Zacks Research Digest
March 30, 2007
Research Analyst: Sweta Killa, M. Fin.
Sr. Ed.: Ian Madsen, CFA: imadsen@zacks.com 1-800-767-3771, x9417
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Swift Transportation
111 N. Canal Street, Suite 1101 Chicago, IL 60606
(SWFT-NASDAQ)
$31.16
Note: All new or revised material since the last report is highlighted.
Reason for Report: Change in EPS Estimate
Previous Edition: February 7, 2007
Overview
Swift Transportation Co., Inc. (SWFT), a holding company, operates the largest truckload fleet in the
United States combining strong regional operations, an expedited transcontinental operation, various
specialty and dedicated offerings and a comprehensive intermodal package.
The principal
commodities that it transports include retail and discount department store merchandise, manufactured
goods, paper products, non-perishable and perishable food products, beverages and beverage
containers and building material. SWFT has a growing cross-border operation into Mexico that ships
through every commercial border crossing. It also has a strategic network of regional terminals and
offices located in areas that have strong and diverse economies and provide access to key population
centers.
SWFT, founded in 1965, is headquartered in Phoenix, Arizona.
website is
www.swifttrans.com. SWFT’s fiscal year coincides with the calendar year.
Analysts have identified the following issues in evaluating the investment merits of SWFT:




Key Positive Arguments
Focus: SWFT provides constant and consistent
availability for service-sensitive customers in
virtually every transportation environment.
Growth Opportunities: The Intermodal rail service
has the potential to add an incremental $200.0
million to the topline and $0.10 to EPS on ramping
up.
Buyout Deal: The deal with Jerry Moyes would
enhance the growth and improve the operations of
the company.
Cost Control: The company is implementing cost
control initiatives, which help to reduce the
operating ration and drive the margins.
Key Negative Arguments
 Cyclical Exposure: Freight volume growth is
dependent on the growth of the domestic economy.
The industry's concentration in retail and
manufacturing makes it particularly sensitive to
consumer spending and inventory levels.
 Driver Availability: Inability to attract and retain
drivers could hamper the operations of the company.
 Highly Fragmented Industry: The truckload
industry is highly fragmented and subject to intense
competition and low barriers to entry. Increase in
truckload capacity intensifies competition. Inability to
maintain service and scale differentiation could
subject leading carriers to increasing price
competition and deteriorating margins.
 Insurance Liability: SWFT retains the first $10.0
million of self-insured accident liability per incident,
much higher than other public carriers. Poor safety
will negatively impact earnings and generate greater
earnings volatility.
© Copyright 2007, Zacks Investment Research. All Rights Reserved.
Recent Events
On January 24, 2007, SWFT announced 4Q06 and FY06 earnings results. Highlights of 4Q06 are as
follows:
 Total revenue decreased 7.2% y-o-y to $782.8 million.
 Pro forma EPS was $0.46 as compared to $0.52 in 4Q05.
Highlights of FY06 are as follows:


Total revenue decreased 0.8% y-o-y to $3,172.8 million.
Pro forma EPS increased 39.4% y-o-y to $2.00
On January 19, 2007, SWFT announced it would be acquired by Jerry Moyes, the company's founder
and largest shareholder, and his family members in an all cash deal valued at approximately $2.74
billion, including $332.0 million of net debt, which equates to $31.55 per share. The transaction is
expected to close during 2Q07.
Revenue
Both the Zacks Research Digest and the company recorded total operating revenue of $782.8 million in
4Q06, down 7.2% y-o-y from $843.6 million in 4Q05. Excluding fuel surcharge revenue, net revenue
decreased 5.1% to $679.0 million in 4Q06 from $716.0 million in 4Q05. This decline was primarily
attributable to the soft freight environment and an increase in truckload capacity.
According to the press release, total operating revenue in FY06 decreased 0.8% y-o-y to $3,172.8
million from $3,197.5 million in FY05. Excluding fuel surcharge revenue, net revenue decreased 3.4%
y-o-y to $2.71 billion from $2.81 billion in FY05. This decline was primarily attributable to a 5.3%
reduction in the average fleet size y-o-y. The Zacks Research Digest total operating revenue was
$3,173.8 million in FY06, down 0.7% y-o-y from $3,197.5 million in FY05.
