Werner Enterprises

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 3/5

A leading transportation and logistics provider specializing in truckload services, including one-way and dedicated fleet options.

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.

Werner Enterprises (WERN) operates in the highly competitive and fragmented trucking and logistics industry. Assessing its long-term competitive advantage reveals that the company exhibits a narrow moat, primarily due to its extensive network, customer relationships, and scale, but these are not difficult to replicate, which lowers the moat rating.

Moat Analysis: 2 / 5

  • Scale: Werner operates a large truck fleet and expansive network, which provides it with certain economies of scale. They also have dedicated fleet solutions, which have long term customer relationships. However, these are not impossible for competitors to imitate, and we observe larger firms such as Knight-Swift Transportation (KNX) that operate even bigger fleets and more diverse offerings. The large size gives it scale advantages on the market as they can cover more areas than small trucking companies, but also increases risk from downturns due to higher overhead.
  • Customer Relationships: WERN has cultivated long-term relationships with its customers, some of which are based on dedicated fleet agreements. Those relationships give more stability to the earnings, but are not difficult to copy or develop.
  • Brand Recognition: WERN is a well-known brand in the trucking industry, known for reliability and safety. This helps them in gaining customers. It is definitely not as strong as well established brands in consumer goods, that have high brand equity. However, it creates a sort of barrier to entry and makes it easier for the company to win customers.
  • Switching Costs: The switching costs for logistics customers are moderate. Many customers are willing to change to a different logistics provider if a better contract is presented. Moreover, there are thousands of logistics companies and many are trying to offer similar services, so there is a constant struggle for customers and margins. Some customers have long term contracts that give a form of switching cost, but not of high magnitude.

Based on these factors, WERN has a narrow moat, though that moat is not extremely wide as it is not based on intangible assets (like a brand), the network effect, switching costs or economies of scale are not too big. Overall there are no extremely powerful or sustainable moats that would make competition very difficult, but they do have some barriers which provide them with some competitive advantage.

Risks to the Moat and Business Resilience

  • Economic Cycles: The trucking industry is highly susceptible to economic downturns. Reduced consumer demand leads to less need for transportation services, which pushes freight rates down. For example, the recent high inflation has caused consumer spending to decrease and reduce business activity. This in turn could lead to overcapacity and more trucks chasing less business. A decline in demand can quickly harm earnings.
  • High Competition: The industry is fragmented, and competition is intense. New entrants are common, and price competition is ever-present. This can easily lead to a downward spiral in margins. WERN’s ability to achieve superior returns over its competitors will be put to the test in a highly competitive environment.
  • Rising Fuel Costs: Fuel is a significant expense for trucking companies and is volatile. Rising fuel costs can eat into WERN’s operating margins. While they try to pass this onto the customers it can be hard in competitive environments.
  • Driver Shortages: A chronic shortage of drivers has affected all transport industries, and this can limit their expansion opportunities. To counteract this, wages need to be raised, which in turn, lower margins. This is a very common theme among companies in the sector.
  • Regulations: Government regulations, such as driver working hours, environmental standards, and safety rules, can affect costs and flexibility. They can also impose additional costs and increase barriers to enter the sector.
  • Technological disruption: While their operations are not easily disrupted by new technology, the shift to automation and self-driving trucks may significantly change the competitive landscape. At the moment, this is not a risk, but in the future, it might be.
  • Pricing Pressure: Competition from other trucking companies could push down prices, impacting revenue and profitability.
  • Integration Risk: Acquisitions can be hard to integrate correctly and if they fail, the company will have to endure the losses. They also need to be done at the right price and this has proven very hard for many corporations.
  • High debt: A large amount of debt can be dangerous for cyclical companies. They might have hard time repaying the debt if business activity goes through a recession. High debt also decreases the leverage to increase their market share, as they cannot take on additional debt.

WERN’s resilience will largely depend on its ability to manage these risks by having solid customer relationships, scale, and technological innovation. They need to keep costs at a minimum and have a proper risk strategy for each situation.

Business Description

Werner Enterprises, Inc. (WERN) is a large transportation and logistics company in North America. They provide a broad range of transportation services, but mainly focus on truckload services. This means they utilize trucks to haul the loads and use them either in a one-way direction or as part of a dedicated fleet for their customers. Their customer base encompasses numerous industries, primarily those who ship consumer goods and manufactured goods.

