1、DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES,ANALYST CERTIFICATIONS,LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS.US Disclosure:Credit Suisse does and seeks to do business with companies covered in its research reports.As a result,investors should be awar
2、e that the Firm may have a conflict of interest that could affect the objectivity of this report.Investors should consider this report as only a single factor in making their investment decision.11 July 2019Americas/United StatesEquity ResearchTrucking Trucker Earnings Reset DOWNGRADE RATINGResearch
3、 AnalystsAllison M.Landry212 325 3716allison.landrycredit-Samantha Yellen212 325 7451samantha.yellencredit-Brian Wright212 538 1855brian.wrightcredit-Tough for Stocks to Work,Even if Valuations Not Totally Unreasonable Downgrading Truckers on Substantial EPS Risk:With a weakening demand backdrop;con
4、tract TL rates that are turning negative;and anecdotal evidence that suggests capacity remains relatively loose,we see fairly meaningful risk to 2H19 and 2020 EPS for the asset based truckers.We cut numbers by 9%on average,and our 2020 estimates are now 6%below the consensus.As such,we are making th
5、e following changes to our trucking ratings(we note that our Neutral rating on KNX is intact):oDowngrading WERN to Underperform from NeutraloDowngrading JBHT to Neutral from OutperformoDowngrading SNDR to Neutral from OutperformoDowngrading ODFL to Neutral from Outperform Wed Be More Negative if Not
6、 for Somewhat Reasonable Valuation:While the stocks are by no means pricing in a recession,valuation levels are not unreasonable(even on our significantly lowered 2020 estimates)-which keeps us from being outright bearish.At the same time,we think a best case scenario is a balanced TL market-which m
7、ight limit significant downside from here,but would also cap a rally in the stocks.In other words,it will be difficult for the stocks to work from here.Truckload Contract Rates Heading NegativePrefer KNX vs WERN:Spot rate comps will get easier in the next few months,but the bigger concern in our vie
8、w is that contract rates are turning negative.Although the carryover impact from a strong 2018 could help to buoy full year 2019 TL rates,it seems clear that full year 2020 rates are set to be down y/y.On a relative basis,we are less negative on KNX given that it has historically outperformed WERN i
9、n both freight contractions and expansions;stands to benefit from self-help;and relatively high short interest levels may create a favorable short-term set up for the stock.Intermodal Rates to Follow;Structural Volume Pressures Emerge:We expect intermodal rates to follow suit with TL contract rates,
10、noting an additional headwind on load growth and margins related to the rails seeming reluctance to lower rates in tandem(as we have historically seen in response to weaker truck rates).Considering this alongside indications that large retail customers are seeking to work directly with the rails,we
11、are increasingly concerned about both JBHT and SNDRs ability to continue to capture share gains at current profitability levels.LTL-Cyclical Pause in ODFL:Given the clear slowdown in ISM New Orders;difficult pricing comps in 2H;and the recent outperformance in the stock,we think its time to take a b
12、reather on ODFL.11 July 2019Trucker Earnings Reset2Table of contentsKey Charts3Truckload4Downgrading WERN to Underperform from Neutral;Lowering KNX Ests4Cass Shipments Index Reflects Downward Trend in TL Volumes4MDI Suggests Demand Deteriorating,But Still Relatively Healthy4Contract Rates Under Pres
13、sure;Likely To Drive Margin Compression5Declines in Contract Rates Typically Lead EPS Declines6WERN Typically Underperforms KNX During Contraction Periods6Valuation7Intermodal9Intermodal Volumes Appear to Have Peaked9Intermodal Pricing Pressure,on Two Fronts9Valuation9Less-than-Truckload11ISM New Or
