Knight-Swift Transportation – Continued Mergers & Acquisitions, Continued Growth (NYSE: KNX)

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Knight-Swift Transport (KNX) has been doing well since its mega-deal that dates back to 2017, when Knight Transportation acquired Swift, even though its own company was a bit smaller. Building on strong economic growth and deleveraging, the company recently closed more deals. These deals look compelling as momentum has been very strong in 2021, as it looks like there is still some equity appeal left.

Looking Back – Defining Expectations

My last version of Knight-Swift dates back to Mach 2018, six months after the agreement between the two companies was concluded. Knight shares aggressively surged to $ 35 when the deal was announced in 2017, after which they climbed back to $ 50 in the spring of 2018, with the first signs of integration looking pretty strong.

The rationale was that Knight would discipline Swift to the same level that Knight was operating at. The deal was of course quite ironic. Knight recorded just $ 1.1 billion in sales on which nearly 15% operating margins were reported, while Swift was much higher with some $ 4 billion in sales, but its margins fell. maintained at around 7%.

The deal was expected to generate synergies of $ 150 million by 2019, as achieving synergies is expected to increase earnings from $ 1.30 per share to $ 1.85 per share in 2019, resulting in a real increase as I understood why the shares rose to $ 35 as a result of the announcement. The deal was closed in September 2017, as shares hit the $ 50 mark, with fourth quarter 2017 results showing earnings were already trending to $ 2 per share. The leverage at just under $ 900 million was a very reasonable amount, with EBITDA already moving to $ 800 million.

By setting a roadmap for earnings to rise to $ 2.50 per share in 2019, I thought the valuation of $ 50 per share might be justifiable, but that left no room for error while waiting for the declines.

The dip has come

After being fairly constructive on Knight in 2018, the downside came quickly as stocks fell to $ 30 that summer, ending the year in the mid-twenties. I was filled on some orders and initiated a trade at an average of $ 35, a little too early of course.

The reason is that the momentum has waned in the market. While revenues of $ 5.3 billion, operating income of $ 569 million, and net income of $ 2.36 per share for the year 2018 were quite strong, and in line with my expectations the market was about to reverse. 2019 sales fell to $ 4.84 billion, as operating profits fell to $ 427 million as profits fell to $ 1.80 per share, partly offset by some buybacks from actions. Net debt has already been reduced to $ 500 million, but the company needed a reorganization to combat intense competition and declining demand as well as increasing online supply.

Before the pandemic, the company was geared towards a modest recovery for the year 2020, with earnings per share ranging between $ 2.00 and $ 2.15 per share. That was of course before the pandemic, as a stronger second half meant that the revenue decline of just 3.5% was quite modest, with annual sales of $ 4.67 billion. Operating profit fell from $ 427 million to $ 564 million, with lower fuel bills being a major contributor.

Amid a continued decline in the number of shares and a marked improvement in margins, earnings fell from $ 1.80 to $ 2.40 per share, with adjusted earnings reaching $ 2.73 per share. Net debt was reduced to a minimal $ 300 million, with EBITDA improving to $ 1.1 billion.

The forecast for 2021 called for earnings to improve to $ 3.30 per share on an adjusted basis. With stocks trading in the mid-1940s early in the year, it goes without saying that the multiples weren’t that demanding.

Strong recovery

While the original forecast for 2021 was quite strong, the company has only seen new momentum since the start of the year. Following the first quarter earnings report, Knight raised the midpoint of the annual forecast to $ 3.525 per share. The forecast was further raised to $ 3.975 per share alongside the release of second quarter results as it gives management some confidence with the company announcing a big deal just ahead of this report.

In July 2021, Knight announced the purchase of AAA Cooper Transportation, an LTL carrier that is expected to add some $ 780 million in revenue, $ 140 million in EBITDA and $ 80 million in operating revenue. The deal was worth $ 1.35 billion, 1.7 times sales and nearly 10 times EBITDA. Following the third quarter earnings report, Knight even raised the forecast to $ 4.525 per share, well above the original forecast for the year.

Net debt jumped to $ 1.35 billion, following the AAA deal. EBITDA already stood at $ 1.05 billion for the first nine months of the year, making this leverage around 1x, still very manageable as EBITDA for 2021 will likely exceed net debt.

This pushed stocks higher towards the $ 60 mark in November, and stocks are now trading at $ 58 per share. That values ​​equity at $ 9.7 billion, or the entire company at $ 11 billion. Such a valuation equates to about twice the sales, or indeed a little less with revenues probably estimated at around $ 5.7 billion without the AAA deal, and therefore $ 6.5 billion with that deal, for a sell multiple of 1.7 times. Take advantage of likely trends around $ 1.5 billion per year, which implies Knight is trading around 7 times EBITDA.

Just before the end of the year, another deal was announced. Knight-Swift announced the purchase of Midwest Motor Express, a full transportation service provider. The purchase price of $ 150 million translates to a sale multiple of 1.1 times based on revenue of $ 137 million. That said, the company is quite profitable as the contribution of $ 27 million to EBITDA is less than 6 times, while the contribution to operating income of $ 16 million reveals a multiple of less than 10 times paid over. This measure. This means that at least six cents of increase in earnings per share is expected, with more to come after integration.

Final thoughts

With profits now well over $ 4.50 per share, the current multiple is only 13 times. This is a modest estimate, as the leverage effect only occurs for 1 time the EBITDA, despite a substantial agreement for AAA last summer. Therefore, I think there is a lot to like about Knight, although the margins are above the long term trend. Nonetheless, valuations look reasonable enough here as I don’t have an urgent need to widen the position, but I certainly feel comfortable holding the position.


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