Provided below is the summary of revenue as compiled by Zacks Research Digest:
Revenue ($ in
Millions)
Zacks Consensus
Total Revenue
Digest High
Digest Low
YOY Growth
Sequential Growth
3Q06A
4Q06A
FY06A
1Q07E
2Q07E
3Q07E
$815.0
$815.1
$815.0
0.3%
0.2%
$782.8
$782.8
$782.8
-7.2%
-4.0%
$3,173.8
$3,174.0
$3,172.8
-0.7%
$771.0
$753.8↓
$772.2
$733.6
-1.2%
-3.7%
$819.9↓
$830.1
$800.7
0.8%
8.8%
$847.7↑
$854.9
$840.6
4.0%
3.4%
FY07E
FY08E
$3,305.0
$3,335.9↓
$3,880.1
$3,152.0
5.1%
$3,389.0
$3,397.4↓
$3,558.7
$3,238.7
1.8%
The Zacks Research Digest model projects revenues of $3,335.9 and $3,397.4 million in FY07 and
FY08, respectively, both are lower than the previous report. Only four firms (Wall Street Strategies, B.
of America, BB&T, Bear Stearns, Wachovia) have provided FY07 revenue estimates.
One firm (BB&T) believes the company is positioned well in its Intermodal business to take advantage
of recent supply management trends. SWFT currently has approximately 3,000 intermodal containers,
and now plans to take hold of another 2,500-3,000 in FY07 depending on the economic environment.
Please refer to the Zacks Research Digest spreadsheet of SWFT for more details on revenue
estimates.
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Margins
The Zacks Research Digest operating margins were 6.1% in 4Q06, down 240 bps y-o-y, and 8.1% in
FY06, down 160 bps y-o-y. The weaker margin performance is primarily attributable to the increased
empty mile percentage, decreased equipment utilization, weaker fuel cost recovery (via the fuel
surcharge mechanism), and a deceleration in the rate of increase in revenue per loaded mile (net of
fuel surcharge).
The company's operating ratio increased to 95.7% in 4Q06 from 91.5% in 4Q05. The impairment of
notes receivable, the very soft freight environment, the increase in capacity, the changes made to the
company's depreciable lives for tractors and the net impact of fuel expense are the primary causes for
the increase in the operating ratio during the quarter.
SWFT benefited from cost reduction initiatives implemented in early 2006 in several expense
categories. Administrative salaries and wages declined y-o-y as a result of reduced average non-driver
workforce by approximately 6.7%. Salaries, Wages and Employee benefits also decreased in part due
to the reduction in the number of miles driven by company drivers associated with the smaller fleet size,
which was partially offset by an increase in the average rate per mile paid to drivers. Equipment
maintenance expense declined y-o-y associated with the smaller average fleet size and changes made
in the shop infrastructure. In addition, travel and other discretionary expenses also decreased as a
result of an increased focus on cost control. These reductions were partially offset by an increase in
hiring expense resulting from the tight driver market in 2006, as well as an increase in expenses related
to the growing Intermodal business. The company also experienced a reduction in expenses related to
workers compensation as previously reported. This increased focus on cost control helped the
company improve its operating ratio by 180 bps to 92.3% in FY06 from 94.1% in FY05.
Provided below is the summary of margins as compiled by Zacks Research Digest:
Margins
Operating
Pre-Tax
Net
3Q06A
8.7%
7.9%
4.8%
4Q06A
6.1%
6.0%
4.0%
FY06A
8.1%
7.4%
4.6%
1Q07E
5.9%↓
4.8%↓
3.3%↓
2Q07E
7.6%↓
6.5%↓
4.3%
3Q07E
6.9%↓
6.4%
3.9%
FY07E
7.0%↑
5.8%
3.8%
FY08E
7.6%↑
6.6%
4.1%
The Zacks Research Digest model projects operating margin of 7.0% and 7.6% for FY07 and FY08,
respectively, up from the previous report.
Please refer to the Zacks Research Digest spreadsheet of SWFT for more details on margin estimates.
Earnings per Share
The company reported GAAP EPS of $0.31 in 4Q06 compared to $0.53 in 4Q05. GAAP results include
a pre-tax impairment charge of $18.4 million for the write-off of a note receivable, and other outstanding
amounts related to the company's sale of its auto haul business in April 2005. Excluding this
impairment and the pre-tax benefit of the change in market value of an interest rate derivative of $2.2
million in 4Q06, the company recorded pro forma EPS of $0.46 in 4Q06 as compared to $0.52 in 4Q05.
According to Zacks Research Digest, pro forma EPS was $0.43 in 4Q06, down 17.54% y-o-y, and
GAAP EPS was $0.31, down 41.5% y-o-y.
