Werner Enterprises (WERN) is a trucking company that ships consumer goods, groceries, and industrial parts. The firm is one of the top 5 truckload carriers in the U.S., with $2.1B in revenues in 2007. As a truckload carrier, Werner sells an entire trailer-load to a single customer, as opposed to less-than-truckload firms who consolidate freight from several customers into one trailer-load. Besides its primary trucking business, Werner earns ~14% of its revenue from truck brokerage, intermodal shipping, and international freight forwarding services.
As a transportation company, Werner’s revenues are closely tied to the overall health of the economy. The company’s focus on retail and grocery products (73% of goods shipped) limits its exposure to the housing and auto markets. However, lower demand in these two hard-hit industries have led competitors to enter Werner’s core markets, looking for business. Another concern is rising fuel prices, which resulted in an additional cost of $23M to the company in 2007, only $14.9M of which it was able to recover through fuel surcharge revenues.
The economic slowdown of 2007 has led to a consolidation of the trucking industry. Industry analysts estimate that nearly 1,000 small carriers went bankrupt in the first quarter of 2008 under the strain of record fuel prices, lower freight volumes, and the increased cost of capital needed to comply with new environmental regulations. Given the tougher economic conditions, Werner’s position as one of a handful of asset-based trucking firms with a debt-free balance sheet gives it an advantage over competitors who have to divert some cash flow to repay their debts.
Werner operates two business segments: Truckload (86% of revenues) and Value Added Services (14% of revenues). Revenues totaled $2.1B in 2007, a 0.5% decrease from 2006. 2007 was a tough year for the shipping industry, which was hampered by a weak economy and record fuel prices. Higher fuel prices resulted in an additional cost of $23M to the company in 2007, only $14.9M of which it was able to recover through fuel surcharge revenues. Additionally, Werner faced excess truck capacity because it had bought a large number of new trucks in 2005 and 2006 to postpone the purchase of pricier trucks required under the 2007 EPA engine emissions standards. These factors contributed to Werner’s declining margins in 2007.
While a number of Werner’s competitors have chosen to focus on narrow service offerings, Werner offers a range of trucking options including medium- and long-haul dry van, temperature-controlled vans, expedited, flatbed, and dedicated contract service (when trucking firms contract out a portion of their equipment and employees to one client for a specified time). WERN is expanding its dedicated contract services, which utilizes 40% of the firm’s tractor fleet. The company’s top 50 customers consist of 46% retail and consumer products, 27% grocery products, 18% manufacturing/industrial, and 9% logistics and other.
Werner’s VAS segment is a non-asset based transportation and logistics provider. This division does not have its own shipping fleet, but contracts with third-party carriers to move goods. VAS operations include truck brokerage, freight management, intermodal shipping, and international freight forwarding. This segment also includes Werner Global Logistics, formed in 2006 and licensed to operate as an ocean transport intermediary, freight forwarder in China (where the company has established a wholly owned foreign entity in Shanghai), and third-party air carrier.
As a shipper of consumer products and retail merchandise among other things, WERN relies on a healthy economy to keep goods moving about the country. A slowing economy and low consumer demand will cause a total volume drop in shipments that can hurt Werner’s earnings. The company’s focus on retail and grocery products (73% of goods shipped), limits its exposure to cyclical sectors like the housing and auto markets. However, lower demand in these cyclical industries cause competitors to seek additional business in Werner’s core markets. Additionally, many customers use a bidding system, which tends to keep prices fairly competitive. For instance, when Wal-Mart Stores (WMT) needs freight shipped, it asks several shipping firms to submit how much payment they are willing to accept. The lowest bid usually wins the contract. When shipping volume decreases in a weakening economy, small competitors bid down prices in order to win loads so that they can cover the cost of their tractors.
