Shares of US Xpress (USX -14%) are tumbling to new lows after the company warned about tough times in its trucking business yesterday afternoon.
The stock of the nation's fifth largest asset-based truckload carrier by revenue has performed terribly since the company went public at an opportune time.
The company sold 18 mln shares at $16 last June, when the freight market was on fire amid strong economic growth (boosted by fiscal stimulus) and a tight trucking market with a shortage of drivers.
This year, supply caught up to demand while the industrial sector has slowed.
The company raised its adjusted operating ratio guidance for the second quarter and fiscal 2019 as market conditions continue to underperform expectations. The operating ratio represents operating expenses as a percentage of revenue, so the lower the number, the better. The operating ratio miss implies lower than expected revenue and profits.
US Xpress guided for a 97.5% adjusted operating ratio for the second quarter after previously calling for a sequential improvement from 95.7%.
The company raised its fiscal 2019 adjusted operating ratio guidance to 95.5-97.5% from 93%. Clearly, an operating ratio that high doesn't leave much room for profits in a business with already thin margins. For comparison, industry leader J.B. Hunt (JBHT) reported a 92% operating ratio in the first quarter.
Chief Executive Eric Fuller said, "The freight market has not exhibited typical seasonal improvement, which we attribute to a combination of trade, industrial production, weather and other factors. In addition, truckload industry capacity has increased year-over-year, as an attractive spot market through the end of 2018 and higher driver pay resulted in incremental trucks and drivers entering the market. The resulting impact on supply and demand has caused revenue per mile and revenue per truck in our Truckload segment to fall below expectations. The change in our guidance is based primarily on the change in freight market dynamics. Importantly, our internal initiatives continue to generate revenue and cost improvement, and we see much room for further operational gains."
The second quarter would represent the fourth consecutive quarter in which the company missed revenue expectations.
US Xpress has a market cap of just under $200 mln. The stock trades at less than 5x EV/EBITDA estimates, below most peers, including $600 mln in debt.
The Dow Jones Transportation Average (DJTA) is strong this session, ignoring the warning from a small player in the sector.
Some of US Xpress's issues could be idiosyncratic, given its relatively small scale, but the company's market commentary shouldn't be ignored.
Transportation stocks have lagged the broader market given the slowdown in the industrial sector. The DJTA is 9% below its peak reached nine months ago and 5% below its highs from late April while the S&P 500 and Dow Jones industrial Average are hitting record highs as expectations for a rate cut from the Federal Reserve at the end of the month force underexposed money managers to chase the market higher.