Earlier, we discussed the 3Q16 revenue changes for the major truckload carriers under review in this series. Now, we’ll review their operating margins.
Higher operating margins create room for higher earnings per share (or EPS), and vice versa. For this reason, investors should keep an eye on direction changes in road carriers’ operating margins.
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A look at the above chart suggests that Knight Transportation (KNX) enjoys the highest operating margin. However, KNX’s 3Q16 margin fell 230 basis points to settle at 13.2% compared to 15.5% year-over-year. While KNX’s 3Q16 revenue fell 6.5%, the company’s operating expenses fell less than its revenue, by 4% in the same quarter.
The company with the second-highest margin is Heartland Express (HTLD). Heartland’s operating margin has typically ranged between 13% and 16% in recent quarters. Importantly, the company was able to maintain its operating margins at 13.3% in 3Q16, compared to 13.6% in the corresponding quarter a year ago.
Werner Enterprise (WERN) reported the biggest contraction in its operating margin in 3Q16. The company’s margin contracted 4% to 5.7% in 3Q16, compared to 9.7% in 3Q15. For WERN, while its revenue fell 4.8% in 3Q16, its operating expenses fell only 0.4%. Higher insurance and claims along with increased rent and purchased transportation expenses resulted in its operating margin contraction.
Swift Transportation’s (SWFT) operating margin settled at 3.9% in 3Q16, compared to 7% in 3Q15. A 3.3% rise in employee compensation and the absence of a $4.0 million gain on property disposal caused this margin contraction in 3Q16.
Landstar System (LSTR) reported an operating margin of 7% in 3Q16, almost flat compared to its 3Q15 levels. Since the company is an asset-light provider of integrated transportation management solutions to its customers, purchased transportation costs represent 75%–80% of its revenue, unlike other carriers. LSTR has the lowest operating margin in the group.
J.B. Hunt Transport Services (JBHT), an industry leader, has an operating margin in the range of 10%–12%. In 3Q16, the company’s operating margin contracted 140 basis points to settle at 10.8% on account of higher rent and purchased transportation expenses.
Transportation and logistics companies form part of the industrial sector. Major US railroads and airlines represent 5.8% and 5% of the portfolio holdings of the iShares US Industrials ETF (IYJ), respectively.
Keep reading to learn more about the impact of operating cost changes on the earnings of these major truckload carriers.