Analysts Predict Strong Results When Fleets Report 2Q Earnings

Rising freight rates and effective cost controls are expected to push many publicly traded second-quarter freight industry earnings to their highest levels since 2008, with three companies likely to post record profits for any quarter.

A review by Transport Topics of earnings estimates compiled by Bloomberg News showed that 14 of 27 companies will improve profits measured in earnings per share compared with at least one quarter in 2008. Old Dominion Freight Line Inc., J.B. Hunt Transport Services Inc. and C.H. Robinson Worldwide Inc. are expected to report record results, based on analyst estimates.

In all, 21 of 27 freight companies are expected to improve over second-quarter 2010 results, marking the sixth consecutive quarter of broadly higher profits as freight capacity tightens. The group includes 23 carriers and four other companies whose primary business is managing carriers’ freight.

“The results will be a combination of two factors,” Jason Seidl, a Dahlman Rose analyst, told TT on July 12. “Across the transportation industry, carriers have been successful in pushing through rate increases above their cost inflation. During the downturn, carriers took time for some belt-tightening moments, and they have retained the cost savings.”

The improvement will show up in improved profit margins for carriers of as much as 1 percentage point over last year’s second quarter, he said.

Both truckload and less-than-truckload carriers as a group are expected to see broad profit improvement, which also will be evident at UPS Inc., forecast for a 24% gain; Ryder System Inc., seen up 33%; and logistics operators Hub Group — 50% gain — and Echo Global Logistics — seen up 44%.

Improved results are expected at five of seven less-than truckload operators, with losses predicted only at YRC Worldwide and Vitran. Also noteworthy is an expected return to profitability for ABF Freight System after 10 consecutive losing quarters and earnings that more than doubled at Con-way Inc.

Among a group of 13 truckload fleets, earnings are expected to be the best since 2006 at Werner Enterprises and Quality Distribution. Only Covenant Transport Group, P.A.M. Transportation and Patriot Transportation Holdings are seen as likely to report results lower than the prior year period.

Results at Vitran, which said on July 11 it will report a loss instead of a profit, are not symptomatic of the overall LTL picture, BB&T Capital Markets analyst Thom Albrecht said on July 13.

The Toronto-based company lost freight previously hauled by recently acquired Milan Express and had less success than others in controlling costs, Albrecht stated.

Old Dominion’s profit will jump 41% to $31 million, or 55 cents a share, analysts estimated.

J.B. Hunt earnings were pegged at $63.7 million, a 33% year-to-year improvement.

William Blair & Co. analyst Nate Brochman pinpointed a “greater ability to pass along higher carrier rates, market share gains and higher gross profit margin expansion” as the reasons for record profits at C.H. Robinson, where he believes margins will improve by 1.2 percentage points to 16.1%.

Robinson is predicted to earn $114.4 million, or 69 cents a share, a 17% year-to-year improvement.

“Asset-based [truckload] carriers remain well-positioned for better-than-expected revenue and earnings-per-share performance during upcoming quarters,” said Douglas Woodrich, an analyst at Longbow Research, in an investor note. “Carriers are using the incremental tightening of capacity to reallocate tractors to the most profitable opportunity.”

Others analysts agreed.

Art Hatfield and Chaz Jones at Morgan Keegan spotlighted the value of rate increases, noting that rate increases improve earnings three times faster than does improving asset utilization for most truckload carriers.

Hatfield and Jones said contract pricing was 5% higher year over year in the second quarter, better than the 4% year-to-year gain in 2011’s first quarter.

Not everyone was as optimistic.

“Second-quarter 2010 truckload reports were strong, but the tone of reports in July was mixed as freight demand was beginning to slow,” said a report from Wolfe Trahan. “We expect the opposite this year, with mostly disappointing reports but improved commentary on demand which seems to have picked up during June.”

Wolfe Trahan’s report did say that the yield, or profit margin growth, will remain solid and similar to first quarter 2011 levels.

Wolfe Trahan was more upbeat about LTL, where year-over-year rate improvements are expected to reach 4.9%, exceeding truckload carriers, and topping the 2.8% in this year’s first quarter.

Better results among truckers are a contrast to second-quarter profit trends at American corporations, which are expected to rise 13% in the second quarter, a Bloomberg News survey of U.S. manufacturers and retailers found. That’s slower than the 37% pace in last year’s second quarter and 18% in the first quarter.

Higher prices for commodities as well as rising fuel prices that triggered a drop in consumer confidence were credited for the recent broad decline in corporate earnings in the July 8 report.