Knight Adds Profit Warning On Eve of Earnings Season

This story appears in the Oct. 14 print edition of Transport Topics.

Some prominent truckload fleets will report weak third-quarter earnings in part because of lost productivity related to the hours-of-service rule change that took effect July 1, company officials and analysts said.

The latest warning came from a Knight Transportation Inc. announcement on Oct. 8, citing the HOS rule change as a factor in lowering earnings to between 18 cents per share and 20 cents per share. Its earlier forecast was a range of 22 cents to 24 cents.

“Soft freight demand, particularly in the first half of the quarter, challenges related to recruiting qualified driving associates, and the new industrywide regulations governing hours of service that went into effect in July 2013 were among the factors affecting the quarter,” the announcement from Phoenix-based Knight said.

Demand for van freight has shown little or no growth this year, while heavy freight such as pipes for energy exploration has pushed American Trucking Associations’ tonnage index to record levels.

Last month, Werner Enterprises Inc. also cited HOS changes as a factor in an earnings shortfall, and Swift Transportation Co. said its results would be less than the average estimate by Bloomberg News analysts but still would exceed 2012 third-quarter earnings.

Knight and Werner didn’t specify the productivity reduction, but analysts, including John Larkin at Stifel, Nicolaus & Co. and Arthur Hatfield at Raymond James Financial Inc., have estimated that amount at 2% to 3%.

Along with higher driver costs, Knight said it suffered both lower productivity per truck and a 3.6% drop in trucks on the road, while “revenue-per-mile improvement fell short of our targeted level.”

“Consistent with Swift’s and Werner’s preannouncements, a weak but stable third-quarter demand environment contributed to lower truck utilization,” analyst Benjamin Hartford at Robert W. Baird & Co. reported.

In a related development, intermodal and logistics operator Hub Group on Oct. 9 said earnings would be in a range of 48 cents to 51 cents per share, citing weak intermodal pricing and stiff brokerage competition. That was as much as 13% below the average estimate of Wall Street analysts surveyed by Bloomberg.

The lowered forecast at Knight, whose 85.3 first-half operating ratio was one of the industry’s best, will push earnings at least 5% below last year’s third quarter on a per-share basis.

Werner’s earnings are expected to fall 16% short of last year’s third quarter, also on a per-share basis. Swift is expected to top 2012 third-quarter earnings by at least 29%.

Analysts’ estimates also indicate that earnings from Celadon Group Inc. could fall in the truckload sector.

Other publicly traded truckload fleets are expected to improve profits, including Covenant Transportation Group, Heartland Express, Landstar System, Marten Transport and Universal Truckload Services.

USA Truck Inc. is expected to narrow its loss.

But the estimates are not all glum.

The first company to report, J.B. Hunt Transport Services Inc., is slated for Oct. 14, with projected earnings of 78 cents per share, 20% better than the 2012 quarter. Hunt’s primary revenue and profit generator is intermodal.

Roadrunner Transportation Systems, which has truckload and less-than-truckload operations, is expected to raise earnings to 38 cents per share. That represents a 44% profit increase as a result of increased stock outstanding stemming from share sales in 2012 and 2013.

Conway Inc., also a truckload and LTL operator, is expected to post 40% higher earnings of 63 cents per share.

There were other LTL bright spots.

Old Dominion Freight Line Inc., with the lowest operating ratio among publicly traded LTL fleets, is expected to increase profit 17% to 69 cents per share, and Saia Inc. earnings also are slated to rise. YRC Worldwide’s deficit is expected to narrow. Only Vitran Inc., which last month agreed to dump its money-losing U.S. LTL service, is expected to have poorer results.

In the package sector, UPS Inc. is projected to increase earnings 8% to $1.15 per share.

Truck lessor and logistics operator Ryder System Inc. also is expected to show progress with earnings of $1.44 per share, up 12%.

Elsewhere in the logistics sector, C.H. Robinson Worldwide is pegged for a 1% improvement in profit. The fastest profit growth in the sector is forecast at Pacer International, where earnings are expected to more than double to 8 cents per share.

However, for the current fourth quarter, which ends Dec. 31, market conditions are seemingly improving. Knight CEO Kevin Knight said in the statement, “In recent weeks, we have seen improvement in driver recruiting, which reduced the number of unseated tractors, and have begun to see pickup in some previously soft freight markets.”

The company lowered fourth-quarter earnings projection by 2 cents per share to a range of 20 cents to 23 cents from a range of 22 cents to 25 cents.