巴克莱美股2018年航空运输业深度展望barclays north america transportation deep dive freight outlook

NorthAmericaTransportation

DeepDiveon2018FreightOutlook INDUSTRYUPDATE

EquityResearch

2October2017

Themarketisclearlybullishonfreightfundamentals,withmostlargetruckingstockstradingnearlyoneortwostandarddeviationsabovehistoricallevels.M&Aaccretion,improvingdemand,lowersupplyandpotentialimpactfromdomesticUSregulations(bothtaxpolicyandindustryissuessuchasELDs)haveledtomaterialstockgainsacrossthemostlysmallandmidcapfreighttransportationvertical(seeourDebatingFreightnotefordetailsonELDregulations,‘LoggingOntoTruckingWeek’published21Mar17).Aswenotedlastmonth,whilewegenerallyagreewiththefundamentalenthusiasmheadinginto2018,weseegreatervalueopportunitiesinlargecaptransports,aslowerrelativevaluationsandequallycompellingearningsoutlookslikelyprovideamorefavorablerisk-rewardspreadatpresent(see‘ValueinLargeCapasPeakArrives’published11Sep17).Nonetheless,inthisnoteweattempttoprovideobjectiveanalysisofkeyrevenue,costandearningsdriversacrossourfreighttransportationcoverage.

RobustrevenuegainsandM&Aaccretiontargetscriticaltoachievingnearly30%expectedtruckingearningsgrowthin2018.Freightpricinghasimprovedin2017,followingseveralyearsofanoversuppliedmarket.Wecurrentlymodelaroughly3%increaseinfreightratesnextyear,whichalsoshouldsupportagenerallyrobustpricingenvironmentforalloftransportsgiventheoutsizednatureofthetruckingmarket.Further,marketenthusiasmformarginimprovementfollowingM&AtransactionsatKNX,HUBGandHTLDaddtotherobustearningsoutlook.

Onthecostfront,driverpayishistoricallycorrelatedwithpricing,butweexpecttepidinflationin2018tosupportcyclehighincrementalmargins.WeremindinvestorsthatthepureTruckLoad(TL)businessdoesnothavemuchoperatingleveragegivenhighdriverturnoverandtheneedtopayhigherwagesduringperiodsofexpansion.Nonetheless,weexpectcostcontrolshouldsupportrobustmargingainsin2018onexpectedtoplinegrowth.

Asset-lightbrokerageandforwardingbusinesseslikelytofacecontinuedmargincompression;intermodalrateincreasescouldbelaggedbutsupportiveofstronger2018outcomes.Whatisgenerallygoodfortheasset-basedfreightprovidershashistoricallyledtolowermarginsfortheasset-lightbrokers.Givenpriorperiodsofcyclicalmargincompressionhavelastedmorethantwoyears,weexpectedcontinuedheadwindsformidcapstocksCHRWandEXPD.

FollowingtherecentclosureofthemergerbetweenTLcarriersKnightTransportationandSwiftTransportation,wearepublishingaproformamodelandestimatesforKnight-SwiftTransportationHoldings(KNX).Weforecast2018Eand2019EEPSof$1.60and$1.85,respectively.Pleaseseethenoteforadetailedlookatourassumptions.Ourpricetargetis$37.

Continuedonpage3…

NorthAmericaTransportation

POSITIVE

Unchanged

Forafulllistofourratings,pricetargetandearningschangesinthisreport,pleaseseetableonpage2.

NorthAmericaTransportationBrandonR.Oglenski

+12125268903

brandon.oglenski@

BCI,US

VanKegel

+12125265019

van.kegel@

BCI,US

MatthewWisniewski

+12125265143

matthew.wisniewski@

BCI,US

BarclaysCapitalInc.and/oroneofitsaffiliatesdoesandseekstodobusinesswithcompaniescoveredinitsresearchreports.Asaresult,investorsshouldbeawarethatthefirmmayhaveaconflictofinterestthatcouldaffecttheobjectivityofthisreport.Investors

shouldconsiderthisreportasonlyasinglefactorinmakingtheirinvestmentdecision.

