Stock Story -
Freight delivery company Knight-Swift Transportation (NYSE:KNX) reported results in line with analysts' expectations in Q2 CY2024, with revenue up 18.9% year on year to $1.85 billion. It made a non-GAAP profit of $0.24 per share, down from its profit of $0.49 per share in the same quarter last year.
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Knight-Swift Transportation (KNX) Q2 CY2024 Highlights:
- Revenue: $1.85 billion vs analyst estimates of $1.83 billion (small beat)
- EPS (non-GAAP): $0.24 vs analyst expectations of $0.27 (12.5% miss)
- EPS (non-GAAP) Guidance for Q3 CY2024 is $0.33 at the midpoint, below analyst estimates of $0.34
- Gross Margin (GAAP): 27.5%, down from 30.2% in the same quarter last year
- Market Capitalization: $7.99 billion
Ground TransportationThe growth of e-commerce and global trade continues to drive demand for shipping services, especially last-mile delivery, presenting opportunities for ground transportation companies. The industry continues to invest in data, analytics, and autonomous fleets to optimize efficiency and find the most cost-effective routes. Despite the essential services this industry provides, ground transportation companies are still at the whim of economic cycles. Consumer spending, for example, can greatly impact the demand for these companies’ offerings while fuel costs can influence profit margins.
Sales GrowthExamining a company's long-term performance can provide clues about its business quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Luckily, Knight-Swift Transportation's sales grew at a decent 8% compounded annual growth rate over the last five years. This shows it was successful in expanding, a useful starting point for our analysis.
Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Knight-Swift Transportation's recent history shows its demand slowed as its annualized revenue growth of 2.5% over the last two years is below its five-year trend. We also note many other Ground Transportation businesses have faced declining sales because of cyclical headwinds. While Knight-Swift Transportation grew slower than we'd like, it did perform better than its peers.
This quarter, Knight-Swift Transportation's year-on-year revenue growth clocked in at 18.9%, and its $1.85 billion of revenue was line with Wall Street's estimates. Looking ahead, Wall Street expects sales to grow 2.3% over the next 12 months, a deceleration from this quarter.
Operating Margin Operating margin is an important measure of profitability. It’s the portion of revenue left after accounting for all core expenses–everything from the cost of goods sold to advertising and wages. Operating margin is also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.
Knight-Swift Transportation has managed its expenses well over the last five years. It demonstrated solid profitability for an industrials business, producing an average operating margin of 10.4%. This was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes huge shifts to move meaningfully. Companies have more control over their operating margins, and it's a show of strength if they're high when gross margins are low.
Analyzing the trend in its profitability, Knight-Swift Transportation's annual operating margin decreased by 6.5 percentage points over the last five years. Even though its margin is still high, shareholders will want to see Knight-Swift Transportation become more profitable in the future.
In Q2, Knight-Swift Transportation generated an operating profit margin of 3.4%, down 2.6 percentage points year on year. Since Knight-Swift Transportation's gross margin decreased more than its operating margin, we can assume its recent inefficiencies were driven more by weaker leverage on its cost of sales rather than increased general expenses like sales, marketing, and administrative overhead.
EPS We track the long-term growth in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company's growth was profitable.
Sadly for Knight-Swift Transportation, its EPS declined by 20.4% annually over the last five years while its revenue grew by 8%. This tells us the company became less profitable on a per-share basis as it expanded.
We can take a deeper look into Knight-Swift Transportation's earnings to better understand the drivers of its performance. As we mentioned earlier, Knight-Swift Transportation's operating margin declined by 6.5 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its lower earnings; taxes and interest expenses can also affect EPS but don't tell us as much about a company's fundamentals.
Like with revenue, we also analyze EPS over a more recent period because it can give insight into an emerging theme or development for the business. For Knight-Swift Transportation, its two-year annual EPS declines of 60.9% show its recent history was to blame for its underperformance over the last five years. These results were bad no matter how you slice the data.
In Q2, Knight-Swift Transportation reported EPS at $0.24, down from $0.49 in the same quarter last year. This print missed analysts' estimates. Over the next 12 months, Wall Street expects Knight-Swift Transportation to grow its earnings. Analysts are projecting its EPS of $0.87 in the last year to climb by 115% to $1.86.
Key Takeaways from Knight-Swift Transportation's Q2 Results It was good to see Knight-Swift Transportation beat analysts' revenue expectations this quarter. On the other hand, its EPS missed and EPS guidance for next quarter was below expectations. Overall, this was a mediocre quarter for Knight-Swift Transportation, and the outlook for Q3 is likely weighing on shares. The stock traded down 2% to $48 immediately following the results.
