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Schneider (SNDR) Strong on Intermodal Unit Amid Cost Woes

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We recently initiated coverage on Schneider National (SNDR - Free Report) — a leading transportation and logistics services company. Founded in 1935, it offers a portfolio of premier truckload, intermodal and logistics solutions. Additionally, Schneider National, which went public in April 2017, operates one of the largest for-hire trucking fleets in North America.

The Bullish Case

In 2018, revenues at Schneider National’s intermodal unit increased 22.3% on a year-over-year basis mainly driven by favorable pricing and volume growth. At the intermodal unit, orders improved 9.9% on conversion of over-the-road freight to intermodal. Operating ratio (operating expenses as a percentage of revenues) also improved 690 basis points to 86.4%. We expect the intermodal unit to continue performing well in 2019, courtesy of strong order volumes.

At the company’s logistics unit, revenues rose 22.8% on a year-over-year basis in 2018 primarily on strong brokerage business. Brokerage volumes at the same unit increased 17% backed by favorable market conditions. Operating ratio improved 50 basis points to 95.4% in 2018. We expect the logistics unit to continue performing well in 2019 owing to favorable brokerage volumes and net revenue management. Additionally, contract price improvements should boost truckload revenues going forward.

This Zacks Rank #3 (Hold) company’s strong balance sheet is an added positive. Schneider National’s debt-to-capitalization ratio improved to 16.4% in 2018 from 19% in 2017, reflecting its healthy financial structure. The company’s debt-reduction efforts are impressive as well.

Riding on its strong balance sheet, Schneider National reduced its debt levels by $29 million in 2018. The company’s efforts to reward its shareholders also substantiate its strong financial health.


The Bearish Case

Schneider National’s First to Final Mile (FTFM) business incurred significant operating losses in 2018, which negatively impacted operating ratio of its truckload segment. Even though the company is taking steps to boost its FTFM operation, it still expects the business to incur an operating loss in 2019.

High operating expenses incurred by this Brown County, WI-based company are added concerns. In 2018, operating expenses increased a respective 12% and 22.5% from 2017 and 2016 levels. Markedly, increasing purchased transportation costs have been the main reason behind rising operating expenses.

At the company’s logistics unit, higher brokerage volumes have pushed up purchased transportation costs. Also, improved driver wages have resulted in an increase in salaries, wages and benefits. We expect the factors to be prevalent in 2019 as well, thereby bumping up operating expenses. This, in turn, might limit bottom-line growth.

Following its annual meeting in April 2019, Schneider National will witness a change at its helm with the retirement of Chris Lofgren. Lofgren, the company’s president and chief executive officer for 17 years, will be succeeded by Mark Rourke. In the event of Rourke failing to replicate the success of Lofgren, investor confidence in Schneider National might take a hit, hurting the stock price significantly.

Key Picks

A few better-ranked stocks worth considering in the Zacks Transportation sector are Azul (AZUL - Free Report) , Norfolk Southern (NSC - Free Report) and Radiant Logistics (RLGT - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Shares of Azul, Norfolk Southern and Radiant Logistics have rallied more than 9%, 28% and 50%, respectively, on a year-to-date basis.

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