Hitting the Brakes on Trucking

Brokerage analysts cut their forecasts on several trucking companies following a warning last week from YRC Worldwide (YRCW).

Blaming an “economic slowdown”, YRC Worldwide CEO Bill Zollars said tonnage was down across all of the company’s business units and pricing was a bit below internal expectations. YRCW now anticipates generating fourth-quarter profits of 95 cents to $1.05 per share; previously the company had guided for profits to be in the range of $1.40 to $1.50 per share. Full-year profit guidance was dropped to a range of $5.00 to $5.10 per share from a range of $5.45 to $5.55 per share. Analysts quickly cut their forecasts for both this year and next. The new 2006 consensus estimate of $5.06 is 35 cents below the projection of a week ago. The new 2007 consensus estimate of $4.54 is 73 cents below the projection of a week ago.

In addition to YRCW, brokerage analysts lowered their profit projections on Arkansas Best (ABFS), Con-Way (CNW), Knight Tranportation (KNX), Swift Transportation (SWFT) and Werner Enterprises (WERN). Seasonal volume for the entire industry has not received the holiday boost that many analysts were expecting and this is leading to the bearishness. In addition, spot market prices have been showing signs of weakness, fuel costs remain high and a driver shortage continues to exist. Finally, competitive pressures from railroads are cutting into market share.

The weakness in volume and spot prices does raise some worry about the state of the economy. There are many other data points that also show the economy hitting a speed bump this quarter. However, slowing growth is still growth and I continue to believe that the economic expansion will continue into next year.

One reason for my optimism is earnings growth. The average¹ company within the Zacks Rank universe² is projected to generate a 15.1% increase in profits next year³. This is not an aggregate forecast, but rather reflects the individual forecasts made for nearly 4,400 companies. Bluntly put, recessions don’t occur when corporations are achieving double-digit growth.

Speaking of profit growth, the fourth-quarter numbers for the major investment banks have been good. Bear Stearns (BSC), Goldman Sachs (GS) and Lehman Brothers (LEH) all easily topped expectations last week. Yesterday, Morgan Stanley (MS) reported fourth-quarter profits of $2.08 per share, 31 cents higher than analysts’ forecasts.

All four firms saw revenues and profits from investment banking, trading and asset management rise. Fixed income and debt derivatives were notable areas of strength, though the equities also played a material role in generating the good results.

Following the results, several brokerage analysts upped their forecasts on the firms.

• Seven out of the 10 covering analysts raised their earnings estimates on Bear Stearns. The new fiscal 2007 consensus estimate calls for profits of $14.63, versus $14.11 a week ago.
• Goldman Sachs, which had seen the strongest upward revisions heading into the fourth-quarter results, was the beneficiary of 43-cent positive revision. Seven of the 12 covering analysts adjusted their forecasts, pushing the consensus estimate up to $18.42.
• Fiscal 2007 profit projections for LEH jumped 16 cents following the earnings report to $7.22, reflecting revisions from eight analysts.
• Since MS reported yesterday, revisions to fiscal 2007 earnings are likely to occur over the next few days.

Zacks Premium and ZacksElite subscribers can view the Zacks Industry Rank List at http://www.zacks.com/zrank/zrank_inds.php. This interactive list allows you to see all of the companies, and their Zacks Rank, within more than 200 industries. Shown below is the Zacks Sector Rank List, which shows the trend in estimate revisions on a broader scale.

Charles Rotblut, CFA is a senior market analyst for Zacks.com. He can be reached at crotblut@zacks.com

¹ The average growth rate is calculated based on 90% of the companies that have reported to prevent the skewing effect of outliers. The worse 5% of revisions and the best 5% of revisions have been excluded. Including the outliers results in an earnings growth rate of 23.1%.

² The Zacks Rank is assigned to companies with earnings estimates made available by brokerage analysts. The Zacks’ database contains earnings estimates for approximately 4400 companies.

³Fiscal 2007 is defined as any fiscal year ending in Mar 2007 through Feb 2008. The rationale for not using a calendar year is account for both early reports, such as investment banking firms, and late reporters, such as retailers.

Read the full analyst report on WERN

Read the full analyst report on KNX

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Read the full analyst report on YRCW

Read the full analyst report on ABFS