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SummaryofourRatings,PriceTargetsandEarningsChangesinthisReport(allchangesareshowninbold)

Company Rating

PriceTarget EPSFY1(E) EPSFY2(E)

OldNew

Date

Price

Old

New

%ChgOldNew%ChgOldNew%Chg

NorthAmericaTransportation PosPos

C.H.RobinsonWorldwideInc.(CHRW)

EW

EW

29-Sep-2017

76.10

67.00

70.00

4

3.353.22

-4

3.603.50

-3

ExpeditorsIntl.ofWashingtonInc.(EXPD)

OW

OW

29-Sep-2017

59.86

58.00

63.00

9

2.352.30

-2

2.652.60

-2

HubGroupInc.(HUBG)

UW

UW

29-Sep-2017

42.95

38.00

40.00

5

1.601.60

-

2.102.10

-

JBHuntTransportServicesInc.(JBHT)

EW

EW

29-Sep-2017

111.08

97.00

105.00

8

3.703.65

-1

4.304.30

-

Knight-SwiftTransportationHoldings(KNX)

UW

UW

29-Sep-2017

41.55

33.00

37.00

12

0.981.20

22

1.251.60

28

WernerEnterprisesInc.(WERN)

EW

EW

29-Sep-2017

36.55

25.00

32.00

28

1.201.25

4

1.301.45

12

XPOLogisticsInc.(XPO)

OW

OW

29-Sep-2017

67.78

65.00

75.00

15

1.931.93

-

2.822.83

0

Source:BarclaysResearch.SharepricesandtargetpricesareshownintheprimarylistingcurrencyandEPSestimatesareshowninthereportingcurrency.FY1(E):CurrentfiscalyearestimatesbyBarclaysResearch.FY2(E):NextfiscalyearestimatesbyBarclaysResearch.

StockRating:OW:Overweight;EW:EqualWeight;UW:Underweight;RS:RatingSuspendedIndustryView:Pos:Positive;Neu:Neutral;Neg:Negative

DeepDiveon2018FreightOutlook

Inthisnotewelayoutour2018assumptionsforour‘freight’coverageandreviewthekeydriversoftruckload(TL,incl.KNX-SWFT,WERN,HTLD),intermodal(JBHT,HUBG),andasset-lightbrokerage&forwarding(CHRW,EXPD).WealsoprovideourestimatesforXPO.

Elevatedsmallcaptransportationvaluationsreflectoptimismforfreightoutlook(Page4,Figures1-4).Truckloadstockscurrentlytrade1-2standarddeviationsabovehistoricallevels,withintermodalalsoelevatedwhilethemidcapasset-lightstocksarenearaverage.

Barclay’sfreightEPSestimatesinlinewithconsensus,includingM&Atailwind(Page6,Figures5-6).FollowingM&AtransactionsatKNX,HTLDandHUBG,weexpectaverageTLEPStogrow28%,intermodal24%andasset-light11%in2018.WemodelXPOat47%,inlinewithconsensus.Fundamentalsareimprovingforasset-basedbusinesses,particularlytruckloadcarrierswhichweresubjecttoanoversuppliedmarketthelasttwoyears.Marginpressureatasset-lighttransportationprovidersislikelytooffsetsometoplinestrengthinthenearterm.

Organicrevenuegrowthin2018expectedatmid-tohigh-singledigitswithTLratemomentumforecast(Page7,Figure7-10).Raterecoveryinthelargedomestictruckingmarketshouldbenefittoplineexpansionacrossfreight-exposedbusinesses,similartoprioryearswithsignificantrateincreases.Wemodelaverageorganicrevenuegrowthof5%forTL,11%forintermodal,7%forasset-lightand5%forXPO.

Historically,labor(driver)wagesusuallyexpandinlinetoabovepriceincreases(Page9,Figure11-12).Nonetheless,wearemodellingamoresubduedcostoutcomein2018followingtwoyearsofchallengedtruckingmarketeconomics.

Consequently,incrementalmarginsshouldbeaboveaverageforTLcarriersin2018(Page10,Figure13-14).Giventhemagnitudeofmarginpressureoverthepriortwoyears,weexpectTLincrementalstoexceedthehistoricalaverageduringpositiverateenvironments,althoughdriverpayincreasesremainarisk.

Asset-lightmargincontractionlikelytocontinueinnear-term(Page11,Figures15-17).WereviewthehistoricalmargindynamicsforCHRWandEXPD,aswellastherelationshipbetweennetrevenuemargins,earningsandstockperformance.Laggedintermodalpricingandhigher‘buy’ratesarelikelytocapincrementalsforintermodalandasset-lightbusinesses.

