Landstar Sees Weakness In TL Spot Market, Downplays Uber-Amazon Impact On Brokerage

Add Landstar System LSTR to the growing list of companies seeing the pain from excess truck capacity and lower demand. The freight broker announced that there is risk to the bottom-end of the earnings guidance range for the second quarter of 2019 that it issued at the end of April.

The company announced that it may not be able to meet the low-end of its guidance range as truckload spot market fundamentals remain weak. The company cited a 1 percent decline in volumes thus far in the second quarter, but noted that falling truckload spot rates due to historic Class 8 truck deliveries in 2018 was the primary culprit for the lowered expectation.

Landstar's President and Chief Executive Officer Jim Gattoni was on hand to deliver the news at Deutsche Bank's Tenth Annual Global Industrials and Materials Summit in Chicago, Illinois.

Gatonni said that revenue per load hasn't followed normal seasonality, declining from February to March, which has only happened twice in the last ten years. He said that there was modest improvement in April, but noted the decline in revenue per load in May was the catalyst for the earnings revision.

DAT Van Freight Rate Index (National US Van) – SONAR

LSTR's initial second quarter 2019 guidance called for truck revenue per load to decline in the high single-digit percentage range year-over-year. Gattoni said that this metric has been down in the low double-digit range for the first two months of the quarter. While new numbers weren't issued to replace the prior guidance, management said that the low-end of the range (total revenue of $1.075 billion to $1.125 billion and earnings per share of $1.56 to $1.62) is in jeopardy.

At the time of the announcement, the second quarter consensus estimate was $1.60 per share for LSTR.

At the same conference, Werner Enterprises, Inc. WERN indicated demand, while slightly improved, hasn't improved sequentially as it normally does and remains lower than they expected. At a separate conference, Schneider National, Inc. SNDR spoke of the lack of seasonal improvement in demand which could weigh on the quarter and potentially through the summer.
Amazon and Uber impact downplayed

When asked about the impact of Uber Technologies Inc. UBER and Amazon.com, Inc. AMZN in freight brokerage, LSTR said that they have been anticipating this for years. "If you're in our business and you weren't talking about Uber and Amazon five years ago then you weren't paying attention to what's going on in the world…seriously," said Gattoni. He went on to explain that Uber is attempting to duplicate what LSTR has done on the technology side. "Uber is just creating what we've had for years," he continued.

Gattoni said that LSTR has been in the business of sharing information with the shipper and carrier forever. He lamented the difference in economics between LSTR and the tech brokers. "The competitive disadvantage we have is we don't like doing things for free, and that's what they're doing. They're trying to build scale by doing it for free."

Gattoni said that LSTR's agents aren't seeing much competition with Uber and Amazon and that LSTR has only 30 percent of their business exposed to the true dry van spot market, which is where he believes the tech brokers want to compete. Roughly 30 percent of LSTR's revenue is tied to the heavy-haul flatbed markets and he believes that LSTR has only a modest amount of exposure to e-commerce. Additionally, Gattoni said that their independent contractor capacity hasn't begun to depart and remains level at 10,600 trucks, even as TL spot pricing has eroded. Further, he believes that LSTR is well-diversified with its largest customer, the U.S. government, accounting for only 4 percent of total revenue.

Analysts have begun to lower second quarter and 2019 earnings estimates and price targets on the announcement. Cowen analyst, Jason Seidl in a note to investors said, "we lower our 2019 and 2020 EPS estimates to $6.25 from $6.40 and to $6.85 from $7.00, respectively. Continuing to use an 18x multiple and our new 2019 EPS estimate, our price target falls to $113 from $115."

The stock is down roughly 2 percent on the news. However, the trucking-centric transports have been in decline for more than a month now. LSTR is off approximately 10 percent since the beginning of May and down 14 percent since its first quarter earnings report. By comparison, the S&P 500 is down less than 4 percent since the beginning of May.