WERN - Examining Werner Enterprises 2023 Potential: A Cautionary Outlook

2023-04-15 06:21:04 ET

Summary

• Werner's growth and profitability indicators point towards a promising trajectory, but investors should approach Werner cautiously due to potential headwinds.
• Small truckload carriers face a double whammy of grappling with lower spot rates and skyrocketing operating costs for drivers, equipment, fuel, maintenance, and capital.
• Due to Werner's exposure to risks and headwinds, investors should approach its stock with caution and monitor its development closely.

Thesis

This article investigates Werner Enterprises, Inc. (WERN) and its potential for 2023, utilizing financial trends to gauge the risks that might affect their progress in the upcoming year. Despite encouraging growth and profitability signs pointing towards a successful trajectory, investors should be cognizant of possible headwinds such as freight market turbulence, high interest rates, insurance costs or additional economic complications which could slow down advancement.

Dedication to Safety and Sustainability

In the realm of transportation, Werner Enterprises has steadfastly pursued a culture of safety, manifesting in a decade-low preventable accident rate per million miles as determined by the Department of Transportation (DOT). A notable innovation in this quest for safety is Werner's pioneering driver feedback and coaching program, which offers drivers tailored insights into their performance, allowing them to learn from their mistakes and improve their driving capabilities.

I believe that this relentless dedication to safety not only epitomizes Werner's core values but also has the potential to significantly reduce insurance and claims expenses over time. This approach is further justified by a study from the National Highway Traffic Safety Administration , which reveals that a staggering 94% of examined crashes can be attributed to driver error. Similarly, the U.S. General Services Administration study discovered that human error is the primary cause in 98% of crashes. As such, Werner Enterprises' focus on driver improvement holds great promise in mitigating the risks associated with human error in the transportation industry.

Recent Acquisitions and Expansion

In light of recent developments, Werner Enterprises has astutely expanded its logistics operations by acquiring both Baylor Trucking and ReedTMS Logistics . These strategic acquisitions, in my opinion, have considerably fortified Werner's logistics segment, equipping the company with the means to adeptly respond to the capricious market environment. The seamless amalgamation and synergy arising from these acquisitions have surpassed expectations.

A case in point is the incorporation of ReedTMS Logistics, which has facilitated Werner's extension into over-the-road, intermodal, drayage, and final mile services. This augmentation of their logistical offerings not only enhances Werner's market presence but also affords them a competitive edge in the cutthroat logistics sector.

Growth Strategy for 2023

As for their 2023 growth strategy , Werner plans to maintain a stable fleet in H1, with an emphasis on growing the Dedicated segment by 1% to 4% in H2. With Dedicated revenue per truck rising by 7.6% in 2022, I believe it's a wise decision to allocate more CapEx to rejuvenate their truck fleet. Their focus on serving large, thriving discount retailers further cements their potential.

As aforementioned, Werner's concerted efforts to slash DOT accident preventable frequency will, I think, could help curb insurance costs. The company's proactive internal initiatives to counterbalance headwinds, such as interest and building expenses, are commendable. Early indicators on equipment receipts and quality are promising, potentially impacting the maintenance line positively.

Cost Reduction and Efficiency

With an emphasis on boosting efficiency and cutting costs, Werner appears poised to ride out current market conditions. Their One-Way network is more engineered than ever, with numerous LTAs in place. Despite the challenging driver wage market, I expect pressure to ease throughout the year. Werner's logistics business continues to expand, and their growing presence in Mexico offers substantial growth prospects.

Finally, with a robust financial standing, featuring net debt of $587 million and equity exceeding $1.4 billion, Werner generates considerable free cash flow. The company's capital allocation framework emphasizes reinvestment in its fleet, expansion and modernization of its terminal and driver school network, and the enhancement of shareholder value through dividends and share repurchases. Surpassing an annual revenue run rate of $1 billion and boasting a burgeoning pool of over 70,000 qualified carriers within a 30,000-trailer ensemble, my conviction is that Werner could be poised for continued growth. The company's ambitious five-year plan to achieve a 10% compound annual growth rate in revenue is ahead of schedule, with recent acquisitions yielding favorable outcomes.

Industry Outlook and Peer Evaluation

In 2021, the global freight transport market size reached USD 28.66 billion with projected compound annual compounded growth rate of 11.3% through 2030.

