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S&P 500   3,841.94
DOW   31,496.30
QQQ   308.68
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S&P 500   3,841.94
DOW   31,496.30
QQQ   308.68
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S&P 500   3,841.94
DOW   31,496.30
QQQ   308.68
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Covenant Logistics Group (NASDAQ:CVLG) Emerges From Tough Year

Tuesday, January 26, 2021 | Thomas Hughes
Covenant Logistics Group (NASDAQ:CVLG) Emerges From Tough Year

Tough Love For Covenant Logistics Sets It Up For 2021

The trucking, shipping, freight, and logistics industry is booming. Not only is eCommerce driving demand for bulk and final-mile delivery services but falling inventories and rapidly ramping economic activity are too. That’s why it is surprising to see Covenant Logistics Group (NASDAQ:CVLG) struggling so much but then we dug into the details. The company’s execs bit the bullet last year and delivered a much-needed dose of tough love. They trimmed the fat, refocused the businesses, and redeployed capital in a more prudent manner. The efforts were not without cost, both revenue and earnings were impacted, but the end result is one we think you will like. A company set up to deliver profits in 2021.

“During 2020 we strategically repositioned our enterprise around our Dedicated, Expedited, Managed Freight, and Warehousing business units, reduced our fixed overhead and capital deployed in non-core businesses, flattened our management structure, and improved our margins on an adjusted basis. For perspective, our revenue was approximately the same on a fleet that is nearly 18% smaller than the same quarter last year,” said Chairman and Chief Executive Officer, David R. Parker.

The only thing holding the company back now, like others in the industry (and other industries as well) is warm bodies. A shortage of drivers is worsening a shortage of capacity within the industry that is, in turn, driving up costs for recruitment, employment, and retention.

 Mixed Results Belie A Great Quarter For Covenant Logistics

Covenant Logistics delivered a mixed quarter to be sure but you must remember the company underwent a rapid transformation that not only cut into net revenue but incurred costs as well. So, the $225.23 million in revenue is down -2.3% YOY and short of the consensus estimate by 1.5% but there are mitigating factors. Not only were some of the company’s underperforming assets cut loose but the shortage of drivers also caused a 5% reduction in weekly tractor miles. That’s a lot of lost revenue and the company still saw a 1.5% increase in revenue from freight.

Moving down to the bottom line, the adjusted EPS of $0.61 missed the consensus by a penny but the GAAP earnings were a real shocker. The GAAP loss of $1.50 missed the consensus by $2.10 but can be attributed to the $48 million charge for restructuring as well as a $33 million loss from discontinued operations. The takeaway is that, while net consolidated revenue shrank and GAAP earnings are in the dumper, the core operating business grew, the gross and operating margins expanded, and the leaner company is leveraged for profit-growth in 2021.

Looking forward, the company forecasts lingering headwinds in the form of employment but sees a strong 2021 ahead. “Taking into account the commercial and cost environment, we expect results for the first half of 2021 will significantly exceed the prior year’s adjusted results for the comparable period,” continued Mr. Parker.

Covenant Logistics Is An Undervalued Trucker Ready To Run

Covenant Logistics is an undervalued trucker no matter how you look at it. The company is set to at least meet or exceed its consensus forecasts for 2021 and is only trading at 7.5X earnings while others in the group are trading nearly twice that valuation. Old Dominion (NASDAQ:ODFL), the highest valued of the bunch is trading at 30X its earnings while J.B. Hunt (NASDAQ:JBHT) is closer to 20. Covenant doesn’t pay a dividend but that doesn’t equate to the huge discount, Old Dominion is only yielding about 0.25% and J.B. Hunt isn’t much better when it comes to yield.

Technically speaking, shares of CVLG are down hard in early trading but setting up a nice buying opportunity. The price action is down under the pressure of knee-jerk selling more than anything else and the buyers are already stepping in. Support is near the $14.25 level, if that fails I would start to get worried. Until then, the outlook for growth support upwards movement in the stock over the short to long-term.

Companies Mentioned in This Article

CompanyMarketRank™Current PricePrice ChangeDividend YieldP/E RatioConsensus RatingConsensus Price Target
Covenant Logistics Group (CVLG)1.7$19.66flatN/A-20.91Buy$28.00
Old Dominion Freight Line (ODFL)1.9$219.85flat0.36%41.72Hold$210.36
J.B. Hunt Transport Services (JBHT)2.0$155.63flat0.72%33.47Buy$149.20
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