Capitalexpendituresmaybehighernextyearforasset-basedproviders,weighingoncashflow(Page13,Figure18-19).Highercapextofundtractorpurchasesandotherequipmentwilllikelylowercashflowacrosstruckloadandintermodalproviders.Nonetheless,weexpectcashflowconversiontoapproach100%ormoreforasset-lightbusinessesCHRW,EXPDandXPO.

DetailedKNX-SWFTproformaassumptionsthrough2019E(Page13,Figure20).Welayoutourtwo-yearassumptionsforthecombinedbusinessrelativetomanagement’sexpectedsynergytargetof$150mmby2019.

QuickthoughtsonHTLD2QearningsandIDCacquisition(Page15,Figure21).

RelativeValuationElevated

Elevatedvaluationsacrosssmallcapfreighttransportationstocksreflectsoptimismforfreightoutlookin2018,withtruckloadstockstradingonetotwostandarddeviationsabovehistoricallevels,intermodalelevatedandasset-lightinlinewithaverage(Figures1-4).

FIGURE1

TLandIntermodalStocksTradingatSignificantPremiumtoHistoricalRelativeMultiples

RelativeValuationbySubsector

(weeklyNTMP/ErelativetoS&P500;a/o9/29/17)/1

Truckloadandintermodaltradesignifcantlyabovenormalrelativemultples

1.56x

x

8x

1.41x

1.30x

1.08x

1.6x

1.5x

1.4x

9

1.3x

1.2x

1.1x

1.0x

0.9x

Integrators Railroads Asset-Light Intermodal TruckloadCurrent 5-yearAvg.

Note:/1TLvaluationexcludesSWFTfollowingmergerannouncementwithKNX;KNXconsensusEPSinterpolatedbetweenannouncementandcloseofmerger

Source:ThomsonReuters;BarclaysResearch

FIGURE2

TruckloadStocksTradingOnetoTwoStandardDeviationsAboveHistoricalAverageRelativeMultiples

TruckloadRelativeP/ERatiosvs.S&P500

HTLDKNX

WERN

SWFT

KNXmaintaineditspremiummultipleafterannouncingSWFTmerger

1.75x (basedonNTMconsensusEPS;st.dev.vs.5-yravg.asof9/29/17)/11.50x

1.25x

1.00x

0.75x

0.50x

Oct-12 Jun-13 Mar-14 Nov-14 Aug-15 Apr-16 Dec-16 Sep-17HTLD KNX WERN SWFT

Note:/1KNXconsensusEPSbetweenmergerannouncementandcloseinterpolatedSource:ThomsonReuters;BarclaysResearch

FIGURE3

JBHTandHUBGCurrentlyTradingLessThanOneStandardDeviationAboveHistoricalRelativeLevels

IntermodalRelativeP/ERatiosvs.S&P500

1.60x

1.50x

1.40x

1.30x

1.20x

1.10x

1.00x

0.90x

(basedonNTMconsensusEPS;st.dev.vs.5-yravg.;asof9/29/17)

JBHT

+0.6σ

HUBG

+0.8σ

Oct-12 Jun-13 Mar-14 Nov-14 Aug-15 Apr-16 Dec-16 Sep-17

JBHT HUBG

Source:ThomsonReuters;BarclaysResearch

FIGURE4

Asset-LightStocksEXPDandCHRWTradingNearAverageRelativeLevels

Asset-LightRelativeP/ERatiosvs.S&P500

1.70x

1.60x

1.50x

1.40x

1.30x

1.20x

1.10x

1.00x

(basedonNTMconsensusEPS;st.dev.vs.5-yravg.;asof9/29/17)

EXPD

+0.1σ

CHRW

-0.2σ

Oct-12 Jun-13 Mar-14 Nov-14 Aug-15 Apr-16 Dec-16 Sep-17

CHRW EXPD

Source:ThomsonReuters;BarclaysResearch

EarningsSettoImprove

M&Aandimprovingfundamentalsforasset-basedbusinessessetthestagefor20%+EPSgrowthacrosstruckloadandintermodal,whilemarginpressurelimitsexpansionforasset-light.OngoingprofitabilityimprovementatXPOcouldcontributetonearly50%EPSgrowth(Figure5).Itisworthnotingthatour2017EJBHTandHUBGEPSestimatesexcludeone-timeitemsthatareincludedinconsensus.Ifweincludedtheseitemsthegrowthrateswouldbeinlinewithconsensusat14%and40%forJBHTandHUBG,respectively.Pleaseseebelowforourestimaterevisions(Figure6).

