Forward Air Posts Strong Revenue in Q3

Forward Air’s third-quarter consolidated revenue increased 18.5%. Excluding the addition of its new temperature-controlled operation, TQI, which was acquired in March, revenue was up 10%. The core airport-to-airport business grew 4% from last year, driven by solid 5.5% tonnage growth, partly offset by a 1% fall in total yield. Forward Air Solutions (the pooled distribution business) posted solid 55% sales growth, reflecting previously announced new contract wins.

In the airport-to-airport segment, core linehaul yield (excluding fuel surcharges) contributed 80 basis points to the overall 1% yield decline. Elevated price competition has been a factor in recent quarters. That said, recent demand improvement should support more stable pricing in the quarters ahead. Additionally, the firm hinted at the potential for a general rate increase during the first half of 2014. Total tonnage was up 5.5%, with average weekly tonnage up roughly 4%.

Year over year, average weekly volume expanded 1.5% in June, 5.5% in July, and 10% in August. Thus far into October, the firm is seeing tonnage up 6%-8%, suggesting the improvement continues. Some of this appears to be coming from better peak season demand for high-value freight, including consumer electronics.

Total operating margin declined only slightly (about 20 basis points)—better than the 150-basis-point fall in the second quarter. Margins in the core Forward Air unit improved 50 basis points (to 16%), and Solutions’ margin improved 320 basis points, to 4.7%–the segment’s best third-quarter margin to date. We suspect Solutions’ better margin performance is partly the result of leverage from solid revenue gains.

The company expects fourth-quarter 2013 revenue to expand 17% to 21% year-over-year (including a 9% boost from TQI), with EPS in a range of $0.53-$0.57 (versus previous Street consensus of $0.55). Overall, we do not expect to make material changes to our fair value estimate or economic moat rating.