14、ders Deteriorating;Key Indicator for ODFL11Tough Pricing Comps in Back Half of Year12Tonnage/Shipments Expected to Continue Declining Y/Y12Stock Had a Good Run in June;Further Upside is Relatively Limited13HOLT Analysis14Current Market Implied EBITDA Margins are Below the Historical Average for TL a
15、nd IM Names14HOLT Valuation Analysis Suggests Current Valuations are Reasonable15Estimate and TP Revisions18Investment Risks20JB Hunt Transport Services(JBHT)21Werner Enterprises,Inc.(WERN)23Schneider National,Inc.(SNDR)25Knight Transportation(KNX)27Old Dominion Freight Line(ODFL)2911 July 2019Truck
16、er Earnings Reset3Key ChartsFigure 1:Cass Shipments Index Down Y/Y for 6 Consecutive MonthsFigure 2:ISM New Orders Dangerously Close to Contraction Territory-6%-4%-2%0%2%4%6%8%10%12%14%Jan-14Jul-14Jan-15Jul-15Jan-16Jul-16Jan-17Jul-17Jan-18Jul-18Jan-19455055606570Jun-14Dec-14Jun-15Dec-15Jun-16Dec-16J
17、un-17Dec-17Jun-18Dec-18Jun-19Source:Cass Information SystemsSource:FactSetFigure 3:TL Spot Rates May Find Second Derivative Bottom as Comps EaseFigure 4:While TL and Intermodal Contract Rates Deteriorating Y/Y-40%-30%-20%-10%0%10%20%30%40%Jan-15May-15Sep-15Jan-16May-16Sep-16Jan-17May-17Sep-17Jan-18M
18、ay-18Sep-18Jan-19May-19Hurricane impactELD Implementation-8%-4%0%4%8%12%16%May-14Nov-14May-15Nov-15May-16Nov-16May-17Nov-17May-18Nov-18May-19Cass Truckload IndexCass Intermodal IndexSource:T via BloombergSource:Cass Information SystemsFigure 5:Retail Inventories May Need Further Destocking Figure 6:
19、KNX Stock Outperforms WERN During Cass Contraction Periods1.161.181.201.221.241.261.281.30Jan-15Apr-15Jul-15Oct-15Jan-16Apr-16Jul-16Oct-16Jan-17Apr-17Jul-17Oct-17Jan-18Apr-18Jul-18Oct-18Jan-19Apr-19Retail Inventory/Sales excl.Autos5-Year AverageCASS Perf.Rank 1Rank 2KNXWERN-7.6%-25.6%WERN KNX1.7%-2.
20、7%KNXWERN112.2%90.6%KNXWERN14.8%-24.1%KNXWERN9.9%-6.1%CASS ContractionFeb-95 Oct-95-4.0%Mar-98 Jan-99-14.1%Jun-14May-16-9.2%Sep-00 Aug-01-13.7%Jul-04 Mar-09-29.7%Source:U.S.Census BureauSource:Cass Information Systems and FactSet11 July 2019Trucker Earnings Reset4TruckloadDowngrading WERN to Underpe
21、rform from Neutral;Lowering KNX EstsWe are downgrading WERN owing to a weaker cyclical backdrop.Contract prices roll off in 2020 and pricing is expected to be flat to down next year(and capacity has been coming in so shippers have more negotiating leverage).Volumes may roll off too since demand may
22、not be as strong as we have been seeing,and comps are challenging owing to an inventory build in the back half of 2018.Less demand/more supply means carriers cannot be as picky with freight so margins come under pressure as well since carriers may have to move loads that are less profitable or dont
23、fit into the network as well(unless carriers hold strong on price,but then volumes would come down even more for them.Either way,there would be less operating leverage).Cass Shipments Index Reflects Downward Trend in TL VolumesFollowing an unprecedentedly strong 2018,the Cass Shipments Index suggest
24、s the backdrop for freight has been weakening.In April,Cass Shipments fell-3.2%y/y,which was worse than the 1.0%y/y decline in March.While the index turned negative in December 2018,it has reflected a downward trend since peaking in March 2018.We expect this trend to persist through the back half of
25、 the year given the weaker demand environment and challenging comps owing to an inventory build in the back half of 2018.Figure 7:Cass Freight Shipment Index(3-mo M.A.;y/y%change)Figure 8:Cass Freight Shipment Index(3-mo M.A.;2-year stack%change)-6%-4%-2%0%2%4%6%8%10%12%14%Jan-13Jul-13Jan-14Jul-14Ja