FIGURE5

CyclicalRecoveryinDomesticTruckingMarketAlongwithRecentM&AShouldSupport20%+EarningsExpansionforAsset-BasedPure-Play’TruckloadCarriersandIntermodalProviders;MarginPressureaHeadwindtoAsset-LightEarnings

Truckload,IntermodalandAsset-LightEPSGrowth

BarclaystruckloadEPSgrowthexpectationsmostlybelowconsensus;HTLDaboveduetolower2017est.

42%

Intermodalestimatesinlineafteraccountingforone-timeexpensesatHUBG

40%

48%

28%

27%

23%

47%

33%

20%

28%

31%

15%

10%

16%

18%

24%

13%

9%

9%

10%

11%

(2018E;Barclaysestimatesvs.consensus)

KNX HTLD WERN TLAvg. HUBG JBHT Intermodal EXPD CHRW Asset-Light XPO

Avg. Avg.

Barclays Consensus

Source:Companyreports;ThomsonReuters;BarclaysResearch

FIGURE6

RevisedEstimatesReflectRecentlyStrongerTruckloadEnvironment,KNX-SWFTMergerandChallengingMarginOutlookfor

‘Asset-Light’Providers

TransportationEPSEstimateRevisions

TL

HTLD

$0.15

$0.14

$0.17

$0.63

$0.63

$0.70

$0.85

$0.85

$0.86

-5%

1%

-1%

-6%

33%

KNX

$0.25

$0.25

$0.30

$0.98

$1.20

$1.21

$1.25

$1.60

$1.71

0%

23%

28%

2%

34%

WERN

$0.31

$0.33

$0.31

$1.20

$1.25

$1.23

$1.30

$1.45

$1.47

5%

4%

11%

14%

16%

IM

HUBG

$0.44

$0.44

$0.40

$1.60

$1.60

$1.49

$2.10

$2.10

$2.09

0%

0%

0%

-30%

31%

JBHT

$0.94

$0.95

$0.99

$3.70

$3.65

$3.86

$4.30

$4.30

$4.46

1%

-1%

0%

-2%

18%

ALight

CHRW

$0.83

$0.82

$0.83

$3.35

$3.22

$3.29

$3.60

$3.50

$3.59

-2%

-4%

-3%

-10%

9%

EXPD

$0.60

$0.60

$0.60

$2.35

$2.30

$2.32

$2.65

$2.60

$2.56

-1%

-2%

-2%

-3%

13%

XPO

$0.58

$0.58

$0.57

$1.93

$1.93

$1.91

$2.82

$2.83

$2.83

0%

0%

0%

92%

47%

Source:Companyreports;BarclaysResearch

TopLineGrowthImproving

GiventhesizeandimpactofthelargedomesticUStruckingmarkethasonfreightpricing,revenueoutcomesacrossTL,intermodalandasset-lightaregenerallycorrelatedwithrateoutcomes.Thissetsupasolidbackdropfortoplinegrowthnextyear(Figures7-10).

FIGURE7

RecentRateRecoveriesHaveLastedRoughlyTwoYears

TLRandATATLRateIndices

(ex-fuel;trailingthreemonthannualch.)

Ratesrecoveredsteadilyfor2yearsfollowingthelasttwodownturns

16%

12%

8%

4%

0%

-4%

-8%

-12%

Jan-04Jul-04Jan-05Jul-05Jan-06Jul-06Jan-07Jul-07Jan-08Jul-08Jan-09Jul-09Jan-10Jul-10Jan-11Jul-11Jan-12Jul-12Jan-13Jul-13Jan-14Jul-14Jan-15Jul-15Jan-16Jul-16

Jan-17

-16%

Source:ATA;TLR;BarclaysResearch

TLR ATA

FIGURE8

Stronger2018RateGrowthShouldProvideaMoreSupportiveEnvironmentforRevenue

Truckload,Intermodal,Asset-LightRevenuevs.TLRRate/Mile

(TLex-fuel;Intermodal,Asset-Lghtgrossrevenue;annualch.)

