increase by up to 27% in 2021. The truckload segment also is expected to deliver which should keep margins elevated. The issue here though for long-term investors is that this growth may be already priced in by the market. Yes, earnings growth as stated is what invariably drives stocks higher over the long term but share price appreciation may not take place at the same time earnings growth does. In 2018, sales grew by well over 13% and EBIT grew by almost 35% but the share price ended up 25%+ lower in that fiscal year. Therefore, long-term buy and holders must continue to watch the trends and ignore short-term pricing which are controlled by cyclical forces.
Despite the slightly lower profitability in 2020, free cash flow increased to almost $200 million for the year. In fact, the $400 million of dividend payments in 2020 which comprised of the $350+ million special dividend paid out to shareholders in Q4 was well covered by operating cash flow in the fiscal year ($618 million). Suffice it to say, these trends bode very well for building the firm's asset base and getting truck capacity up to the above-mentioned 6,000 number. With sales growth expected to come in close to 10% in 2021, this trend will enable earnings and cash flow growth which should subsequently enable the company to invest in more assets which will drive the sales cycle once more.
From a valuation standpoint, Schneider's sales, assets, earnings and cash flow multiples are still significantly lower than the sector at large but nearing the company's very own four-year averages. Given that it is very difficult to predict profit more than two to three continuous quarters in this industry, Schneider's cash flow multiple of 7.2 look very attractive when viewed against the industry as it demonstrates the firm's strong capability of generating elevated cash flow. We saw this in 2020 in that when one takes out the special dividend payment, the company still managed to generate approximately $200 million in free cash flow. A solid result. This trend reduces risk due to cash being there in case the industry was to take some type of turn for the worst in upcoming quarters.
Therefore, to sum up, although we have slight divergences on the weekly technicals, Schneider's financials look solid which is enabling the firm to double down on its capex spend ($425 million expected this year). Swing traders should monitor the 10-week moving average for clues on a possible reversal whereas long-term investors should keep a close eye on whether guidance can be achieved. We look forward to continued coverage.
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