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Pay Close Attention to Truckload Carriers’ Operating Margins

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Operating margins of truckload carriers

Previously, we looked at some changes in 2Q16 revenues for some of the major truckload carriers. In this part, we’ll examine their operating margins. You should focus particularly on operating margins in the transportation space.

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Heartland Express: The leader in operating margins

As you can see in the above graph, Heartland Express (HTLD) enjoys the highest operating margins. The company’s margin range of 15%–19% is the highest in our peer group in this series. However, we should also note that in 2Q16, the gap between HTLD’s operating margin and other carriers’ operating margins declined substantially. The main reason behind the decline in HTLD’s operating margin in 2Q16 is the 16.1% steep decline in revenues compared to a 12.6% decline in operating expenses.

Landstar System (LSTR) has the lowest operating margin of 7%–9% in our group. An 11.8% rise in insurance and claims expenses in 2Q16 led to its fall in operating margins. Since the company is an asset-light provider of integrated transportation management solutions to its customers, purchased transportation costs represent 75%–80% of its revenues, unlike other carriers. This is the main reason that LSTR has the lowest operating margins in our group.

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JB Hunt Transport Services (JBHT), an industry leader, has an operating margin range of 10%–11%. It’s important to note that the spread in JBHT’s 2Q15 and 2Q16 operating margins has been much less. The company’s improved network operations, lower maintenance costs, and increased contract pricing have led to the rise in margins.

The change in operating margins

Although we can ignore a small negative change in operating margins, we do need to pay attention to the spread of contraction or expansion of those margins. In the above graph, Werner Enterprises’ (WERN) and Heartland Express’s (HTLD) operating margins have contracted significantly.

For WERN, the margin contraction was 3.8% in 2Q16. The decline in WERN’s revenues in 2Q16 was 6.7% against a 2.8% decline in operating expenses in the same quarter. An 18.8% rise in rent and purchased transportation expenses negatively impacted the decline in operating expenses in 2Q16.

But in the current soft freight environment, Knight Transportation (KNX) has been able to maintain its operating margin. It was 13.8% in the second quarter of 2016, the same as 2Q15.

ETF holdings

Transportation and logistics companies form part of the industrial sector. Major US railroads and airlines represent 5.5% and 4.9%, respectively, of the portfolio holdings of the iShares US Industrials (IYJ).

In the next part of this series, we’ll assess the impact of fuel cost changes on the operations of trucking companies.

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