8%

6%

4%

2%

0%

-2%

-4%

-6%

'05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16'17E'18E

TLRRev/Mile(ex-fuel) TLAvg.(ex-fuel;rhs)

IntermodalAvg.(rhs) Asset-LightAvg.(rhs)

28%

21%

14%

7%

0%

-7%

-14%

-21%

Note:/1excl.EXPD'10,SWFT'11,HUBG'11andHTLD'14;HTLD'18Ebasedonest.organicrevenuegrowthex-IDC;TLR2017EYTD;2018EBarclaysest.TLrateincreasesin2018

Source:TLR;Companyreports;BarclaysResearch

FIGURE9

BasedonExpected3%RateIncrease,WeExpectRevenuetoGrowInLineWithAverageLevelsSeenDuringYearsofPositiveRateGrowth

FreightTopLinevs.TLRRateIndexDuringYearsofPositiveRateGrowth

(avg.since2005;positiverateyearsonly;annualch.)

Intermodal(GrossRevenue)

Truckload(Revenueex-fuel)

TLRRate/Mile(ex-fuel)

Weexpectroughlyavg.TLrateincreasesin2017,leadingtoavg.non-fuelrevenueexpanson

AssetLight(GrossRevenue)

Fuel-inclusiveintermodalandasset-lghtrevenuehistoricallymoredispersed

35%

3.0%

6.3%

6.2%

10.5%

115%

11.1%

7.4%

Avg.'05-'16 2018E Avg.'05-'16 2018E Avg.'05-'16 2018E Avg.'05-'16 2018E

Note:/1excl.EXPD'10,SWFT'11,HUBG'11andHTLD'14;HTLD'18Ebasedonest.organicrevenuegrowthex-IDC;TLR2017EYTD;2018EBarclaysest.TLrateincreasesin2018

Source:TLR;Companyreports;BarclaysResearch

FIGURE10

TopLineGrowthAcrossTruckloadStocksBoostedbyM&AActivity,withOrganicGrowthAcrossFreight-ExposedBusinessesintheMid-toHigh-SingleDigitRange

Truckload,IntermodalandAsset-LightRevenueGrowth

(2018E;Barclaysestimatesvs.consensus;grossrevenueforHUBG,CHRW,EXPD,XPO)

7%

8%

11%

12%

Barcest.organcrevenuegrowthoflegacybusinessex-acquisiton

XPOrevenuegrowthinlinewithotherfreight-exposedbusinesses

124%

19%

16%

5%

11%

7% 5%

KNX/1 HTLD WERN TLAvg./1 JBHT HUBG Intermodal CHRW EXPD Asset-Light XPOBarclays Avg. Consensus Avg./1

Note:/1KNXrevenuegrowthincl.est.proforma2017SWFTrevenuefollowing9/8/17mergerclose;consensusrevenuenotmeaningful;KNXconsensusrevenuegrowthexcl.fromTLavg.

Source:Companyreports;ThomsonReuters;BarclaysResearch

TruckloadCostInflation

Exceedingcostinflation,particularlylaborinflation,ishistoricallychallenginginthetruckloadindustry.Nonetheless,wemodellaborcostpermilegrowthbelowrateincreasesin2018followingadifficultandlengthytwo-yeardownturn(Figures11-12).

FIGURE11

LaborCostsHaveMovedCloselywithRatesThisCycle(>40%R-Sq.),SuggestingSomeRisktoCurrentDriverPayandEBITExpectations

TruckloadNon-FuelRateperMilevs.LaborCostperMile

10%

8%

6%

4%

2%

0%

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

1Q17

2Q17

3Q17E

4Q17E

1Q18E

2Q18E

3Q18E

-2%

(TTM;annualch.;avg.KNXandWERN)/1

Note:/1Rateperloadedmileex-fuelandlaborcostperest.company-ownedmileSource:Companyreports;BarclaysResearch

FIGURE12

CoreTruckloadBusinessOftenSeesUnitCostInflationinExcessofLoadedRateperMileIncreases,AlthoughUtilizationImprovementCanStillDriveMarginExpansion

SpreadofRateperMileLessOpexperMilevs.1-QtrLaggedTL'Core'EBITMargin

(TTM;annualch.;4Q11-pres;avg.KNXandWERN)/1

Unitcostsgenerallyoutpaceunitrevenuein'core'truckloadbusiness,butmarginexpansionpossibleatsmallnegativespreads

(+)MarginCh.(-)MarginCh.

