Is the trucking rebound at hand?
Morningstar published a detailed piece yesterday on how trends appear to be converging to support a rebound in trucking stocks. Landstar (Nasdaq: LSTR ) just reported an encouraging 14% revenue improvement. According to the report, demand was off its 2009 nadir, with the seasonally adjusted for-hire truck tonnage index up 6.2% year-to-date. Intermodal traffic (i.e., shipping that makes use of both trucks and trains) was hitting all-time highs. Best of all, UPS (NYSE: UPS ) , Arkansas Best (Nasdaq: ABFS ) , and YRC Worldwide (Nasdaq: YRCWD ) appeared to be calling a truce in the cutthroat price wars in less-than-truckload-weight shipping, increasing prices an average of 5.9% each. FedEx (NYSE: FDX ) went one (percent) better, and raised prices 6.9%.
Now, with earnings season in full swing, we can finally put that thesis to the test, beginning with Knight Transportation (NYSE: KNX ) , which reported earnings last night. So how did it do? Good, just not good enough.
Judging from the stock's red ticker on a bright green index morning, you might think things were not so hot. But Knight's problem wasn't that it performed poorly; it just didn't perform as spectacularly as expected. Revenues climbed 10% in comparison to last year's third quarter, shifting Knight's per-share profits into overdrive -- up 25% year-over-year.
On one hand, 10% revenue growth was below-trend this year for Knight. But on the other hand, revenues without considering the fuel surcharges that Knight imposes on its clients marked a slight uptick -- climbing 7.9% for the quarter, faster than 7% year-to-date.
Warning: Bridge freezes before road
On yet another hand, I find it disconcerting that Knight decided to add 140 tractors to its fleet last quarter. Expanding capacity in an already overcrowded market may be good for Knight's market share, but it may not be great news for industrywide pricing discipline. With the Christmas retail season on the horizon, Knight's gonna want to put those new tractors to work. It would be a real shame if doing so causes Knight to lose ground on the 5% gain in "average revenue per total mile" it spoke so proudly of in yesterday's report.
Final thought: Knight mentioned that it expects capital expenditures this year to come in at or just below $100 million (roughly equal to last year's level). At its current run rate on cash flow, this suggests the company will be free-cash-flow-positive for the year, but not nearly as profitable as its income statement will suggest. Foolish investors will want to keep that in mind when the fourth-quarter earnings come out three months from now.