More signs of a slowdown in the smaller truckload space were evident on Thursday, when ArcBest presented updated third-quarter data and one analyst lowered expectations for Saia after its lackluster report on Wednesday.
Industry revenue continues to grow year-over-year (y/y) as prices remain stable. However, volumes fell, signaling that even one of the best-performing regimes over the past few quarters may be feeling the effects of slowing macroeconomic trends.
ArcBest (NASDAQ: ARCB) asset-based division, which includes LTL, reported revenue growth of 19% in July and 18% in August. Tonnage increased 7% y/y and 8% in the first two months of the third quarter. However, ArcBest has faced light competition since August 2021 (down 4.5% YoY), meaning analysts were looking for more. The August result did not live up to expectations, similarly Wednesday reports from LTL peers Old Dominion Freight Line (NASDAQ: ODFL) and Saya (NASDAQ: SAIA).
LTL shares fell 3.4% on Wednesday, compared with the S&P 500, which rose 1.8%. The selloff continued in early Thursday’s trading session, with the group down nearly 2% against the broader market, which was unchanged.
ArcBest’s tonnage was up 12% year-over-year in July, but only up 3.5% in August. These growth rates trailed Old Dominion and Saia by 400-700 basis points over the same period.
Throughout the LTL upcycle, a number of carriers, including ArcBest, have been improving the margins on the loads they carry by selecting more profitable loads that better fit the network in terms of efficiency. Cargo substitution is an obstacle to volume growth for these carriers.
So far in the third quarter, ArcBest’s tonnage is ahead of the 3.7% year-over-year growth rate recorded in the second quarter, although income per quintal weight, or yield, has declined somewhat. Yields rose 11.2% y/y in July and 9% in August, compared to plus 17.7% y/y last quarter.
Compared to 2020, ArcBest’s profitability increased by approximately 30% in July and August, in line with industry leaders such as Old Dominion. A sharp rise in diesel prices has helped boost yields in recent quarters. Still, the price per gallon fell an average of 5% sequentially in the third quarter and 12% from its peak in late June.
“[The] The asset-based business delivered strong year-over-year revenue growth driven by a rational pricing environment, higher fuel surcharges and increased tonnage and shipments, primarily rated LTL, the SEC said in a filing.
ArcBest also reported that its consolidated revenue was up 36% YoY in July and 32% higher in August, with all operating segments recording YoY growth.
Companies the asset-light segment, which includes brokerage services, recorded year-over-year revenue growth of 84.9% and 67% in July and August, respectively. Large growth rates include acquisition of truck broker MoLo, which closed in November 2021. Purchased transportation costs as a percentage of revenue in the division rose sequentially to 82.7% in July and 83% in August, even as third-party capacity costs in the spot market declined. Purchased transport costs in the second quarter accounted for 81.5% of revenue.
Saia’s valuations fell after its Q3 update
After Saia updateDeutsche Bank (NYSE: DB) analyst Amit Mehrotra cut his revenue expectations for the carrier. It subtracted 5% from its fourth-quarter EPS estimate and 11% from its 2023 EPS estimate, which now stands at $13.38. Its third-quarter and fourth-quarter EPS estimates are now 6% and 14% below consensus estimates, respectively.
Mehrotra said softening volume trends in addition to declining fuel tax revenues, which are providing increased revenue for LTL carriers, are the reasons for the shaky numbers. He expects diesel prices to continue to decline consistently through 2023, creating a headwind for the results.
He said he still expects Saia to deliver on its profitability initiatives and deliver growth in shipping revenue (barring changes in fuel prices), but cautioned that this reduction in earnings per share is likely to be a harbinger for other companies , which it covers.
“We remain convinced that Saia is pursuing strategies that will lead to significantly higher returns in the medium to long term. … We simply believe that 2Q22 and 2023 will be a pause in what has otherwise been a major earnings growth and execution story based on real-time demand trends.
“In this context, we believe today’s material reduction in our Saia forecasts will be the first of many revisions we are making across our coverage world…reflecting a marked slowdown in volume and price trends across the group.”