As the major publicly held rail and trucking companies get ready to announce their first-quarter earnings, Morgan Stanley’s research team of Ravi Shanker, Diane Huang, and Shaked Atia are cautioning investors not to expect the banner results the firms reported in the fourth quarter.
“We expect 7 beats, 3 in-line and 12 misses in the quarter and limited (if any) upside to guidance,” they said in an investor’s note. “ELD impact is still likely to be the main focus in the space in 2018 and we think TL management commentary will likely be bullish. On the other hand, rail end-market softness and operating/service issues will likely be areas of concern.”
The note referenced “weather and other operating issues” as hampering first-quarter results. Morgan Stanley is particularly negative on the rails, with the Class 1 railroads expected to produce broad misses in earnings.
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“Rail service has been poor almost across the board in 1Q18 (except for CSX, though volumes are much lower than those of peers),” it said. “For the Canadian Rails, we believe bad weather may be the primary driver of their 1Q service issues, which should allow them to bounce back quicker (CNR carloads have turned positive and accelerated in recent weeks).”
U.S. rails are in a little better shape, the note said, but weather again will be an issue as is network congestion and poor service metrics which have hampered railroads recently.
“We believe network congestion/poor service metrics could be a result of cutting resources too much in 2016/17 in a bid to protect their [operating revenue], exacerbated by the combination of volume growth, a tighter TL market, and adverse weather events,” Morgan Stanley said. “This could take several quarters to remedy and yield negative operating leverage in the meanwhile.”
On the trucking side, strong fourth quarter results and strong commentary in February have raised the expectations for 2018, creating a backdrop where first-quarter results will be a disappointment.
“[First quarter] may be a relative disappointment as weather and Easter timing will be headwinds to overcome and ELD pricing/tightness benefits will not materially show up until 2Q. However, we expect management teams to sound very bullish on market conditions,” the firm said.
On the truckload side, Morgan Stanley expects Knight-Swift Transportation (KNX) and Schneider National (SNDR) to be the stocks to watch.
“KNX is unlikely to deliver as big a beat as 4Q given peak season surcharges last quarter, but we expect management to sound bullish on 2Q/FY18/FY19 and the pace of integration,” the note said. “We believe SNDR’s weak YTD performance/attractive valuation could make them a top pick into 1Q earnings especially if they are able to maintain [intermodal] momentum.”
Old Dominion Freight Lines (ODFL) should be the one to watch in the less-than-truckload space, beating Arcbest Corp. (ARCB) and SAIA (SAIA) inline, Morgan Stanley said.
“[First quarter] is likely to be more challenging for the IMCs and we expect misses at both JBHT and HUBG as weather and poor rail service present challenges to the intermodal business,” it said.
The first quarter is also a key time for brokers and 3PLs, Morgan Stanley noted.
“Brokers continue to be consensus longs as bulls expect them to take advantage of tight market conditions to get higher price. However, we (and bears) believe weaker volumes y/y and contract business margin squeeze will limit net revenue growth, along with lack of flexibility in significantly lowering operating costs. Either way, we should have evidence this quarter,” it said.
C.H. Robinson Worldwide (CHRW) is expected to miss its consensus while ECHO Global Logistics (ECHO) looks like a slight beat of consensus. At XPO (XPO), the focus will be on management commentary as the timing and likelihood of any acquisitions will “remain the primary catalyst for the stock in FY18.”
Morgan Stanley continues to favor trucking over the rails, 3PLs and parcel delivery firms.
“From a positioning perspective, going into 1Q EPS, investors remain bullish even if conviction is not as high as three months ago,” it said. “Rails and 3PLs appear to be consensus longs, with sentiment souring somewhat on the TLs and LTLs (where many believe upside is priced in). However, we continue to believe that TLs are the most likely to see upside revision to consensus estimates in 2018 followed by LTLs, and we see downward pressure at rails, 3PLs and parcels.”
