Truck broker Landstar System Inc. (NASDAQ:LSTR) sees trends improving thus far in the fourth quarter, producing a new earnings expectation "slightly above" the high end of the company's initial guidance range issued during the third-quarter report.
Appearing at the Stephens Annual Investment Conference, the Jacksonville, Florida-based company's president, CEO and interim principal financial officer, Jim Gattoni, said improvement in fundamentals has accelerated as the quarter has progressed. Higher demand for consumer durables and home improvement items has propelled truck demand and rates upward. Gattoni attributed much of the advance to strong consumers, who have a larger wallet as they spend less on services, travel and transportation.
Further, declines in the flatbed market, nearly one-third of the company's business, have started to level off. Landstar has seen flatbed demand shake off year-over-year load declines, flattening closer to the levels seen in 2019, with rates increasing slightly. However, Gattoni noted that most of the rate improvement is related to heavy-haul, higher-premium freight versus a broader rate increase in the flatbed markets as verticals like metals and machinery remain weak.
The company now expects truck loads to be at the high-end of the prior range, which called for high-single-digit increases year-over-year. Revenue per load for truck shipments are averaging mid-teen-percentage increases currently, ahead of the original expectation for low-double-digit increases.
The original guide called for revenue of $1.15 billion to $1.20 billion and adjusted earnings per share (EPS) of $1.61 to $1.71, excluding 29 cents per share, or $15 million, in one-time expenses related to the buyouts of legacy compensation plans with independent sales agents. The adjusted EPS number increases by 2 cents as the actual cost of the buyout will be approximately $15.5 million, or 31 cents per share. The new guidance calls for EPS to be slightly above the high end of the range, which means Landstar may beat its all-time quarterly earnings record set in the fourth quarter of 2018.
As the peak season winds down, Gattoni expects the company's substitute linehaul shipments for parcel carriers to slow. However, he doesn't see any slowdown in consumer durables demand or the shipment of building materials until after the first quarter at the earliest.
Is this cycle different?
While many are expecting inventory replacement and a lack of qualified drivers to keep trucking capacity tight for a period longer than past cycles, Gattoni provided a more cautious tone. "The asset-based guys are going to see rates climbing, they're going to pay more to the drivers, they're going to put more trucks into the system and we're going to cycle back like we always do."
He conceded that his statement was a "pessimistic viewpoint," noting that low turnout from driver schools during the pandemic is a "real thing."
Fewer new CDL drivers coming to the market in 2020, attrition from accelerated retirements due to COVID and the Drug & Alcohol Clearinghouse putting roughly 40,000 drivers on the sidelines is limiting available truck capacity. Further, Gattoni believes increased driver recruiting costs and higher insurance premiums will remain capacity headwinds for operators moving forward. Landstar saw its insurance premiums jump from $8 million a year to roughly $22 million annually during its May renewal.
Gattoni agreed with the premise that capacity should remain tight but found it hard to overlook past cycles. "I don't know why this cycle would be different than the historical patterns of what happens in our world."
If his expectation for a "normal cycle" holds, he believes the spot market should weaken by summer as more freight will begin to be moved contractually.
Landstar is having success retaining truck capacity in its network. Gattoni said turnover is down to the 20% range currently, almost half the level they experience during weakening markets. The company is adding business capacity owners (BCOs) at the same rate they normally would but fewer are leaving. Landstar also provides commercial trucking insurance coverage for BCOs, which could be providing a recruitment tailwind in a hardening insurance market.
New in-house agent shop
Landstar recently acquired one of its agent offices and now runs the shop as a company store. Gattoni said the experience has allowed them to test certain technologies and systems in-house so to speak versus trying to get feedback from agents through focus groups. He said having a company store allows them to measure the use of the Landstar's technology tools and live the life of one of their agents.
The company may look to use the in-house agent model to take on contractually brokered freight, something they haven't done in the past. Landstar is primarily a spot broker with a highly variable cost structure that provides flexibility as demand fluctuates, avoiding large gains or losses on contracts that end up being priced above or below the market as spot rates change.
Gattoni said Landstar has the tools in place to add high-density, dedicated freight on a contractual basis. He believes Landstar's in-house technology will allow them to remove friction in the broker process and improve the yields of this type of freight.
Year-end cash deployment
Asked about plans for year-end cash deployment, Gattoni said they would look at a special dividend or share repurchases when the board meets in December. The company ended the quarter with $219 million in cash and equivalents compared to $284 million in the same quarter last year when it paid a special dividend of $2 per share.
Shares of LSTR are flat on the day.