  • Revenue Streams: WERN’s revenues come mainly from two segments:
    • Truckload Transportation Services: This segment includes one-way trucking, dedicated fleet services, and regionalized trucking. These are basically the main services of the company. They transport various goods across a large network.
    • Logistics Services: This segment includes freight brokerage, intermodal transport, and other logistics solutions for customers. This segment provides more variable margins, and is used to provide additional services to customers.
  • Industry Trends: The transportation industry, especially truckload services, has been marked by the following trends:
    • Increased competition and new entrants, with low switching costs.
    • Growth in e-commerce, which is shifting preferences.
    • Driver shortages, and increasing wages and employee benefits.
    • Increasing volatility in fuel costs, which directly impacts earnings.
    • Regulation of the sector has changed, impacting their operations.
  • Margins: WERN’s operating margins have varied with changes in demand and operating expenses (such as driver pay and fuel costs). Their latest quarterly reports show that operating expenses are a larger percentage of the revenue than in previous quarters, lowering the profitability. This is mainly due to increased driver pay and higher insurance expenses. While they attempt to pass this increase on their customers it is not always easy.
  • Competitive Landscape: WERN competes with numerous companies in the truckload and logistics sectors. It needs to constantly find ways to differentiate itself, as well as maintain customer relationships. Consolidation in the industry could lead to higher competition in the future. It is also a difficult sector to compete in with low barriers to entry, so companies must have a great strategy to stand out.
  • Differentiation Factors: Werner differentiates itself through
    • Extensive network and large fleet size, that gives a big advantage to reach more customers faster and in a more economical way.
    • Advanced tracking and data analytics which gives a great value proposition to its customers.
    • Long-term customer relationships, many of which are with established corporations.

Financials WERN’s financials show a company with modest growth and fluctuating profits. The business has been consistently generating revenue, however profitability is often fluctuating due to external forces.

  • Revenue: WERN has increased its revenues over the past years, reaching $1.97 billion in 2022. This is due to increased demand, however, it is crucial to see that this growth is not sustainable over longer periods of time. Also, in more mature markets, revenue growth cannot always create value if costs are higher and thus ROIC becomes lower. The latest quarterly reports show a decrease in revenues, which is expected due to lower demand and economic contraction.
  • Profitability: WERN’s profitability, as demonstrated through operating profit or net profit margins, can vary quite a bit. This variability is mostly due to the changes in industry dynamics, fuel prices, driver wages, and other variables. 2022 was a particularly good year, but even during 2022 its margins weren’t high.
  • Returns on Capital: WERN generates middling returns on invested capital. The ROIC without goodwill and intangibles has been relatively steady around 10-14 percent since 2014, with recent figures showing lower returns. It is important to note that in the past years, the returns on invested capital was better and more predictable.
  • Debt: The company holds a substantial amount of debt, mainly through revolving credit facilities. Debt-to-equity ratio is on average around 0.7x, but it can be much higher. It is important to have an eye on total debt because the company can struggle during tough economic times.
  • Valuation Multiples: The company is currently trading at around 13 times its PE ratio and 1 times book value. In the long run, the value will depend on the company’s ability to create long-term profitability and generate cash flows.

Recent Concerns and Management’s View

  • WERN experienced a significant drop in profits during the latest quarters due to a decline in shipping volumes. However, management expects that demand will pick up over the coming year and that they are doing their best to control costs.
  • They were unable to meet their revenue growth targets due to a slowdown in the economy. This seems like a systemic problem and not particular to WERN.
  • Increased expenses, specifically driver wages and fuel costs, are impacting margins. They are trying to find ways to mitigate these costs and optimize their operation, but they acknowledge that it is difficult due to the nature of the industry. They are also trying to pass costs over to their customers and have successfully renegotiated some long-term contracts.
  • The stock price has declined drastically in the recent months, mainly driven by the concerns of increased expenses and falling demand.

Based on earnings calls, management is actively trying to address these problems by controlling costs, cutting capital expenditures, and trying to improve customer relationships. They are focusing on building long-term relationships. They also want to use their balance sheet conservatively.

Understandability: 2 / 5

WERN is not hard to understand, but it can be difficult to grasp the competitive landscape of the trucking industry and the company’s performance drivers without knowledge about the sector. The overall concept, however, is easy to understand.

  • Business Model: The concept of shipping goods is simple. The way they earn money is easy to understand (through charging customers). However, logistics is a really difficult industry and requires an analytical person to fully grasp the different components.
  • Financials: The financial statements are relatively straightforward, but the cyclical nature and the fluctuating margins might make analysis somewhat difficult.
  • Industry Dynamics: The dynamics of the trucking industry and the many factors that affect performance can be complex for a non-industry expert.

Balance Sheet Health: 3 / 5

WERN’s balance sheet health is a mixed bag. They have a good amount of current assets and low debt obligations relative to their business peers, but a large amount of debt makes it a bit risky.

  • Debt levels are somewhat high, though they are manageable.
  • Strong current assets and cash position give them enough short-term liquidity.
  • Overall liabilities are not too high, especially considering the amount of assets.
  • They do have a good amount of tangible assets to offset total liabilities.

Overall their balance sheet is strong, but the high debt should be monitored. It puts a company at a slightly higher risk if economic times get hard. They need to keep costs at a minimum and have a sound financial approach to maximize shareholder value.