Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...

Last year's merger between Knight Transportation and Swift Transportation to form trucking giant Knight-Swift Transportation (NYSE:KNX) isn't going exactly as planned. Shares of trucking specialist are up less than 6% over the past year -- less than half the gains of the S&P 500. This is despite the fact that merging the two companies resulted in a near-fourfold increase in pro forma sales and earnings for Knight last quarter.

It's also, in the opinion of one banker, a big mistake.

Truck driving downhill

Knight stock's been rolling downhill for most of this year. Can an upgrade apply the brakes and stop the stock's slide? Image source: Getty Images.

Upgrading Knight-Swift Transportation Holdings

British banker Barclays has had a $55 price target on Knight-Swift stock since February of this year, and up until about March, that looked to be the direction that it was heading. Problem was, Knight-Swift hit a pothole in March and the stock began a downward descent. Today, Knight-Swift shares sell for less than $37 apiece.

In Barclays' view, though, this cheaper price just makes Knight-Swift stock a more "appealing opportunity" for investors, as the analyst explains in a note covered this morning on TheFly.com. The fundamentals of the trucking industry, argues Barclays, are still "robust" and should remain so for "the next few quarters."

Meanwhile, Knight management has promised its shareholders that it will improve the profitability of its integrated Swift Transportation business, and deliver cost savings of $100 million this year and $150 million next year. Between the better margins, lower costs, and a generally favorable market for trucking, this could mean 35% improvement in profits for the combined operation.

In Barclays' view, this makes the case for a $55 price target for Knight stock, and a good reason to overweight it.

Driving forward

How likely is this scenario to emerge? When Knight and Swift merged last year, they formed a trucking titan boasting 23,000 tractors, 77,000 trailers, and 28,000 employees, and promised investors their combined companies would produce $5 billion in annual revenue. Trailing results don't yet fully reflect this promise, with Knight-Swift's trailing-12-month results currently clocking in at only $3.4 billion, according to data from S&P Global Market Intelligence.

However, if you focus on quarterly results, Knight-Swift generated $1.6 billion in sales in Q4 of last year, and $1.3 billion in Q1 of this year. Over the past six reported months, sales have thus totaled a bit over $2.6 billion, and if you run-rate that number over 12 months, Knight-Swift is in fact driving toward annual sales of $5.2 billion, which is more than it initially promised.

How profitable are these sales? Fourth-quarter results were inflated by a big $310 million tax benefit from tax reform, which probably can't be relied upon to repeat. On the other hand, the company earned $71 million in Q1 without any big income tax benefit to boost its results -- a better quarterly result than Knight had booked in years. Analysts are predicting Knight will wrap up this year with $2.26 per share in earnings -- and grow those earnings 41% over the next couple of years, and average 15% annualized profits growth over the next five years.

What it means to investors

So as things stand, business is going pretty well for Knight-Swift. Profit margins for the operation as a whole are still depressed by the addition of Swift, but last quarter's numbers look to have at least stabilized versus Q1 2017 levels, and continued cost-cutting holds the potential to get them growing again. Meanwhile, with a share price just 16.3 times this year's projected earnings, a 15% expected growth rate, and a 0.6% dividend yield, Knight shares don't look particularly expensive today.

In fact, if you take analysts' projections at face value, the $36.76 per share that Knight-Swift stock sells for today is less than 12 times the $3.18 per share it's expected to earn two years from now. Assuming Knight-Swift is still growing at 15% or so when 2020 rolls around, the stock could be exactly what Barclays says it is: A buy.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.