2018E

2H17E

(-)Spread

375bps

TLSegment'Core'EBITMargin

250bps

125bps

0bps

(125bps)

(250bps)

(525bps)

(450bps)

(375bps)

(300bps)

(225bps)

(150bps)

(75bps)

0bps

75bps

150bps

225bps

(375bps)

UnitRevenueLessUnitCost(ex-Fuel,BrokerageRevandPurchTrans,SaleGains)

Note:/1'Core'EBITmarginrepresentsEBITexcl.gainonsaleandnon-assetEBITatKNXandWERN;unitrevenuerepresentsnon-fuelfreightrevenueperloadedmile;unitcostsrepresentopexlessfuel,estimatedbrokeragepurchasedtransportationexpenseandgainsonsale

Source:Companyreports;BarclaysResearch

TruckloadIncrementalMargins

WeanticipatestrongerratesandsomecostleveragecouldresultinaboveaverageincrementalmarginsforTLcarriers,whichshouldhelpEBITgrowthachievenearcycle-highlevels(Figures13-14).

FIGURE13

AverageTruckloadEBITGrowthEstimatedat29%on35%IncrementalMarginVersusAverageSince2000of16%EBITGrowthon22%IncrementalMargininYearswithNon-FuelRateIncreases

Truckload2018EEBITBridge

Rev.Growth=4%Incr.Marg.=51%Avg.Incr.Marg.=16%EBITGrowth=39%

Rev.Growth=8%Incr.Marg.=43%Avg.Incr.Marg.=19%EBITGrowth=30%

Rev.Growth=5%Incr.Marg.=24%Avg.Incr.Marg.=18%EBITGrowth=16%

Incr.Marg.=20%Avg.Incr.Marg.=30%EBITGrowth=31%

($73)

$88

($50)

$96

$122

($98)

SWFT

$125

$163

KNX

$145

$168

WERN $79

HTLD

$103

(Barclaysests.;incrementalmargin=incrementalEBIT/incrementalrevenue;avg.duringyearsofrateincreases)

EBIT Incr. Incr. EBIT EBIT Incr. Incr. EBIT EBIT Incr. Incr. EBIT EBIT Incr. Incr. EBIT(2017E)Rev. Marg.(2018E)(2017E) Rev. Marg.(2018E)(2017E) Rev. Marg.(2018E)(2017E) Rev. Marg.(2018E)

Source:Companyreports;BarclaysResearch

FIGURE14

WeExpect2018RateIncreasestoDriveStrongestEBITGrowthSince2014and2010FollowingContractionin‘16andMutedGrowthin‘17…

TruckloadNon-FuelRateperMilevs.Asset-BasedEBIT

(annualch.;avg.KNXandWERN;Barclaysests.)/1 36%

%

%

%

%

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017E

2018E

%

Note:/1KNXestimatesforLegacyKNXstandalone;rate/loadedmileexfuelexcludesbrokeragerevenue;asset-basedEBITexcludesbrokerageEBITatKNX/WERN

Source:Companyreports;BarclaysResearch

IntermodalandAsset-LightMarginDynamics

Incrementalmarginsarelikelytobesub-optimalacrossbusinesseswhichrelyonsignificantpurchasesofthird-partycapacity,includingintermodalandasset-lightsubsectors(Figure15).Moreasset-intensiveintermodalprovidersarelikelybetterpositionedinthenear-term,asweexpecttypicalcounter-cyclicalasset-lightmargindynamicstocontinuetoplayoutforseveralmorequarters(Figures16-17).

FIGURE15

WeExpectIncrementalMarginsMostlyBelowHistoricalAveragesGivenLaginIntermodalContractRe-PricingandSignificantCostLeveragetoPurchasedTransportationAcrossIntermodalandAsset-LightBusinesses

IntermodalandAsset-Light2018EEBITBridge

GrossRev.Growth=12%Incr.Marg.=11%

Avg.Incr.Marg.=16%

EBITGrowth=14%

GrossRev.Growth=11%

GrossRev.Growth=8%Incr.Marg.=5%

Avg.Incr.Marg.=17%

EBITGrowth=30%

EBITGrowth=8%

GrossRev.Growth=7%Incr.Marg.=14%Avg.Incr.Marg.=14%EBITGrowth=10%

$1196$1136

$819

($725)

HUBG

$445 ($382)

CHRW

$796

EXPD

$96

$457 ($428)

$124

$736

$646

$709

(Barclaysests.;incrementalmargin=incr.EBIT/incr.grossrevenue;avg.duringyearsofTLrateincreases)

