One really good area to make some money over the past year or so has been the transportation/logistics market. The continued growth of e-commerce, combined with supply chain constraints that have resulted in robust demand for what firms do have capacity, has led to attractive revenue growth and robust cash flows. One beneficiary of this has been Knight-Swift Transportation (NYSE:KNX). In recent months, in particular, shares of the company have moved nicely higher. But the big question is whether or not the company deserves even further upside. Based on my own assessment, I do believe that the company offers some additional potential for investors. Though this picture could change once management reports financial results covering the final quarter of its 2022 fiscal year.
The last article I wrote about Knight-Swift Transportation was published in August of 2022. In that article, I called the company an attractive prospect. I found myself impressed by the strong financial performance of the business leading up to that point, with sales and profits climbing year over year. Add on top of this the fact that shares of the company looked quite cheap, and I felt as though the upside for investors was greater than what it would be for the broader market. At the end of the day, this led me to keep the ‘buy’ rating I had previously assigned the company in November of 2021. And so far, that call has proven to be pretty positive. While the S&P 500 is down 1.2%, shares of Knight-Swift Transportation have generated upside of 9.6%. And for context, from the time I initially wrote about the company in November of 2021, shares are down 4.1%. But that's far better than the 14.3% decline experienced by the S&P 500 over the same timeframe.
This share price outperformance relative to what the market has achieved can be understood by looking at the company's fundamental performance. In the third quarter of its 2022 fiscal year, for instance, sales came in at just under $1.90 billion. This translates to a 15.5% increase over the $1.64 billion in revenue generated the same time one year earlier. It is worth noting that a sizable portion of this increase was driven by fuel surcharges. If we ignore those, sales would have been up a more modest but still impressive 9.2%. Although the company experienced increased revenue from its core operations in general, some of the greatest growth came from its LTL segment. Revenue here jumped 45.2%, though this number does shrink to 33.7% if we ignore fuel surcharges and enter segment transactions. This increase, according to management, was driven by multiple factors. For starters, the number of shipments per day reported by the company jumped 14.5%. Though the weight per shipment did decline by 5.3% while the average length of a hall as measured by miles dipped 0.6%. Revenue per shipment soared 19.4% according to management, while revenue per hundredweight increased 26.2%. Helping accommodate greater demand was also a 26.6% rise in the number of tractors at the company's disposal and a 17.6% increase in the average number of trailers.
Another area of strength of the company was the Intermodal segment. Revenue there rose 15.9%, with a 16% increase being the case if we ignore intersegment transactions. A 12% rise in the average number of containers, combined with a 27.5% increase in the average revenue per load helped the company immensely in this regard. On top of this, the company also benefited from a 56% rise in revenue associated with operations that are not under the purview of any one segment. Strong demand for the company's insurance, equipment maintenance, equipment leasing, and warehousing services were instrumental in this regard. This is not to say that everything reported by the company was great. Its Logistics segment actually saw revenue drop 6.9% year over year. This, according to management, even as the load count growth for the company jumped by 20.1%. The cause then was a 21% decrease in revenue per load. Though management did not really provide much in the way of detail as to why this situation developed.
On the bottom line, the picture for the company was okay, but not great. Net income did worsen year over year, dropping from $206.2 million to $194.8 million. On the other hand, operating cash flow rose from $358 million to $379 million. Any enthusiasm on this front though was offset by the fact that, if we adjust for changes in working capital, the metric would have fallen from $406.1 million to $367.5 million. Meanwhile, EBITDA for the company inched up from $399.6 million to $413.8 million. Although the company did experience some obvious weakening on the bottom line in the third quarter, results for the first nine months of 2022 as a whole were relatively robust. Sales of $5.69 billion beat out the $4.18 billion reported one year earlier. Profits jumped from $488.8 million to $622.6 million. Operating cash flow expanded from $817.5 million to $1.10 billion, while the adjusted figure for this increased from $944.7 million to $1.16 billion. And finally, EBITDA for the business grew from $996.1 million to $1.30 billion.
On the bottom line, the expectation by analysts is that weakness will continue. But they also expect that weakening to occur on the top line. You see, in the final quarter of the company's 2021 fiscal year, it reported revenue of $1.817 billion. Currently, analysts anticipate sales for the final quarter, which will be reported after the market closes on January 25th, of $1.80 billion. Earnings per share should be around $1.10, with adjusted earnings of $1.12. This compares to the $1.52 in profits reported the same time last year, with adjusted profits of $1.61. For the year as a whole, management has forecasted earnings per share between $5.17 and $5.22. At the midpoint, that would translate to net income of $839.4 million. The farm has not provided any guidance when it comes to other profitability metrics. But if we annualize those experienced so far for the year, we would anticipate adjusted operating cash flow of $1.67 billion and EBITDA of $1.93 billion.
Based on these figures, the company seems to be trading at a forward price-to-earnings multiple of 10.6. The forward price to adjusted operating cash flow multiple would be 5.3, while the EV to EBITDA multiple would also hit 5.3. By comparison, using the data from 2021, these multiples be 11.9, 6.5, and 6.9, respectively. As part of my analysis, I also compared the company to five similar firms. On a price-to-earnings basis, these companies ranged from a low of 5.7 to a high of 17.6. Of the firms with positive results, two of the four were cheaper than our prospect. Using the price to operating cash flow approach, the range was from 1.2 to 13.9, while the EV to EBITDA approach resulted in a range of between 3 and 10. In both cases, three of the five companies were cheaper than Knight-Swift Transportation.
|Company||Price / Earnings||Price / Operating Cash Flow||EV / EBITDA|
|Knight-Swift Transportation Holdings||10.6||5.3||5.3|
|ArcBest Corporation (ARCB)||6.0||4.5||3.2|
|Yellow Corporation (YELL)||N/A||1.2||3.0|
|Ryder System (R)||5.7||2.1||3.3|
|Saia, Inc. (SAIA)||17.6||13.9||10.0|
|TFI International (TFII)||13.4||10.7||7.2|
Fundamentally speaking, it does look as though some deterioration might be occurring on the bottom line for Knight-Swift Transportation. Management attributed much of this pain to inflationary pressures in driver-related costs, maintenance, and insurance. The term that could prove to weigh on shares to some degree. But given how cheap the stock is and the fact that revenue continues to expand, I remain optimistic about its prospects. Of course, this picture could change when management reports financial results in the coming days. In the event that the company does show significant deterioration, I could understand some downside revision in expectations. But given how cheap the stock already is, the deterioration would have to be truly material for me to make such a change. So unless that comes to pass, I believe that further upside is still on the table for investors.
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This article was written by
Daniel is an avid and active professional investor. He runs Crude Value Insights, a value-oriented newsletter aimed at analyzing the cash flows and assessing the value of companies in the oil and gas space. His primary focus is on finding businesses that are trading at a significant discount to their intrinsic value by employing a combination of Benjamin Graham's investment philosophy and a contrarian approach to the market and the securities therein.
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.