One week after trucker J.B. Hunt Transport Services (NASDAQ:JBHT) disappointed investors with a Q1 2014 earnings report that came up light on both revenues and earnings, smaller rival Werner Enterprises (NASDAQ:WERN) reported... pretty much the same kind of news on Monday.
Reporting after the close of trading yesterday, Werner described a fiscal Q1 in which:
- Revenues slipped only slightly, remaining basically flat at $492 million, but missing the consensus target of $501 million.
- Profits plunged 17%, to just $0.20 per share -- a penny short of estimates.
- Free cash flow fell off a cliff.
Whereas one year ago, Werner generated $76.6 million in cash flow from operations and spent $21.3 million of that on capital expenditures, in Q1 2014 cash flow fell 23%. Despite paring capital expenditures by 25%, the company still ended the quarter with cash profits of only $43.2 million -- down 22% year over year.
And yet, bad as all this news was, investors appear to be in a forgiving mood. They didn't take J.B. Hunt to task for its earnings miss one week ago. And judging from after-hours trading Monday, investors appear reluctant to punish Werner's miss as well. But why?
Context is (almost) everything
The common theme running through transport companies' earnings reports this quarter, it seems, is the awful weather experienced by much of the country in Q1. Werner yesterday attributed much of its earnings misfortune to "harsh winter weather in first quarter 2014." J.B. Hunt last week lamented "increased costs incurred to recover from rail service disruptions and weather effects." (This isn't limited to trucking companies, either. As we saw last week, rail operator CSX had many of the same complaints.)
But barring a series of freak blizzards in May and June, it's likely that these weather concerns are now in the past. And Werner had a lot of positive predictions to make that might be encouraging investors to believe the rest of the year will be better for its business. According to management, the past three months saw "the strongest first quarter performance in 10 years" for freight demand, "a backlog of truckload freight shipments," and "a tightening of truck capacity due to increasing trucking company failures, an extremely challenging driver market, expensive new trucks and increasing federal safety regulations."
All of this tends to suggest that demand for Werner's services in coming quarters will be strong, and competition weak. Taking advantage of the situation, Werner says it's already booking new customers, raising rates for "some existing customers," and "in the process of negotiating rate increases with many customers." None of this would be possible in an environment where demand was weak, and competition fierce.
But valuation still matters
Analysts expect to see Werner grow its earnings by better than 10% annually over the next five years. Management's comments seem to indicate that Werner, too, believes that growth is achievable. Personally, my concern is that 10% growth, even assuming that it does happen, isn't fast enough to justify the premium, 22-times-earnings multiple that investors are paying for the stock.
That seems an overly aggressive valuation to me. So even if management is right, and even if business will soon bounce back -- I still think the stock just plain costs too much to buy.