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Knight Transportation Tries to Ride to the Rescue

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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.

Fool contributor Rich Smith does not own shares of any company named above. The Fool has a disclosure policy. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 01, 2010, at 3:55 PM, SayRay53 wrote:

    I find it disconcerting that Knight Transportation, Inc., had all of the employees (save one) at their Chicago terminal quit and walk out on October 22, 2010. What is up with the management of this terminal/company?

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