Covenant Logistics hopeful despite no expected demand increase in Q4

Management at Covenant Logistics Group praised the company’s third-quarter performance in a weak freight market but still expects to see depressed load volumes across the trucking industry over the next several months.

Chattanooga, Tennessee-based Covenant (NASDAQ: CVLG) reported third-quarter earnings after the market closed Wednesday. Company officials held a conference call to discuss the results with analysts on Thursday.

“We are optimistic that the trough of the freight cycle is behind us but remain cautious about the rate at which we will see improvements,” Paul Bunn, Covenant’s president and chief operating officer, said during the call.

Bunn said inventory destocking by its retail customers — which has reduced demand for shipping — could be ending as stores look to rebound over the next several quarters.

“I think that the destocking is behind us and hopefully in the next six months, we believe we can get in some sort of more normalized restocking pattern,” Bunn said. “If fuel prices stay high, hopefully capacity continues to exit the market, maybe in the next six to nine months, we’ll get this thing back in balance a little bit.”

The truckload transportation services provider reported adjusted earnings per share of $1.13 in the third quarter, 1 cent lower than the Wall Street consensus estimate and 26% less than the same period in 2022.

Covenant’s total revenue in the third quarter was down 7.4% year over year to $288.7 million. Total freight revenue decreased 5% y/y to $253.3 million.

The company operates four business segments: expedited, dedicated, warehousing and managed freight transportation.

Warehousing was the only segment that had higher y/y results during the quarter, producing a 14.8% y/y increase in freight revenue to $25 million.

Covenant officials said third-quarter results in its dedicated segment benefited from the acquisition of Huntsville, Arkansas-based poultry hauler Lew Thompson & Son Trucking, acquired in April for $100 million.

“One of the things that we’ve brought to [Lew Thompson & Son Trucking] in terms of growth potential is something they’ve never had before. … [G]etting outside of that wheelhouse of their region is something that they have not done before,” said Tripp Grant, executive vice president at Covenant. “I do think that there is lots of opportunity. I’d be hesitant to kind of give numbers right now, because we’ve got a lot of things in the pipeline. But it’s a feather in our cap next year with just the opportunities that I believe that we have with Lew Thompson.”

Covenant officials also said cost reduction and stock repurchase initiatives — such as reducing tractor fleet counts across its business segments, lowering costs per mile and selling off underperforming assets — have helped improve margins and cash flow during recent quarters.

Covenant repurchased $30 million of stock in the first quarter of 2022 and made an additional $75 million stock repurchase in the second quarter of 2023.

“Since Jan. 1, 2022, we have repurchased $110 million of stock, paid $10 million of dividends and had three very creative acquisitions for $156 million,” Grant said. “[We have] paid out a total of $275 million that are moving the business and the valuation forward. In turn, we’ve had to sell underperforming capital, two terminals for $40 million and $56 million that weren’t producing a return on investment. We’ve seen the truck counts come down over the previous quarters. We’re selling off underperforming capital to help finance these things that are producing above-market returns on invested capital.”

For the fourth quarter, Covenant officials expect revenue and earnings to experience a small decline sequentially due to cyberattacks on a major customer and the ongoing United Auto Workers strike, which has temporarily depressed load volumes, Bunn said.

“There’s less work in Q4 with all the holidays,” Bunn said. “I think we’ll be down sequentially, but I still think it’ll be a nice fourth quarter. It’ll be a modest decline.”

An analyst also asked Covenant officials about the company’s stock performance over the past several years, whether they feel undervalued by the market and would consider taking the company private again.

“We can’t talk about going private or anything like that, but that’s why we have a board: to talk about all the issues that are there and we’re busting our butts,” said Chairman and CEO David Parker. “Two or three years ago, when we started down this road of where we should be in the market … somebody’s going to love us, Wall Street can love us, we’re going to love our staff, we bought back 25% of the company, and we’re doing a great job. This team is doing unbelievable, I could not be any more excited about what the group is doing. I think Wall Street will reward us. I think one day that it will wake up and say, ‘They are doing well,’ and we will get rewarded.”

Shares of Covenant were down 4% on Thursday at 3:30 p.m. EDT.