By Balasubramanyam Seshan: Subscribe to Balasubramanyam's RSS feed
July 28, 2010 8:08 AM EDT
Deutsche Bank downgraded on Tuesday ratings of truckload carriers Knight Transportation Inc. and Werner Enterprises Inc. on balanced risk-reward equation.
Analyst Justin Yagerman said he is moving to the sidelines on both Knight and Werner and are awaiting a better entry point or a sense that pricing upside is likely. The analyst believes Knight and Werner are both poised to benefit from tightening of truck capacity, which should drive truckload rates (and earnings) higher in both second half of 2010 and 2011.
“However, with truckload shares trading at 9.8 percent above 10-year average price-to-earnings multiples, we believe the risk-reward equation is currently balanced. We see further upside potential in shares of both Knight and Werner as our unchanged target prices imply upside potential of roughly 8 percent,” said Yagerman.
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Although the analyst believes Knight and Werner are doing a great job of leveraging a better truckload rate environment and controlling costs, his sense is near-term share performance from here will likely be overly impacted by macro-sentiment given already lofty valuations and EPS beats already reported.
The brokerage does not see an immediate upside catalyst to drive the shares higher, and have moved to the sidelines. The brokerage downgraded shares of Knight and Werner to Hold from Buy. The brokerage maintained its price target on Knight of $24 and on Werner of $26.
The analyst said his near-term concerns about CH Robinson Worldwide Inc. has mounted as it expects CH Robinson to report downside second quarter EPS (his estimate at $0.53 vs. Consensus estimate of $0.55). The analyst said there is still room for downward revisions and the shares could react negatively to either a miss or further reductions in 2010 Consensus expectations following the recent move up.
Deutsche Bank is currently favoring transportation operating leverage and pricing power into second half of 2010 and 2011 given an uncertain economic backdrop. While Deutsche Bank’s sense is that the economy will not experience a double dip, it has taken some money off the truckloads and, for now, are favoring exposure to manufacturing end-markets over retail.
“We are buyers of companies that are trading at more reasonable valuations and are poised to drive significant earnings improvement with only a modest increase in demand. Our favorite sectors are the Class I railroads and Airfreighters because of: high barriers to entry, a favorable pricing environment, the ability to garner strong incremental margins as volumes increase, and compelling valuations relative to historical forward P/E multiples,” said Yagerman.
Knight Transportation shares closed Tuesday down 2.57 percent at $21.61 on the NYSE, while shares of Werner ended 1.29 percent lower at $23.73.
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