Werner Finds the Open Road

I don't envy the lot of America's trucking companies these days. They're all facing tough obstacles, notably the high cost of fuel in recent years (or haven't you noticed?) as well as a tight labor market for qualified truckers. In a related article today, I look at one company that's weathered the storm better than most -- Heartland Express (NASDAQ:HTLD). But for now, I'd like to take a quick look at one of its competitors, which, while maybe not quite as successful as Heartland, is doing a pretty decent job nonetheless.

Werner Enterprises (NASDAQ:WERN) is its name, and trucking goods across North America (to Yanks and Canadians) and into Central America (through Mexican partners) is its game. Werner's one of the big boys in this industry, operating a fleet of 8,600 tractors and 23,500 trailers.

The company reported its second-quarter 2005 earnings last night, and while you might ordinarily expect companies that report long after Wall Street's closing bell to be trying to hide something, Werner actually made out pretty well. The company grew operating revenues by 18% in the first half of 2005, as compared with the first half of last year, and translated that sales growth into 22% growth in both net profits and diluted earnings per share.

All of this was despite a series of difficulties that the CEO outlined in the press release. In particular, he highlighted that it's hard to find qualified drivers for Werner's rigs, and fuel costs for the fleet, which have risen in each of the last eight consecutive quarters. Indeed, employee salaries (integral to attracting qualified drivers in a tight labor market) and fuel costs make up the largest entries on the statement of operating expenses. Year to date, labor costs are up 5% over last year; fuel costs are up more than 50%.

In my other article, I point out how the company lags Heartland in free cash flow generation. So to be fair, here I'll point out the bright side of this free cash flow coin:

True, management's spending a lot ($153 million in capital expenditures year to date, more than twice last year's figure), and yes, those expenditures cause cash to flow out of the company (at an annualized rate of more than $100 million per year). But in exchange for those costs, Werner is improving its fleet, and presumably its reliability. In contrast to last year, when Werner's trucks had an average age of 1.71 years, that age is now already down to 1.44 years.

The newer trucks should need less maintenance, keeping those costs in check in the future. And in fact, maintenance is one of the few categories in which Werner's costs have fallen year on year in 2005.

So, that's the bright side; for a more complete look, be sure to read Heartland Cash Cache Delivers.