Werner Enterprises Downgraded

We are reducing our recommendation on Werner Enterprises, Inc. (WERN - Analyst Report) to Sell from Hold, and lowering our target price to $17. At the same time, we are cutting our 2008 diluted EPS estimate to $0.80 from $0.87, reflecting higher estimated fuel costs now that oil is trading around $140 per barrel.

Our 2009 EPS estimate remains $1.07. We expect WERN’s trucking operations to continue to be hurt by the weak U.S. economy, demonstrated by falling volumes and weak pricing due to increased truck supply and a softer freight market, as well as higher fuel costs and lower gains on truck sales. WERN reported first quarter EPS of $0.12, down 43% year over year.

However, to provide customers with additional capacity and provide additional diversification, Werner is growing its non-asset based Value Added Services (VAS) division, the gross margin of which was up 20% to $9.5 million. While the increase in VAS gross margin is encouraging, VAS generates a significantly lower operating margin than the company’s trucking business. But VAS provides additional freight opportunities, which dampens seasonal fluctuations in companywide revenues.

Read the full analyst report on WERN