EBIT Incr.Gr. Incr. EBIT EBIT Incr.Gr. Incr. EBIT EBIT Incr.Gr. Incr. EBIT EBIT Incr.Gr. Incr. EBIT(2017E)Rev. Marg.(2018E)(2017E) Rev. Marg.(2018E)(2017E) Rev. Marg.(2018E)(2017E) Rev. Marg.(2018E)

Source:Companyreports;BarclaysResearch

FIGURE16

CHRWandEXPDUnderperformedAsset-BasedTransportsRecentlyasMarginsHaveBeenPressuredbyRising‘Buy’Rates…

'Asset-Light'EBIT,NetRevenueMarginandRelativeStockPerformance

(annualch.;basedonCHRWandEXPD)/1

Recentunderperformancew/spotratestrength

s

highermargins&strongearning

Equitiesralliedasmarginsimprovedlatelastcycle

Pre-'01equitygainscamewith

Asset-lightequitiesoutperformedin2015-2016asmarginsspikedhigher,typicallyalate-cyclesgn

rm

erperfoslows

Asset-lghtequitesunwhenmargingrowth

100%

80%

60%

40%

20%

0%

-20%

-40%

Apr-96Dec-96Jul-97Mar-98Oct-98Jun-99Jan-00Sep-00Apr-01Dec-01Jul-02Mar-03Oct-03May-04Jan-05Aug-05Apr-06Nov-06Jul-07Feb-08Oct-08May-09Jan-10Aug-10Mar-11Nov-11Jun-12Feb-13Sep-13May-14Dec-14Aug-15Mar-16Nov-16

-60%

1,000

800

600

400

200

0

(200)

(400)

(600)

StockPerf.vs.'Asset-Heavy' EBIT NetRevenueMargin(bps,rhs)

Note:/1EBITandNetRevenueMarginsbasedontotalrevenuesandEBITforCHRWandEXPD.StockperformanceisaveragemonthlyannualchangeforCHRWandEXPDlessaveragemonthlyannualchangeforUPS,FDX,UNP,NSC,CSX,CP,CNR,WERN,KNX,HTLD,ODFLandCNW.

Source:Companyreports;ThomsonReuters;BarclaysResearch

FIGURE17

…HistorySuggestMarginPressureCouldHaveFurthertoGoinBothTimeandMagnitude

HistoricalPeriodsofAsset-LightNetRevenueMarginContraction(TTM)/1

Marginscontractedsteadilyaseconomy

grewlastcycle.

-29bps

-79bps

Marginscontractedfor2.5yearsduringtherecoveryearlerthiscycle,thenspikedamidexcesscapacity,decliningspotratesandanindustrialrecession.

Onanabsolutebasis,netrevenuemargins

arestill100-200bpsabovetrough.

Note:/1basedonCHRWandEXPDcombinednetrevenuemargins(netrevenue/grossrevenue).TroughmarginforcurrentcycleismostrecentfigureSource:Companyreports;BarclaysResearch

CapitalSpending&CashFlow

Althoughwedon’thaveexplicitguidanceforcapitalexpendituresnextyear,weexpectasset-basedtruckloadandintermodalproviderstoincreasespendingtofundgrowthinastrongrevenueenvironment.Thismaypressurefreecashflow;nonetheless,asset-lightbusinessesshouldcontinuetoconvertnearly100%ofearningstocashflow(Figures18-19).

FIGURE18

WeExpectCapitalExpenditurestoIncreaseNextYearAcrossAsset-BasedTruckloadandIntermodalSubsectors…

Truckload,IntermodalandAsset-LightRelativeCapex

16%

13%

13%

10%10% 9%

8%

9%

8%

7%

6%

4%

2%

4%

2%

3%3%

1%

0%0%

1%

1%

Asset-Light

Intermodal

Truckload

(Barclaysestimates;capex/revenue;capexnetofassetsales;grossrevenueforHUBG,CHRW,EXPD,XPO)

KNX/1 WERN HTLD TLAvg./1 JBHT HUBG Intermodal EXPD CHRW Asset-Light XPO

2017E

Note:/1KNXcapexandrevenueincl.est.proforma2017SWFTresultsSource:Companyreports;BarclaysResearch

Avg. 2018E Avg.

