Knight-Swift Transportation Holdings Inc.

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

Knight-Swift Transportation Holdings Inc. is one of North America’s largest and most diversified freight transportation companies, providing multiple full truckload, LTL, intermodal, and logistics services.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Knight-Swift is not just a trucking company; it’s a multifaceted transportation provider. The company’s operations span across various segments, each with distinct characteristics.

  • Truckload: This is the largest segment, where full truckload services are offered. They operate using their own tractors, trailers, and drivers.
  • LTL (Less-Than-Truckload): In this segment, they consolidate freight from various customers to be transported on the same truck. This is mainly a regional service.
  • Logistics: A non asset service, where they are involved in arranging the shipment of freight by utilizing carriers that are not part of their fleet. These are also more customized, specialized transportation services.
  • Intermodal: Here, they are involved in moving freight containers by a combination of rail and trucks.

Industry Trends: The transportation industry is inherently cyclical, experiencing periods of high demand followed by periods of decreased activity. Key trends include fluctuating freight volumes, volatile fuel prices, increasing labor costs, and technological innovation.

Competitive Landscape: The trucking industry is highly competitive, with a mix of large publicly traded companies and smaller privately owned operators. Intense competition leads to rate pressure, and market share shifts among the different players. The rise of e-commerce and digital freight brokers is also transforming the industry.

What Makes Knight-Swift Different? Knight-Swift differentiates itself through a diversified portfolio of transportation services, allowing the company to serve diverse customer needs and potentially mitigate the effects of a single segment downturn. Moreover, they are the largest player in the market by quite a large margin. The acquisition of USXpress also made them significantly bigger.

  • Scale and Diversification: Knight-Swift is one of the largest trucking companies in North America, giving it significant scale and diversified operations.
  • Integrated Operations: They can use their large fleet of trucks and drivers with their large amount of clients on the LTL and truckload side of business. Additionally, they can utilize their logistics brokerage and transportation planning services to find additional volume.
  • Technology-Driven Operations: They are focused on implementing AI to be able to do more advanced transportation planning and provide better service.

Financial Analysis

Here is an in-depth analysis of KNX financials.

Revenue Distribution: The Truckload segment is the biggest revenue generator by a large margin. Also, their Truckload revenue is more stable while LTL and Intermodal tend to fluctuate more with seasonality.

  • In Q1 2024, Truckload was at $1.28 billion with LTL at $634.9 million and Intermodal at $263.3 million and the rest under other segment.
  • For 2023, Truckload was at $5.21 billion and LTL at $2.37 billion and Intermodal at $998.8 million and the rest under other segment.

Margins: The Truckload segment has always been the highest margin segment. However, the LTL is improving, but still far below.

  • In Q1 2024, the operating margin was at 11.1% for Truckload, 5.7% for LTL and -14.4% for Intermodal.

  • For 2023, the operating margin was at 12.1% for Truckload, 8.7% for LTL and -6.3% for Intermodal.

  • EBITDA: For the quarter ended March 31, 2024, they had a adjusted EBITDA of $318.2 million and an adjusted operating income of $165.4 million. Adjusted EPS came in at $0.89.
  • For year 2023, they had a adjusted EBITDA of $1.15 billion and a net income of $416 million. Adjusted EPS came in at $2.24.

Recent Concerns / Controversies and Problems Faced by the Company:

  • LTL Integration: It seems like there are challenges in integrating the operations and routes from the company’s acquisition of less than truckload service provider (MME) and the LTL segment as a whole. There are many overlapping routes that they have not fully optimized and is hurting the operating margin and making the costs of the business worse. Management has talked about this a lot and are confident in being able to fix that, but it takes time.
  • Volume and Pricing: In recent earnings calls, Management has been discussing that they are seeing lower freight volume and lower prices. Pricing is being influenced by higher capacity in the industry and lower demand.
  • Insurance costs: The company expects higher insurance expenses to continue, which may impact profitability in coming years.
  • Supply Chain Disruptions: The company also still has some concerns about labor shortages in the industry and supply chain disruptions that impact equipment availability, parts, and maintenance.
  • Debt: Management did not really like the high debt load incurred to acquire USXpress and are trying to bring the leverage back down.

Balance Sheet Health:

  • They have a cash balance of $290.7 million.
  • They have a good amount of current assets as opposed to liabilities. For the quarter ending March 31, 2024, they have total assets of $12.848 billion and total liabilities of $7.657 billion.
  • They have significant goodwill on the books, stemming mostly from their acquisition of U.S. Xpress.
  • The debt to equity ratio is around 1.66 at the moment.

Moat Assessment

Knight-Swift’s moat rating of 3/5 is due to its wide geographical presence, robust service portfolio, and the integration of technology. However, several factors limit the durability of this moat.

  1. Network Effect : While Knight-Swift benefits from its extensive network of terminals and routes, it does not qualify as having a strong network effect.
  2. Switching Costs : Customer stickiness in the industry is relatively limited, particularly in the truckload segment. While they do have some switching costs with their integrated operations, it’s not as strong as they would like.
  3. Intangible Assets : Their brands are well-regarded in the industry, but it seems like a moat is not based on a brand in this industry.
  4. Cost Advantages: They have a fairly good cost advantage, which primarily comes through efficient operations and a large scale that enables them to lower some costs. They have made a lot of acquisitions and are working towards implementing synergy from these mergers, which is a positive for margin improvement.

Moat Risks and Resilience

  • Industry Cyclicality: The trucking industry is highly cyclical and is influenced by the state of the broader economy and global supply chain dynamics.
  • Technology Disruption: The rise of autonomous trucking and digital freight brokers may significantly alter the competitive landscape and put them at a disadvantage if not properly adopted.
  • Labor Costs: The industry is highly dependent on its drivers and a driver shortage could hurt profitability and force them to increase wages.
  • Regulatory Changes: Changes to regulations for driver safety and fuel economy could lead to unexpected costs that could further affect profitability.
  • Acquisition Integration Risk: The size and scope of the company can complicate the integration of acquisitions, leading to disruption, higher costs and underperforming results.

Understandability

KNX has a rating of 3 / 5 for understandability. While the company’s overall business model is easy to comprehend, understanding the details of intermodal transportation, the complex dynamics of the industry, and the financial statements require a high level of expertise.

Balance Sheet Health

KNX has a rating of 4/5 for balance sheet health. They are currently reducing leverage and have a fair amount of cash to support operations. However, the level of goodwill is something to watch out for, as a significant impairment can greatly affect shareholders’ equity. They have sufficient assets to cover liabilities as well.