Expanding High-Service Dedicated Fleet Will Strengthen Future Performance

Key Takeaways

• Covenant Logistics focuses on margin improvement and profitability by expanding their Dedicated fleet and optimizing their Expedited segment.
  
• Targeted growth in Managed Freight, Warehousing, and improved pricing in the recovering freight industry will drive revenue and earnings growth.
  
• Prolonged cost headwinds and operational challenges could pressure Covenant Logistics' net margins and financial stability across multiple business segments.

Catalysts

Provides transportation and logistics services in the United States.

• The company's strategy to focus on expanding its Dedicated fleet, particularly in high-service requirement areas, suggests potential revenue growth and improved profitability, as it aims for more consistent above-market returns.
  
• Covenant Logistics plans to exit less profitable business and add more profitable avenues in its Expedited segment, indicating a focus on margin improvement through rate increases, which is expected to positively impact net margins and earnings.
  
• The company’s Managed Freight segment is targeting growth through profitable revenue from new customers and optimizing costs, aiming for mid-single digit margin goals, which will support overall margin expansion and earnings growth.
  
• Warehousing showed significant improvement in operating profit and is expected to grow through a robust organic growth pipeline and cost management, which is likely to contribute positively to future revenue and operating income growth.
  
• Covenant's expectation of improved pricing year-over-year due to a recovering freight industry presents a potential catalyst for enhancing revenue and net margins across various segments as contracts renew throughout 2025.

Covenant Logistics Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Covenant Logistics Group's revenue will grow by 5.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.1% today to 8.3% in 3 years time.
• Analysts expect earnings to reach $110.0 million (and earnings per share of $3.59) by about January 2028, up from $35.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.0x on those 2028 earnings, down from 21.4x today. This future PE is lower than the current PE for the US Transportation industry at 29.9x.
• Analysts expect the number of shares outstanding to grow by 5.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.51%, as per the Simply Wall St company report.

Covenant Logistics Group Future Earnings Per Share Growth

Risks

• The Dedicated segment underperformed due to customer shutdowns, volume reductions, and higher operational costs, which could negatively impact revenue and net margins if these issues persist.
  
• Prolonged cost headwinds, including higher driver wages, claims expenses, and operations maintenance, can pressure net margins and earnings.
  
• The specialized Dedicated business may face near-term margin pressures from start-up costs and a weak poultry production forecast for 2025, impacting profitability.
  
• The Managed Freight segment's current margin improvements may not carry into 2025, which could affect earnings if not offset by new profitable revenue streams.
  
• Increased interest expenses from higher debt levels and potential volatility in the market for new and used equipment could impact net margins and financial stability.

Valuation

• The analysts have a consensus price target of $35.33 for Covenant Logistics Group based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.3 billion, earnings will come to $110.0 million, and it would be trading on a PE ratio of 12.0x, assuming you use a discount rate of 7.5%.
• Given the current share price of $28.64, the analyst's price target of $35.33 is 18.9% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.