26、n-15Jul-15Jan-16Jul-16Jan-17Jul-17Jan-18Jul-18Jan-19-8%-4%0%4%8%12%16%20%Jan-13Jul-13Jan-14Jul-14Jan-15Jul-15Jan-16Jul-16Jan-17Jul-17Jan-18Jul-18Jan-19Source:Cass Information SystemsSource:Cass Information SystemsMDI Suggests Demand Deteriorating,But Still Relatively HealthyAs we can see in Figure 9
27、,below,the market demand index reflects a deteriorating demand environment.The MDI has pulled back from its peak of 70.0 in June 2018,which was unprecedentedly strong.However,we note that demand remains healthy,as the MDI was 48.2 in June vs.the 5-year average of 25.7.This ticked up from May and Apr
28、il at 33.5 and 32.2,respectively,and may have been supported by a delayed produce/beverage season.11 July 2019Trucker Earnings Reset5Figure 9:Market Demand Index(MDI)01020304050607080Jan-10Jun-10Nov-10Apr-11Sep-11Feb-12Jul-12Dec-12May-13Oct-13Mar-14Aug-14Jan-15Jun-15Nov-15Apr-16Sep-16Feb-17Jul-17Dec
29、-17May-18Oct-18Mar-19Source:Company data,Credit Suisse estimatesContract Rates Under Pressure;Likely To Drive Margin Compression Spot rates have continued to fall in 2019 after hitting record levels in 2018.Given that spot rates typically lead contract pricing,we believe the truckload carriers have
30、had less negotiating power through the bid season,which will likely result in negative contract rates in 2H19.Moreover,with less demand and more capacity in the market,carriers cannot be as picky with freight.This means that margins come under pressure as well since carriers have to move loads that
31、are less profitable or dont fit into the network as well(unless carriers hold strong on price which then means a more dramatic drop off in volumes,and less operating leverage).Additionally,we note that WERN is heavily exposed to contract rates.This means that the company may see lower TL pricing for
32、 longer compared to its peers.And KNX has a more diversified book of business,which may help offset some of the pressure in a weaker TL environment.Figure 10:Avg.Truckload Spot Rates(4-wk M.A.;y/y%chg)Figure 11:Cass TL Line Haul Index(3-mo M.A.;y/y%change)-40%-30%-20%-10%0%10%20%30%40%Jan-15May-15Se
33、p-15Jan-16May-16Sep-16Jan-17May-17Sep-17Jan-18May-18Sep-18Jan-19May-19Hurricane impactELD Implementation-4.0%-2.0%0.0%2.0%4.0%6.0%8.0%10.0%12.0%Jan-15May-15Sep-15Jan-16May-16Sep-16Jan-17May-17Sep-17Jan-18May-18Sep-18Jan-19May-19Source:Company data,Credit Suisse estimatesSource:Company data,Credit Su
34、isse estimates11 July 2019Trucker Earnings Reset6Declines in Contract Rates Typically Lead EPS DeclinesAs we can see in Figure 12 and Figure 13,a contraction in contractual trucking rates often leads and coincides with earnings declines.Specifically,the Cass Linehaul Index decelerated to 0.4%y/y gro
35、wth in Q2 vs.+4.8%y/y in Q1 and+7.2%y/y in Q4.As such,we believe TL earnings will decelerate in a similar manner,and we forecast average EPS growth of+4%for WERN and KNX in Q2,following an average of+31%y/y in Q1 and+77%in Q4.Figure 12:Cass Linehaul Contract Rates vs.WERN EPSFigure 13:Cass Linehaul
36、Contract Rates vs.KNX EPS-75%-50%-25%0%25%50%75%100%125%-8%-6%-4%-2%0%2%4%6%8%10%12%1Q074Q073Q082Q091Q104Q103Q112Q121Q134Q133Q142Q151Q164Q163Q172Q181Q19Cass Linehaul(y/y%chg)WERN EPS(y/y%change;RHS)-125%-75%-25%25%75%125%175%225%-8%-6%-4%-2%0%2%4%6%8%10%12%1Q074Q073Q082Q091Q104Q103Q112Q121Q134Q133Q1
37、42Q151Q164Q163Q172Q181Q19Cass Linehaul(y/y%chg)KNX EPS(y/y%change;RHS)Source:Company data,Credit Suisse estimate,Cass Information SystemsSource:Company data,Cass Information SystemsWERN Typically Underperforms KNX During Contraction PeriodsKNX typically outperforms WERN during periods of contraction
38、(see Figure 14),and we dont expect this cycle to be any different especially considering KNXs 2017 acquisition of SWFT.This means that there is more perceived room for margin improvement at KNX than at WERN.And given WERNs heavy exposure to contract rates,we believe the company will see greater pric
