ArcBest income up 22.5% in third quarter, up 43.4% year-to-date

Improving margins by shedding unprofitable accounts and a better freight market helped ArcBest beat third-quarter earnings expectations. The company missed on the revenue estimate and Stifel analysts put a hold rating on ArcBest shares, citing “valuation and execution concerns” and upcoming union negotiations.

Adjusted third quarter income was $15.49 million, better than the $12.635 million in the third quarter of 2016. The adjusted earnings per share of 59 cents beat the 58 cents per share consensus estimate of 11 analysts who follow the company. Revenue during the quarter reached $744.28 million, also better than the $713.923 million in the same quarter of 2016. The consensus revenue estimate was $750.51 million.

Shipments and tonnage during the quarter declined, but a better pricing environment allowed the company to boost revenue per shipment. Shipments declined 3.7% to 1.315 million compared with the same quarter of 2016. Tonnage per day fell 5.2% to 788,228. Billed revenue per shipment was up 4.9% to $389.79, and billed revenue per hundredweight – a standard metric in the industry – rose 6.6% to $32.53.

“Our expedited business was particularly strong, and on the asset-based side, we continue to make progress on the implementation of our space-based pricing initiative, which took effect August 1,” ArcBest Chairman, President and CEO Judy McReynolds said in the earnings report. “While we experienced some negative effects in our asset-based business from hurricanes in the southern U.S. and Puerto Rico, customers seeking total logistics solutions and guaranteed capacity are increasingly looking to ArcBest to fulfill their supply chain needs.”

The company reduced expenses by using less purchased transportation and improving margins through “purposeful reductions” – aka, cutting marginally profitable customers – in the ABF Freight business. ABF, a less-than-truckload carrier, is the company’s largest subsidiary and one of the nation’s largest LTL carriers.

“On the expense side, costs were reduced in a number of areas through cost management efforts including lower linehaul costs influenced by our optimization technologies and reductions in purchased transportation. However, these cost reductions were offset by reduced pickup and delivery productivity, higher rental costs and increased health, welfare and pension expenses for union employees,” noted the earnings report.

For the first three quarters of 2017, ArcBest posted net income of $24.372 million, ahead of the $16.996 million during the same period of 2016. Total revenue during the first three quarters was $2.115 billion, ahead of the $2.012 billion in the same period of 2016. Shipments per day during the first three quarters are up 2.8% and total tonnage shipped is down 2%.

ANALYST INPUT
Trucking/transportation analyst Jason Seidl of Cowen and Co. put a hold on ArcBest shares citing a reduction – down 10 cents to $1.25 – in the earnings per share estimate for 2017.

“Our 2017 estimates already reflect 6% improvement in revenue [per hundredweight] and another modest improvement in 2018,” Seidl noted.

David Ross, the lead industry analyst with Stifel, also issued a hold – which indicates investors should not buy but hold the shares they have – on ArcBest shares in an investor note posted Friday (Nov. 3). Ross said the asset-light divisions missed estimates on revenue and margins, and overall, ArcBest’s operating ratio is “one of the worst in the industry.”

“While a strong case lies ahead for the LTL industry in 2018, we remain on the sidelines with ABF due to valuation and execution concerns,” Ross noted.

He also noted the company’s contract with the International Brotherhood of Teamsters expires in March 2018, and negotiations may not be smooth.

“This will be interesting, since the company has not given the Teamsters back what they implicitly promised in the form of bonuses, as operations have continued to underperform. Will the union want wage and benefits raised more than industry average [particularly when industry average increases are rising]?” Ross wrote. “We see more downside risk than upside from the current union contract negotiations, because why would the union have to give anything up to a healthy company going into what should be a better market in 2018?”

ArcBest shares (NASDAQ: ARCB) closed Friday at $33, up 70 cents. During the past 52 weeks the share price has ranged between $34.25 and $16.95.

SEGMENT FINANCIALS
• ABF Freight
Revenue
Third-quarter 2017: $517.41 million
Third-quarter 2016: $509 million

Operating income
Third-quarter 2017: $21.769 million
Third-quarter 2016: $18.05 million

Revenue
January-September 2017: $1.496 billion
January-September 2016: $1.434 billion

Operating income
January-September 2017: $33.905 million
January-September 2016: $26.423 million

• Asset-light companies
Revenue
Third-quarter 2017: $235.317 million
Third-quarter 2016: $210.064 million

Operating income
Third-quarter 2017: $8.478 million
Third-quarter 2016: $6.39 million

Revenue
January-September 2017: $640.861 million
January-September 2016: $592.152 million

Operating income
January-September 2017: $16.987 million
January-September 2016: $10.151 million