LTL Carriers Off to Hot Q4 Start

After posting record results in the third quarter, several publicly traded less-than-truckload carriers have announced that the positive trends have carried through October.

Asset-light trucking provider Forward Air FWRD announced Tuesday that its expedited segment, which includes LTL, truckload and final-mile services, saw tonnage increase 16% year-over-year with revenue per hundredweight, or yield, up 11% during October. The result pushed revenue per shipment in the division 52% higher.

The company has been taking advantage of a hot LTL market to swap out its customer book, replacing lower-priced and network-clogging freight with better-margined, heavier loads. Weight per shipment was up 33% year-over-year in the month, slightly accelerating from the growth rate booked in the third quarter.

"October results look terrific and showcase the ongoing momentum that resulted from continued strong demand for our services and our surgical collaboration with customers on selecting handling, and pricing freight," said Tom Schmitt, chairman, president and CEO. "We are excited with the better-than-expected strong performance. With these positive trends, Forward's run rate for the fourth quarter looks promising."

Overall strong trucking demand along with a very favorable pricing environment has been driving improved freight density in LTL networks and better yields.

In its quarterly filing with the Securities and Exchange Commission, ArcBest ARCB said daily billed revenue in its asset-based segment, which includes LTL, was up 20% year-over-year. This was in line with the growth rate the carrier reported in the third quarter.

The revenue increase was comprised of an 18% year-over-year jump in yield, inclusive of fuel surcharges, and a 1% increase in daily tonnage. A "strong pricing environment" with "increased customer business levels" was cited as catalysts.

Old Dominion Freight Line ODFL recorded a 36% year-over-year increase in daily revenue during October. Tonnage per day was up 16% (daily shipments up 19% with weight per shipment down 3%) and yields (including fuel revenue) moved 17% higher.

However, the carrier muted some of the excitement around the top-line surge on its third-quarter call with analysts, saying the record growth accompanies some expected cost catch-up over the next couple of quarters. It's also looking to minimize its reliance on third-party linehaul capacity, which has increased alongside record growth and requires additional investment.

Yellow YELL said its October daily tonnage was down 10% year-over-year. However, the carrier remains intent on taking yields higher, which has meant jettisoning lower-priced freight. Contractual rate negotiations were 9% to 10% higher in October and it implemented a general rate increase of 5.9% on Monday.

Saia SAIA told analysts on its conference call that October's daily tonnage was up between 9% and 10%.

Chart: (SONAR: LCWTF.USA) – Final reporting of LTL rates. Seven-day moving average of daily median rate per 100 pounds. Reported on a 42-day lag. To learn more about FreightWaves SONAR, click here.

Analyst says LTL stocks have jumped too far too fast

In a Tuesday note to clients, Morgan Stanley MS analyst Ravi Shanker pumped the brakes on the exuberance around LTL stocks given the run-up share prices have seen.

"The LTLs (ODFL, SAIA, XPO, ARCB) have been – by some distance – the best-performing stocks in freight transportation this year (up 110% YTD, on average (ex. XPO given the split) vs. our coverage universe +38% and the S&P +25%)," he stated.

He questioned if the group could grow into the stretched valuation multiples (some over 30x forward earnings), noting that share prices are up roughly 250% since 2019, with 2022 earnings estimates implying growth of only 150% from 2019.

"The market believes that the current pace of earnings growth is not just sustainable but will meaningfully accelerate in the years to come," Shanker added. "We like the LTL space fundamentally but we think this bar may be too high."

He raised his earnings expectations for the group, lifting ArcBest's estimates by more than 30% in 2022 and 40% in 2023, inclusive of the company's recent acquisition of TL broker MoLo Solutions. He has the stock rated at "overweight" as it trades at a much lower valuation multiple than its peers.

"Despite its group-leading stock performance, ARCB still screens extremely inexpensive on a relative basis (roughly half the multiple of ODFL and SAIA)," Shanker said.

He downgraded Old Dominion to "equal-weight" and left Saia at "underweight" as they trade at significant premiums to their historical multiples. He has XPO Logistics XPO rated at "equal-weight" as well.

"Put another way, even using a normalized PE of 20x (3-4x higher than long-term average LTL PEs) implies that the market is already pricing in normalized EPS that is roughly double FY21 EPS for ODFL and SAIA. We think topping these expectations that are already priced in is going to be a tough ask in the near term," Shanker said.

Click for more FreightWaves articles by Todd Maiden.

• ‘Don't sweat' big gains on equipment sales booked by carriers in Q3
• Forward Air acquires 2 Twin Cities intermodal operators
• Transportation capacity falls further and faster in October

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