Moving on to its competitors, Werner Enterprises' forward price-to-earnings ratio of 14.79 appears to be a judicious reflection of the company's anticipated earnings, according to market sentiment. Although the figure exceeds that of rivals such as [[ARCB]] and [[XPO]], it falls short of the valuations assigned to [[MRTN]] and [[HTLD]]. This suggests that investors discern considerable growth potential in WERN, justifying a higher valuation, albeit one that avoids excess.

In the realm of growth metrics , WERN's revenue growth figures are striking, boasting a year-on-year rate of 20.32% and a compound annual growth rate of 10.12% over three years. While this performance lags behind ARCB's and MRTN's expansion, it surpasses that of XPO, which has experienced negative growth in recent years. This implies that WERN is holding its own in the competitive landscape of revenue growth.

Furthermore, the company's EBITDA and earnings per share growth rates demonstrate similar trends, insinuating a respectable growth trajectory vis-à-vis its competitors. This could be seen as a promising indicator of WERN's future profitability and its potential for sustained expansion.

Turning to profitability measures , Werner Enterprises' gross profit margin of 23.88% surpasses ARCB and XPO, albeit falling short of MRTN and HTLD. However, its net income margin aligns with industry peers, implying efficient expense management. Moreover, WERN's return on equity and return on assets remain in line with its competitors, signaling the generation of robust returns for shareholders. In sum, my assessment is that although the company's valuation ratios are not the most modest, they remain somewhat reasonable, and its growth and profitability indicators could be interpreted as pointing towards a promising trajectory.

Possible Risks and Headwinds

Werner's 2022 success was marred by the fourth quarter's seasonally weak freight market, affecting its One-Way Truckload and Logistics segments. This turbulence is expected to persist through the first half of 2023 before a gradual recovery in the latter half, putting investors on edge.

Although Werner boasts a robust Dedicated fleet, a diversified One-Way Truckload fleet, and a burgeoning Logistics segment, a challenging economic environment threatens the company's growth trajectory. The aforementioned acquisitions of Baylor Trucking and ReedTMS Logistics may not suffice to counterbalance freight market headwinds. While Werner's commitment to enhancing safety and service is laudable, it might not fully mitigate the effects of economic turmoil. Investors should thus approach Werner cautiously, monitoring its resilience amidst the prevailing economic conditions.

Furthermore, a disconcerting financial trend emerges as Werner's adjusted operating income drops 8% , and adjusted operating margin declined 240 basis points YoY, compared to the previous year's record fourth-quarter operating margin. Adjusted operating expenses per mile net of fuel surged 6.6%, primarily due to an 18% increase in supplies and maintenance and a 53% increase in insurance and claims, while driver pay rose a mere 4%. Moreover, Werner incurred an $11 million uptick in insurance and claims expense, coupled with an unusual charge of $0.13 per share during the fourth quarter.

In addition to moderating equipment sales gains from 2022's record highs, Werner foresees a downturn in the used truck and trailer market. The Logistics segment's adjusted operating income plummeted $3.9 million YoY to a mere $8 million, exacerbating concerns as the logistics business was anticipated to counterbalance truckload challenges.

Werner's cautious approach in keeping its fleet stable during H1 2023 and focusing on 1-4% Dedicated growth during H2 reflects the company's wariness. However, one-way rates are projected to decline 3-6% YoY in H1 2023, while Dedicated revenue per truck is anticipated to increase between 0-3%, considering the freight market outlook and more challenging comparisons. Additionally, this year's interest expense will be $20 million higher than the previous year, primarily due to elevated interest rates and a higher debt level.

Furthermore, small truckload carriers face a double whammy: grappling with 35% lower spot rates and skyrocketing operating costs for drivers, equipment, fuel, maintenance, and capital. This trend is already underway, with carrier failures projected to increase. Werner also expects modest improvements in 2023's OEM new truck and trailer production.

Finally, headwinds such as interest expense, insurance, and building expenses will challenge Werner's financials. Although the company is striving to counteract these obstacles, progress will be incremental. The economic backdrop may strain some Dedicated fleets' businesses, resulting in shrinkage.

Takeaway

Due to Werner's exposure to risks and headwinds, investors should approach its stock with caution and monitor its development closely. Although Werner offers promising growth and profitability indicators, investors need to factor in its challenging operating environment before making their decisions - my recommendation would be holding for now.

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