With Yellow possibly in its final days if not hours, the timing of earnings calls is perfect for Wall Street analysts to ask trucking executives how their companies could benefit.
On Covenant Logistics’ (NASDAQ: CVLG) second-quarter earnings call Thursday, President and COO Paul Bunn acknowledged the opportunity but said the company would not wildly chase linehaul business that had been carried by Yellow.
Wall Street liked the Covenant earnings. At approximately 1:50 p.m., Covenant stock was up 10.66%, a gain of $5.20, to $53.96.
So far, the impact from the slide in Yellow business is “two trucks here, a few trucks there.” But any decision to add a “significant volume of trucks” would only be with “the folks that we have longer-term partnerships with,” Bunn said.
“As we move those trucks around, they’re going to be more heavily weighted toward folks that are willing to sign up on a longer-term basis that we have been partnering with through the ’21-’23 cycle,” he added.
In reaction to an analyst question that noted the shift away from Yellow is “not just a short-term sort of stopgap, this is potentially a longer-term sort of step up,” Bunn maintained that any growth that Covenant might get out of a Yellow collapse needs to be “sticky.”
He also said it would be shouldered by the company’s Expedited division, which does “business with practically every major LTL and freight forwarder, so we continue to field a lot of calls from people who need some incremental capacity.”
The company’s first-quarter earnings call in April was marked by the announcement that Covenant had acquired Lew Thompson and Sons, a specialized poultry and livestock hauler based in Arkansas.
Bunn said Thursday, the day after Covenant released its second-quarter earnings, the Lew Thompson acquisition so far has generated optimism about “how well it’s getting out of the gate.”
And while CFO Tripp Grant said that Covenant’s balance sheet can “absolutely support an additional acquisition,” he added that “there’s a lot of executional risk at play” that requires focus on the operations at Lew Thompson for now.
During the discussion of that purchase, Bunn agreed with a comment by TD Cowen transportation analyst Jason Seidl, who said the pool of buyers for niche companies like Lew Thompson has changed: There are fewer financial buyers as opposed to companies already in the business.
The Covenant strategy of being more selective in the freight opportunities it chases was on display in the second quarter both in the number of trucks deployed and in comments made by Bunn on the call. The Dedicated fleet fell to 1,248 trucks in the second quarter from 1,465 a year ago. This occurred despite the addition during the quarter of Lew Thompson.
“The overall fleet reduction in our Dedicated segment aligns with our strategy of exiting unprofitable or underperforming business and replacing it when opportunities arise that meet our profitability and return requirements,” Bunn said.
In other commentary from the earnings call:
- David Parker, the company’s founder, chairman and CEO, was relatively optimistic about the state of the freight market and said he recently predicted a rebound in September. “Capacity is leaving our industry,” Parker said, citing among other things separate comments by Bunn about used equipment prices being in a “freefall.” One condition, however, is the economy “at least needs to stay where it is today.”
- In reaction to a question from Seidl about low rates in the market, with anecdotal reports of sub-$1,000 numbers being quoted by brokers on some lanes, Bunn said he saw no short-term impact from that on Covenant’s finances. “It will negatively affect the brokerage segment a bit but it shouldn’t affect Expedited or Dedicated for the balance of the year,” he said, adding, “We’ll see what contract rates do next year.”
- The company’s brokerage division, which is called Managed Freight, was down across the board. Its OR dropped to 96.9% from 89.3%; adjusted operating income fell to $2 million from $8.67 million; and revenue dropped to $63.3 million from $80.3 million. “The significant reduction in revenue and operating profit was primarily the product of little to no high-margin overflow freight from our asset-based Truckload segments,” Bunn said on the call. “The brokerage environment remains highly competitive with numerous brokers aggressively competing for volumes at the expense of margin. We anticipate continued margin pressure in this environment.”
- Grant said many of the company’s costs had gotten softer, with one exception: “I quite honestly don’t see a lot of reduction in wages.”
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