Since 2004, diesel prices have more than tripled from $1.50 per gallon to $4.72 per gallon in May 2008 . Like most of its competitors in the transportation industry, Werner determines shipping rates by charging a base rate plus or minus a change in diesel prices. However, this fuel surcharge is not always fully and immediately transferable to the customer (WERN has historically been able to recover ~70-90% of fuel price increases). Higher fuel prices resulted in an additional cost of $23M to the company in 2007, only $14.9M of which it was able to recover through fuel surcharge revenues. In order to hedge against rising fuel costs, Werner has expanded its dedicated contract services (when trucking firms contract out a portion of their equipment and employees to one client for a specified time), which comprise 40% of the firm’s tractor fleet. Compared to other types of truckload shipping, dedicated contract services are less sensitive to fuel price volatility because clients pay a fuel surcharge for all miles driven, regardless of whether the trucks are empty, off-route, or idling.
The transportation industry is subject to a number of state and federal rules on issues such as insurance requirements, environmental standards, safety requirements, etc. In 2004, the Department of Transportation reduced the amount of time that drivers can spend behind the wheel. And in 2002, the Environmental Protection Agency instituted new guidelines designed to reduce diesel truck emissions by 2010. The latest stage in this process came into effect January 2007, after which all newly manufactured truck engines have to comply with a set of more restrictive engine emission requirements. Trucks manufactured with the new engines have a purchasing price ~$5,000 to $10,000 higher than older models, are less fuel-efficient, and have higher maintenance costs. To delay the cost impact of these new emission standards, Werner purchased significantly more new trucks in 2005 and 2006 than it normally buys each year. This allowed WERN to postpone purchases of trucks with the 2007-standard engines until 2008.
The driver market is the tightest it has been in 20 years, with turnover rate exceeding 100% in some large trucking companies. According to the American Trucking Association, the long-haul segment of the trucking industry faced a national shortage of 20,000 drivers in 2007, a number that will swell to 111,000 by 2014. This shortage will increase the costs of trucking companies like WERN as they struggle to attract and retain drivers.
Werner’s top 10 customers accounted for 40% of 2007 revenue (the firm’s largest client, Dollar General (DG), comprised 8%), so customer concentration risks exist for WERN. The loss of a major client will have a significant impact on the company's balance sheet.
Werner competes with a range of regional and national transportation and logistics companies. The trucking industry is highly fragmented because of low barriers to entry. There are roughly 360,000 trucking companies (96% operate fewer than 28 tractors and 82% operate fewer than 6) .
Market share figures assume trucking industry revenue of $357.7B in 2006. Several of the listed companies earn a portion of revenues outside of transporting goods, such as warehousing and logistics. These instances usually account for less than 10% of the total sales.
Note: A parenthesis around the figure indicates a negative number, i.e. (5.4%) is a decrease of 5.4%.
|Company||Revenue (billions USD)||Net Income (millions USD)||1 Year Sales Growth||Operating Ratio||# of Tractors||# of Trailers||Market Share|
|YRC Worldwide (YRCW)||$9.6||($638)||(3.0%)||97.6%||26,137||86,462||2.7%|
|Conway Inc (CNW)||$4.4||$147||3.9%||94.0%||45,378 (tractors and trailers)||1.2%|
|J.B. Hunt Transport Services (JBHT)||$3.5||$213||4.9%||75.7%||10,308||60,614||1.0%|
|Landstar System (LSTR)||$2.5||$110||(1.1%)||92.8%||8,603||14,333||0.7%|
|Arkansas Best (ABFS)||$1.8||$57||(2.4%)||95.0%||0.5%|
|Old Dominion Freight Line (ODFL)||$1.4||$72||9.5%||90.7%||5,016||19,513||0.4%|
|Universal Truckload Services (UACL)||$0.7||$18||6.0%||95.9%||36,000||2,900||0.2%|
|Heartland Express (HTLD)||$0.6||$76||3.5%||78.1%||0.2%|
|Knight Transportation (KNX)||$0.6||$63||5.8%||83.0%||3,527||8,809||0.2%|