Knight-Swift Transportation: Hold Rating Until Earnings Growth Turns Positive

Knight-Swift Transportation's recent Q4 earnings report shows a significant improvement in the company's performance, despite a worsening macro environment and management pulling back on guidance. The report highlights a meaningful rebound in revenue and adjusted operating income, leading to a reiteration of a hold rating until earnings growth inflects upwards.

Knight-Swift Transportation Holdings Inc (NYSE: KNX) reported a significant rebound in its Q4 earnings, demonstrating resilience despite a worsening macroeconomic environment and management pulling back on guidance. The company's latest financial report highlights a meaningful improvement in revenue and adjusted operating income, leading to a reiteration of a hold rating until earnings growth inflects upwards.

The report shows that Knight-Swift's revenue excluding fuel surcharge grew by 1.9% year-over-year (YOY), driven primarily by strong performance in the less-than-truckload (LTL) segment, which experienced a 28.4% YOY growth. The truckload (TL) segment, while still soft, showed early signs of stabilization, with a 2.7% YOY decline in revenue. Adjusted operating income improved by 17.2% YOY, with the company's adjusted earnings per diluted share increasing by 61.5% YOY to $0.21 [3].

The company's truckload segment saw a 260 basis points (bps) YOY improvement in adjusted operating ratio (OR) to 94.6%, primarily driven by solid execution in reducing cost per mile. The U.S. Xpress integration also contributed to this improvement. The LTL segment, however, saw a deterioration in adjusted OR, declining by 720 bps YOY to 93.1%, due to integration expenses and network expansion costs [2].

Knight-Swift's adjusted EPS of $0.35 beat expectations, and the company reinstated forward guidance, expecting 3Q25 EPS of $0.36-$0.42. This reinstatement of guidance is a positive sign, indicating a clearer picture of the company's financial outlook [2].

Despite the improvements, Knight-Swift's asset-light segments, including logistics and intermodal, continue to show weakness. Logistics load count fell 11.7% YOY, and intermodal volumes were down 12.4% YOY, with the latter still posting an operating loss. The company's valuation has improved, with the forward price-to-earnings (PE) ratio increasing from ~18x in April to 22x today. However, further earnings growth will depend on the company's ability to support TL segment growth with both volume and pricing, and to scale LTL segment revenue fast enough to offset near-term increases in adjusted OR [2].

In conclusion, Knight-Swift Transportation's Q4 earnings report shows a significant improvement in the company's performance. However, the company's stock remains at a 22x forward PE ratio, which may have limited upside potential unless the company can demonstrate pricing strength in the TL segment and margin stabilization in the LTL segment. Until then, a cautious stance is recommended.

References:
[1] https://investor.knight-swift.com/overview/default.aspx
[2] https://seekingalpha.com/article/4805849-knight-swift-transportation-stock-reiterate-hold-until-earnings-growth-inflects-upwards
[3] https://finance.yahoo.com/news/knight-swift-transportation-holdings-inc-071451153.html