The Value Deepens In Knight-Swift Transportation Knight-Swift Transportation (NYSE: KNX) is one of the nation's largest trucking outfits and one bent on growth. The company has been actively acquirin...

Knight-Swift Transportation Is A Buy On Post-Earnings Weakness

Knight-Swift Transportation (NYSE: KNX) is one of the nation's largest trucking outfits and one bent on growth. The company has been actively acquiring businesses across the country for the past few years and that can be seen in the revenue. Surprisingly, the shares are moving lower in the wake of what we consider to be a very solid earnings report but that is, ultimately good news. The move lower should be viewed as a buying opportunity by long-term-oriented investors looking for high-quality dividend growth stocks. Trading it only 13X earnings, the stock represents a deep value relative to the broad market and competitor JB Hunt. JB Hunt is trading about 24X its earnings suggesting Knight-Swift Transportation is ripe for a multiple expansion.

Knight-Swift Transportation Falls On Better-Than-Expected Results

Knight-Swift Transportation reported a strong second quarter and one supported by strength in all segments. Systemic high demand for Freight and Logistics services are driving not only an increase in load count but also in revenue per load. The company reports $1.31 billion in net revenue for a gain of 23.6% over last year. The revenue beat the consensus by 760 basis points but it is admittedly versus an easy comp in last year's data. The company experienced a decline in revenue in last year's second quarter so the 2-year comp of up 5.6% is relevant here. Fuel surcharges have also come back into play and added 200 basis points to the growth.

On a segment basis, the company's two high-growth segments led with gains of 142% and 40%. The Logistics segment grew 142% to $162 million or 12.36% of revenue while the Intermodal segment grew 40% to $115 million or 8.8% of revenue. The company's core trucking segment grew 8% on a 10% increase in revenue per tractor offset by a 2% decline in the number of tractors in use. Revenues would likely have been higher if the company could fill much-needed driver seats.

Moving down to the bottom line, the company's efforts to achieve internal efficiencies and synergies with acquired businesses helped improve operating ratios in all segments. This helped drive the GAAP and adjusted EPS above consensus estimates and set the company up for continued share repurchases and dividend increases. The company paid $84 million in dividends and repurchases over the past quarter, out of a free cash flow of $339 million, so there is ample room for the company to continue increasing shareholder returns as well as the company's value.

Knight-Swift Transportation Could Deliver A Big Dividend Increase

Knight-Swift Transportation doesn't pay a large dividend in terms of the yield but it is a grand dividend in terms of its safety and outlook for sustained growth. The company yields about 0.83% with the stock trading near $46.75 but the payout ratio is below 10% and there is already a history of dividend increases. The compound annual growth rate over the past few years is running near 7% which we think is a highly sustainable figure and one that may even get larger in the coming years. Looking at the balance sheet, it's a fortress so there's no worry there, free cash flow is ample, and increased capital returns are certainly expected if not guaranteed.

The Technical Outlook: Knight-Swift Pulls Back To Support

Shares of Knight-Swift fell nearly 5% in early action but appear to be confirming support above $46. The caveat is that this candle has yet to close so the price action may look much different at the end of the day. Assuming support holds, we would be looking for price action to move back above the short-term moving average before buying but do think this stock is a great value regardless. Longer-term, we see the stock retesting the all-time highs above $50 by the end of the year and probably moving higher.

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