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Covenant Logistics Group Inc. reported second-quarter revenue and earnings growth July 25, despite market headwinds.
The Chattanooga, Tenn.-based truckload carrier posted net income of $24.5 million, or $1.56 a diluted share, for the three months ending June 30. That compared with $15.4 million, 91 cents, during the same time the previous year. Total revenue increased by 23.8% to $317.4 million from $256.3 million.
“The small acquisition we made in the first quarter plus the continued pursuit of investing in our undervalued company stock contributed nicely to the improved results versus year ago,” Covenant President Joey Hogan said during a call with investors. “Despite the murky economic outlook, we are bullish on Covenant.”
Hogan highlighted a few key takeaways from the quarter:
- Freight revenue grew 15% to $260 million compared with the prior year’s quarter and adjusted earnings per share increased 70% to $1.63 per share from the year-ago quarter. The asset-based truckload freight revenue grew 16% since last year with 80 fewer trucks.
- The asset-light managed freight and warehouse segments combined grew 14% compared to the second quarter of 2021.
- Through the strong cash flow in the quarter, our net indebtedness increased only $10 million after utilizing $28.5 million of cash on share repurchases,” Hogan said. “We finish the quarter with a leverage ratio of 0.43, debt to equity ratio of 14.6% and a record return on invested capital of 15.7%.”
The results surpassed Wall Street analysts’ expectations of $1.36 per share and revenue of $288.8 million, according to Zacks Consensus Estimate.
Covenant Logistics said the results were achieved despite unprecedented cost inflation, unusually high insurance costs, minimal gain on the sale of used equipment and a softening in the freight market. The company expects both cost inflation and softening of the freight market to continue in the second half of the year.
The combined truckload operations reported that revenue increased 29.1% to $218.4 million from $169.2 million during the same time last year. Operating income increased 74% to $17.5 million from $10 million last year.
“As we have discussed in the past few quarters, the managed freight revenue growth versus year ago is beginning to cool as the market softens and surge demand recedes,” Paul Bunn, senior executive vice president and chief operating officer at Covenant, said during the call. “However, the net revenue margin continues to be strong, we have an active pipeline for new business. By the end of the third quarter, our warehouse team will have set up three startups for the year, primarily in the second quarter. We will focus the remainder of the year on maximizing the revenue and margin opportunities and to grow income. The asset-light route remains a priority for growth, focused on talent acquisition and technology enhancements.”
The revenue increase for combined truckload operations consisted of $23.2 million higher freight revenue and $26 million higher fuel surcharge revenue. The increase in freight revenue primarily related to a 19.9% increase in average freight revenue per tractor, which was offset by a 3.3% decrease in the average operating fleet size that has resulted from the constraints of an extremely tight equipment market. The combined truckload operations include the expedited and dedicated segments.
The expedited truckload segment reported that revenue increased 39.2% to $121.6 million from $87.4 million the prior year. Operating income increased 42.9% to $14.6 million from $10.2 million. The average total tractors increased 4.6% to 906 from 866 in the prior year quarter. The average freight revenue per tractor per week increased 17.7%.
The dedicated segment revenue increased 18.2% to $96.8 million from $81.9 million last year. Operating income increased to $2.88 million from an operating loss of $191,000. Freight revenue in the segment increased 8.3% while the average dedicated tractors decreased by 7.6% to 1,465 units from 1,585 in the prior-year quarter. Average freight revenue per tractor per week increased 17.2%.
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The managed freight segment reported that revenue increased 12.1% to $80.3 million from $71.6 million during the same time last year. Operating income increased 17.9% to $8.6 million from $7.3 million. The results were primarily attributable to handling overflow freight from both expedited and dedicated truckload operations, growth in revenue per load and purchasing of new capacity.
The warehousing segment saw revenue increase 20.1% to $18.4 million from $15.3 million last year. Operating income decreased 23.2% to $754,000 from $982,000. The increase in revenue was primarily driven by the year-over-year impact of new customer business and rate increases with existing customers. The year-over-year decline in profitability with this segment is largely attributable to incurring temporary incremental costs associated with new startup business and a constrained labor market.
Cowen and Co. said the company posted an impressive top and bottom line beat well above its forecast. This was driven by robust pricing, aggressive buybacks and contributions from the recent acquisition of AAT Carriers. The investment bank and financial services company pointed to the expedited division as leading the charge.
“On the demand side, management struck a fine balance, noting that seasonal trends will impact July volumes,” Cowen analyst Jason Seidl wrote in a report. “Contract pricing should remain flat in [the second half] as customers have not yet come back for rate changes. Management stated that trough earnings should look 25%-30% below peak — slightly better than our 2023 assumptions.”
Covenant Logistics Group ranks No. 40 on the Transport Topics Top 100 list of the largest for-hire carriers in North America.