FIGURE19

…LeadingtoLowerCashConversion;Nonetheless,CHRW,EXPDandXPOShouldConvertCloseto100%orMoreofEarnings

Truckload,IntermodalandAsset-LightFreeCashFlowConversion

-38%

HTLD WERN KNX/1 TLAvg./1 JBHT HUBG Intermodal EXPD CHRW Asset-Light XPO

2017E

Note:/1KNXcashfromops,capexandnetincomeincl.est.proforma2017SWFTresultsSource:Companyreports;BarclaysResearch

Avg. 2018E Avg.

UpdatedThoughtsonKNX-SWFT

PleaseseethefollowingpageforadetailedlookatourKNX-SWFTmodelassumptions(Figure20).

FIGURE20

KNX-SWFTHighlyAccretive,butValuationCurrentlyStretchedEvenUnderOptimisticScenario

ScenarioAnalysis(2019E)

KNX2-YearFinancialSensitivityAnalysis(basedonCombinedProFormaFinancials)

2017E

Low

Barc

High

Notes

RevenueStatistics/1

TotalTractors(000's)

21,032

21,455

21,684

21,882

CAGR2yr

1.0%

1.5%

2.0%

MilesPerTractor(000's)

110.6

111.7

113.0

113.9

CAGR2yr

0.5%

1.1%

1.5%

EmptyMiles(%)

11.0%

11.0%

10.9%

10.8%

CAGR2yr

0.0%

-0.3%

-1.0%

RevEx-Fuel/LoadedMile

$1.84

$1.93

$1.94

$1.99

CAGR2yr

2.5%

2.8%

4.0%

FuelRev/LoadedMile

$0.21

$0.18

$0.18

$0.18

CAGR2yr

-5.9%

-5.9%

-5.9%

OtherRevenue($mm)

$894

$986

$1,003

$1,024

CAGR2yr

5.0%

5.9%

7.0%

ProFormaRev.($mm)

$5,135

$5,503

$5,652

$5,861

CAGR2yrbasedonproformarev.

3.5%

4.9%

6.8%

Weexpectratestocompoundatroughly3%from2017to2019.

Otherincl.intermodal,brokerageandother

OperatingExpenses

LaborCost/Mile

$0.63

$0.67

$0.66

$0.66

Notably,wemodellaborinflationbelowrate

CAGR2yr

3.0%

2.3%

2.0%

increasesoverthesameperod.

Avg.MilesperGallon

11.6

11.6

11.8

12.0

CAGR2yr

0.0%

0.7%

1.5%

D&A($mm)

$373

$393

$393

$393

%ofNetPP&E

15.9%

15.2%

15.2%

15.2%

OtherOpex/Mile

$1.06

$1.08

$1.07

$1.05

CAGR2yr

0.5%

0.1%

-0.5%

ProFormaEBIT($mm)

$346

$443

$538

$713

CAGR2yr

13.1%

24.7%

43.5%

ProFormaEBITMargin

6.7%

8.0%

9.5%

12.2%

Avg.Ann.Ch.(bps)

65

139

271

EV/EBITMultple

12.0x

13.5x

13.5x

ImpliedSharePrce

$25

$37

$50

%Upside/Downside

-38.2%

-7.9%

22.3%

InterestExpense($mm)

$24

$21

$23

Rate

2.7%

2.7%

2.7%

Synergesfromotheropex,incl.purchasedtransportation.

Wemodelover$190mmEBITimprovementversusKNXgudanceforsynergesof

$150mmby'19,or140bpsmarginexpansonperyear.

5-yravg.KNXmult.(+/-1σ):NTMEV/EBIT=12.2x+/-1.9xNTMEV/EBITDA=7.3x+/-1.2x

OtherIncome($mm)

$8

$8

$8

TaxRate

37.0%

37.0%

37.0%

NetIncome($mm)

$267

$330

$439

ShareCount(mm)

178.0

178.0

178.0

EarningsPerShare

$1.20

$1.50

$1.85

$2.46

Barclays2017EKNXEPSincl.SWFTresults

CAGR2yr

12.0%

24.4%

43.4%

since9/8/17close.

P/EMultple

18.0x

20.0x

20.0x

5-yravg.KNXmult.(+/-1σ):

ImpliedSharePrce

$27

$37

$49

NTMP/E=19x+/-3x

%Upside/Downside

-33.6%

-9.0%

20.5%

Rel.P/E(S&P500)=1.2