2023-12-27 08:03:40 ET
Summary
- Schneider's stock experienced a 20% gain over the past 7 weeks, but its momentum may not continue due to significant overhead resistance.
- Q3 earnings showed a sizable drop in total revenues, with adverse trends in the intermodal and trucking segments.
- Recent initiatives to diversify income streams need to come to the forefront to improve earnings, but consensus EPS revisions suggest a continued downcycle.
Intro
We wrote about Schneider National, Inc. (SNDR) in May of this year, when we speculated that buyers would begin to step in aggressively on any convincing down move in the stock. Well, that down move occurred over a three-month timeframe where shares fell from approximately $31 per share at the beginning of August to roughly $21.50 per share by the beginning of November. As expected, buyers stepped in aggressively at that point, resulting in approximately a 20% gain in Schneider's stock over the past 7 weeks. The question now is whether Schneider's strong momentum can continue to the upside in earnest.
If we go to Schneider's technical chart, it looks doubtful whether momentum can continue to the upside in earnest. We state this because of how shares are now coming up against significant overhead resistance which will most likely put at least a halt to the present rally. Moreover, investors would also do well in observing the stock's ADX (trend-following indicator) which has demonstrated that the 7+-week rally in Schneider has not coincided with an elevated ADX reading. Therefore, given that we believe that technical analysis is the summation of Schneider's fundamentals at this point, we see limited near-term upside in the trucking outfit at this point. Trends on the company's income statement, growth worries, and forward-looking EPS revisions back up our thesis as we see below (Maintaining a 'Hold' rating)
Q3 Earnings
Total revenues of $1.35 billion in Q3 was a sizable drop when compared to the same period of 12 months prior ($1.67 billion). Apart from the fact that pricing in the Truck network business was abysmal in the quarter, Schneider also had to account for multiple cost items in Q3, which ended up derailing both margins and earnings in this business. Suffice it to say, that if current pricing conditions continue, management knows it will have to take a harder line concerning minimizing operating costs going forward. Pricing was also an issue in the intermodal business, where an elevated number of shorter-haul orders also contributed to the decrease in revenue per order. Margins also came under pressure in the logistics business in Q3, whereas the dedicated business managed to hold its own in the quarter, where current trends point to stable margins & both organic & inorganic growth.
However, as mentioned, it was the intermodal & trucking segments that did the majority of the damage in the quarter. Their adverse trends were compounded by above-average fuel costs, bad debt expenses & multiple customer bankruptcies, which all contributed to the negative earnings print for the quarter. To give some context, Q3 net profit came in at $35.6 million, which was a sizable sequential decline ($77.5 million in Q2) plus a significant drop compared to Q3 of fiscal 2022 ($125.6 million). Investors, though, should not let the above temporary cost items cloud their judgment concerning Schneider's current profitability. We state this because if one goes further up the income statement, it is evident that trends in both gross profit & EBIT also continue to struggle.
Recent Initiatives Now Need To Come To The Fore
Therefore, recent initiatives concerning the diversification of the company's income streams now have to come to the fore to ensure earnings do not remain depressed from the unfavorable pricing environment. The growth of the dedicated business (as mentioned) is encouraging, where management still has plenty of scope (through both organic & recent investments such as Midwest Logistics Systems) to place more trucks on dedicated layouts. Furthermore, management continues to see strong potential in the Intermodal segment, as we see below.
Despite not having the benefit of a meaningful customer allocation season, we have already grown our order count by 20% on the CPKC service into and out of Mexico since its implementation. Overall, we continue to believe there is a large opportunity to convert over-the-road freight to intermodal across the entire North American network. Encouragingly, discussions with several of our largest customer relationships in the consumer products, retail, and automotive verticals indicate that over-the-road conversion is aligned with their 2024 transportation allocation objectives. We have at least 30% of pent-up growth opportunities in intermodal container and chassis asset productivity.
Consensus EPS Revisions Trend
Given Schneider's growth catalysts, the consensus is only expecting consolidation next year (4%+ bottom-line growth) before earnings finally ramp up significantly in fiscal 2025. It is good to see that 30-day revisions have stabilized somewhat, although the Q4 EPS target of $0.22 per share remains 65%+ below the bottom-line number of the same period of 12 months prior & generally the same as what SNDR reported in Q3 this year. Suffice it to say, that the current downcycle is far from over, which is why investors may need to wait for a better entry price here in SNDR.
Conclusion
Therefore, to sum up, although shares of Schneider have rallied close to 20% over the past 7 weeks, we believe there are limited legs left in this rally due to numerous segments that continue to struggle. Furthermore, overhead resistance on the technical chart at approximately the $26 level points to consolidation over the near term. Therefore, let's see if we can see a sequential bottom-line improvement in the company's upcoming Q4 earnings. We look forward to continued coverage.
For further details see:
Schneider National: Challenging Trading Conditions To Limit Upside For Now