39、ing pressure through the bid season which could lead to longer periods of lower TL rates.Figure 14:KNX vs.WERN Stock Performance During Cass Contraction PeriodsCASS Perf.Rank 1Rank 2KNXWERN-7.6%-25.6%WERN KNX1.7%-2.7%KNXWERN112.2%90.6%KNXWERN14.8%-24.1%KNXWERN9.9%-6.1%CASS ContractionFeb-95 Oct-95-4
40、.0%Mar-98 Jan-99-14.1%Jun-14May-16-9.2%Sep-00 Aug-01-13.7%Jul-04 Mar-09-29.7%Source:CASS Information Systems,Credit Suisse analysis11 July 2019Trucker Earnings Reset7Figure 15:KNX vs.WERN Stock Performance During Cass Expansion PeriodsCASS Perf.Rank 1Rank 2KNXWERN101.7%75.6%KNXWERN-20.0%-24.5%KNXWER
41、N125.0%110.3%WERNKNX33.9%14.5%KNXWERN87.3%77.2%CASS ExpansionNov-95 Feb-98Sep-01 Jun-0423.0%Feb-99 Aug-008.1%25.0%Apr-09 Jun-1026.0%Jun-16Jan-181.9%Source:CASS Information Systems,Credit Suisse analysisValuationWERN is currently trading at a forward P/E of 12.0 x vs.the historical average of 16.9x.O
42、ver the past 5 years,WERN has traded in a range of 10.7x-25.3x.Similarly,KNX is currently trading at a P/E of 11.8x vs.the historical average of 18.8x.The stock has traded in a range of 8.9x-31.5x over the past 5-years.Additionally,we note that short interest is currently much higher for KNX than WE
43、RN.And the relatively high short interest level may be a near term positive for the stock.Figure 16:WERN Rolling Forward P/E(FY2)Figure 17:KNX Rolling Forward P/E(FY2)8.0 x10.0 x12.0 x14.0 x16.0 x18.0 x20.0 x22.0 x24.0 x26.0 x28.0 xJun-14Dec-14Jun-15Dec-15Jun-16Dec-16Jun-17Dec-17Jun-18Dec-18Jun-19P/
44、E5 Yr Avg.FY2 P/E8.0 x12.0 x16.0 x20.0 x24.0 x28.0 x32.0 x36.0 xJun-14Dec-14Jun-15Dec-15Jun-16Dec-16Jun-17Dec-17Jun-18Dec-18Jun-19Forward P/E5 Yr Avg.Source:Company data,Credit Suisse estimatesSource:Company data,Credit Suisse estimates11 July 2019Trucker Earnings Reset8Figure 18:WERN Short Interest
45、 Fairly SubduedFigure 19:KNX Short Interest Elevated 5.0 6.0 7.0 8.0 9.0 10.0 11.0 12.0 13.0Jul-18Aug-18Aug-18Sep-18Oct-18Oct-18Nov-18Dec-18Dec-18Jan-19Feb-19Mar-19Mar-19Apr-19May-19May-19Jun-19Jul-19Jul-19 15.0 17.0 19.0 21.0 23.0 25.0 27.0 29.0 31.0 33.0 35.0Jul-18Aug-18Aug-18Sep-18Oct-18Oct-18Nov
46、-18Dec-18Dec-18Jan-19Feb-19Mar-19Mar-19Apr-19May-19May-19Jun-19Jul-19Jul-19Source:Company data,Credit Suisse estimatesSource:Company data,Credit Suisse estimates11 July 2019Trucker Earnings Reset9IntermodalIntermodal Volumes Appear to Have PeakedIntermodal volumes appear to have peaked as(1)the frei
47、ght backdrop has been softening with waning demand/increasing capacity,(2)higher rail pricing has made it difficult to grow volumes,(3)comps in the back half of the year are challenging,and(4)there appears to have been a pull forward in demand ahead of tariffs in 2H18.Specifically,rail service will
48、likely be a headwind to intermodal volumes.Service metrics at BNSF(a key rail partner for SNDR)have been deteriorating through 1H19 which puts SNDRs margins and volumes at risk as it disrupts network fluidity(which leads to an imbalance of resources,lower asset turns,etc.).Meanwhile,NSC is beginning
49、 its network cutover in early July,which poses a meaningful risk to velocity and dwell metrics.We believe this could be a meaningful risk to JBHTs service(which could result in lower pricing power,a decrease in shipments,and margin pressure).Additionally,a longer term,structural trend has emerged wh
50、ereby large retail customers are seeking to work directly with the rails as opposed to using an intermodal company.Specifically,there have been reports that AMZN and WMT are building out their own container fleets which would shift volumes away from SNDR/JBHT as retailers contract directly with the
