More signs of deceleration in the less-than-truckload space were evident Thursday when ArcBest provided a third-quarter update and one analyst cut expectations for Saia following its lackluster report on Wednesday.
Revenue for the industry continues to move higher year over year (y/y) as pricing remains firm. However, volumes have moderated, signaling that even one of the best performing modes over the last several quarters may be feeling the impacts of slowing macroeconomic trends.
ArcBest’s (NASDAQ: ARCB) asset-based division, which includes LTL, reported y/y revenue growth of 19% in July and 18% in August. Tonnage was up y/y by 7% and 8% for the first two months of the third quarter. However, ArcBest was up against an easy comp from August 2021 (down 4.5% y/y), meaning analysts were looking for more. The August result fell short of expectations, similar to Wednesday reports from LTL peers Old Dominion Freight Line (NASDAQ: ODFL) and Saia (NASDAQ: SAIA).
LTL stocks were down 3.4% on Wednesday compared to the S&P 500, which was up 1.8%. The selloff continued into the early trading session on Thursday as the group was off nearly 2% compared to the broader market, which was flat.
On a two-year stacked comp, ArcBest’s tonnage was up 12% y/y in July but only 3.5% higher in August. Those growth rates trailed Old Dominion and Saia by 400 to 700 basis points over the same period.
Throughout the LTL upcycle a number of carriers, including ArcBest, have been upgrading the margin profile of the freight they haul, choosing more profitable loads that better fit the network from an efficiency perspective. Swapping out the freight has presented a headwind to volume growth for these carriers.
So far in the third quarter, ArcBest’s tonnage is outpacing the 3.7% y/y growth rate logged in the second quarter, although revenue per hundredweight, or yield, has moderated somewhat. Yields were up 11.2% y/y in July and 9% in August compared to plus 17.7% y/y last quarter.
Compared to 2020, ArcBest’s yields in July and August were up by approximately 30%, which is on par with industry leaders like Old Dominion. Surging diesel fuel prices have provided a tailwind to yields in recent quarters. However, the per-gallon cost is down 5% sequentially on average in the third quarter and off 12% from the high in late June.
“[The] asset-based business delivered strong year-over-year revenue growth due to a rational pricing environment, higher fuel surcharges and increased tonnage and shipments, primarily LTL-rated tonnage and shipments,” an SEC filing read.
ArcBest also reported that its consolidated revenue was up 36% y/y in July and 32% higher in August, with all operating segments recording y/y growth.
The company’s asset-light segment, which includes brokerage, recorded y/y revenue growth of 84.9% and 67% in July and August, respectively. The large growth rates include the acquisition of truckload broker MoLo, which closed in November 2021. Purchased transportation costs as a percentage of revenue in the division ticked higher sequentially at 82.7% in July and 83% in August even as third-party capacity costs have declined in the spot market. Purchased transportation expenses were 81.5% of revenue in the second quarter.
Saia’s estimates cut after Q3 update comes in light
Following Saia’s update, Deutsche Bank (NYSE: DB) analyst Amit Mehrotra cut his earnings expectations for the carrier. He took 5% out of his earnings-per-share estimate for the fourth quarter and 11% out of his 2023 EPS number, which is now $13.38. His third-quarter and fourth-quarter EPS estimates are now 6% and 14% below consensus estimates, respectively.
Mehrotra said moderating volume trends in addition to lower fuel surcharge revenues, which provide an earnings uplift for LTL carriers, were reasons to reel in numbers. He expects diesel prices to continue to step lower sequentially through 2023, presenting a headwind to results.
He said he still expects Saia to execute on its yield initiatives and capture revenue per shipment increases (excluding changes in fuel prices) moving forward but warned that this EPS cut was likely a harbinger for the other companies he covers.
“We continue to have high conviction that Saia is pursuing strategies that will result in significantly higher earnings power over the mid/long term. … We just think 2H22 and 2023 will represent a pause in what has otherwise been a blockbuster earnings growth and execution story based on real-time demand trends.
“In this context, we estimate today’s material cut to our Saia forecasts will be the first of many revisions we make across our entire coverage universe … which reflects the notable slowdown of volume and pricing trends across the group.”