Covenant Logistics’ (NASDAQ: CVLG) fourth-quarter earnings, beyond being another solid step in what company officials have said is a major transformation in the company’s structure, took two significant steps in its administration and its relationship with shareholders.
First, the truckload carrier, which has not paid a dividend for several years, is set to return money to shareholders through a $40 million share buyback. The move appears to be driven by the fact that Covenant stock has lagged its peers. For the 52 weeks, Covenant stock is up just 9.28%; for the three months, it’s down more than 14%. According to Barchart, Covenant’s price to cash flow stood at 3.22 Tuesday. A comparable company, Werner Enterprises, had a ratio of 7.13.
Covenant generated essentially flat cash flow for the full year, $63.3 million versus $64 million a year earlier. But in the fourth quarter, there was a significant pickup, to $38.3 million versus $24.2 million last year, leading executives on an earnings call with analysts to note they are not worried about being able to fund the stock buybacks out of free cash flow.
In the opening remarks for the call Tuesday, a day after the release of the earnings report when Covenant first disclosed the stock buyback, Executive Vice President Paul Bunn said the buyback plan “affords us significant flexibility to allocate capital toward the most expected most favorable results for our shareholders.” He then addressed the stock valuation, noting that it has traded near the company’s book value even though Covenant’s balance sheet has been significantly improved because of debt reduction.
“We believe the flexibility resulting from the reduction in debt over the last nine months may create an opportunity for us to invest in ourselves, given that doing so is less disruptive than an acquisition or alternate use of cash flow,” Bunn said.
An analyst on the call said of the buyback that Covenant had not been “getting credit” in its stock price for the improvement in its balance sheet.
Whether the company uses the full $40 million in authorized buying power will depend not just on the stock price but also may be affected by the final resolution of charges Covenant may face from the troubled spinoff of its TFS factoring unit to Triumph. While charges have been taken in conjunction with that, it isn’t certain yet whether they’ll turn into an actual cash outlay.
The other significant management move at Covenant has come in the shift of Co-president John Tweed to a consulting role. Tweed came to Covenant when it acquired truckload carrier Landair in July 2018. He has been co-president with Joey Hogan.
In remarks on the call, Tweed said he will continue to work several days a week. He said he was transitioning to the new role because “given where I am at this stage in life, and if I turn back the clock to 2018, some boxes haven’t been checked in my career.”
Tweed said his consulting role will focus on “costs, utilization, overhead and pricing.”
Looking over the changes that Covenant has made, Tweed described the company as about “eight to 10 months ahead of plan.” He added that earlier this year he increased his stake in Covenant through market purchases.
The call with analysts featured extensive discussion on rates in the coming months. CEO David Parker several times referred to the “Big Four,” Covenant’s largest customers. But he also talked about other customers as well in the company’s Expedited division.
Parker said that for some Expedited customers who already have gotten rate increases back in September and August, “we’re actually going in for another round.” Those increases have averaged 6.7%, Parker said, but he added that number has been held in check by increases of 5% that were done early in the process.
As far as the Big Four, Parker said two of the four unidentified customers already have been renegotiated for contracts starting in the second quarter, and so far, the increases have been an “eight-plus type of number.”
Tweed also noted that increasingly there are driver surcharges built into some of the company’s Dedicated contracts. “So if we see the driver pay situation go for another round (of increases), we absolutely will go back to them and have them reimburse us for that,” he said. Covenant on Jan. 4 put into place what it said was the “largest pay increase in the company’s 35-year history” for its Expedited division.
In the company’s Dedicated division, Bunn said it is operating as “A Tale of Two Cities,” with half the Dedicated fleet operating at “acceptable margins” and the other half operating “under contracts that need to be replaced or repriced.”
Tweed said that in the Dedicated division, Covenant “did cut some deals” earlier in 2020 that “if we’d known where we would be today, we would have been a little more aggressive.”
Covenant’s stock did not react positively to the earnings or to the stock buyback proposal. At approximately 2:45 p.m. Tuesday, on a day when broader markets were generally higher, Covenant stock was down $1.06, a drop of 6.64%, to $14.91.
For investors, Covenant seems to be struggling with the fact that its areas of improving operations are not ones that necessarily grab attention. Total quarterly freight revenue net of fuel was down 2.3% and the combined truckload freight revenue of Expedited and Dedicated was down 14%.
Covenant’s statement suggest it would respond by saying that it is in the process of streamlining its operations and not chasing a lot of freight opportunities that it might have in the past. Average freight revenue per tractor per week rose to $4,032 from $3,857 in the fourth quarter of last year, and net of cash, its total indebtedness is down to $101.9 million from $304.5 million at the end of last year.
But so far at least, it doesn’t seem to be resonating with Wall Street, though among the small group of analysts who follow Covenant, the comments and questions on the earnings call were at worst neutral and at best positive and supportive.
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