In FY06, the company recorded GAAP EPS of $1.86 compared to $1.37 in FY05. The results for 2006
include a pre-tax impairment charge of $18.4 million for the write-off of a note receivable, and other
outstanding amounts related to the company's sale of its auto haul business in April 2005. Excluding
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this impairment and the impact of the change in market value of the interest rate derivatives of $1.1
million in 2006, pro forma EPS increased 39.4% y-o-y to $2.00 from $1.47 in FY05. According to the
Zacks Research Digest, GAAP EPS was $1.85, up 35.0% y-o-y, and pro forma EPS was $1.95, up
32.7% y-o-y.
Provided below is the summary of EPS as compiled by Zacks Research Digest:
3Q06A
EPS
Zacks Consensus
Digest High
Digest Low
Digest Average
YOY growth
Sequential Growth
Company Guidance before
FAS123 (ESOE)
Company Guidance after FAS123
(ESOE)
Company Guidance(GAAP)
$0.52
$0.44
$0.51
55.8%
-7.1%
4Q06A
$0.46
$0.31
$0.43
-17.5%
-16.6%
FY06A
1Q07E
2Q07E
$2.00
$1.86
$1.95
32.7%
$0.34
$0.38
$0.28
$0.34↓
-25.6%
-21.9%
$0.47
$0.52
$0.43
$0.48
-13.0%
43.9%
3Q07E
$0.52
$0.40
$0.47↓
-9.1%
-3.0%
FY07E
FY08E
$1.86
$1.95
$1.47
$1.76↓
-9.8%
$2.09
$2.19
$1.79
$2.01↑
14.3%
Highlights from the chart are as follows:


2007 EPS forecasts (7 total) range from $1.47 to $1.95; average is $1.76.
2008 EPS forecasts (5 total) range from $1.79 to $2.19; average is $2.01.
One firm (Bear Stearns) expects Jerry Moyes will once again emphasize growth for SWFT once he
regains operating control, as he grew the fleet at a CAGR of 21.4% per year for the past decade,
compared to the past two years when the fleet has declined 5.2% under the stewardship of Bob
Cunningham.
Please refer to the Zacks Research Digest spreadsheet of SWFT for more extensive EPS figures.
Target Price/Valuation
The average Zacks Digest price target is $32.51 (↑ from the previous report and approximately 4%
upside from the current price). The price target ranges from $27.00 (↑ from the previous report and
approximately 13% downside from the current price) to $40.00 (↔ to the previous report and
approximately 28% upside from the current price), with the median price target of $32.00 (↑ from the
previous report).
The firm (Wall Street Strategies) with the Digest low price target does not provide any valuation
methodology. The firm (BB&T) with the Digest high price target used 21x FY07 EPS estimate of $1.93
to value the shares.
Of the ten firms covering the stock, one (BB&T) has a provided positive rating and eight gave neutral
ratings. One firm (Wall Street Strategies) has rated the stock negatively.
One firm (B. of America) derives its target price based on acceptance of Moyes’s proposal to acquire all
shares at $31.55. Deal implies a 16x P/E multiple to FY08 EPS estimate. The firm notes multiples can
range from as low as 11-12x to as high as 17-19x, depending on the strength of economic cycle and
the direction of Fed Funds and interest rate policy of the Fed.
Provided below is the summary of valuation or target price as compiled by Zacks Research Digest:
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Rating Distribution
Positive
Neutral
Negative
Avg. Target Price
Median Price Target
Upside from Current
Upside from High Target
Downside from Low Target
Total No. of Analysts with Target Price/Total
10%
80%
10%
$32.51↑
$32.00↑
4.3%
28.4%
13.4%
5/10
Please refer to the Zacks Research Digest Spreadsheet of SWFT for further details on valuation.
Capital Structure/Solvency/Cash Flow/Governance/Other
The company's balance sheet remains strong. In 2006, cash flow from operations and free cash flow
were $365.4 million and $226.2 million, respectively. The company's operating lease adjusted debt-tototal capitalization ratio improved dramatically from 41.3% at year-end 2005 to 27.3% at the end of
2006. With no fleet growth, the company was able to keep up with required maintenance capital
expenditures, while generating significant free cash flow that was used for paying down debt.
Discussion on Moyes Deal
Jerry Moyes and his family (buyout group) own approximately 39% of shares outstanding, which means
the buyout group only needs an additional 8.7 million votes (or 18.7% of the remaining votes) to obtain
a majority vote. The deal will be financed through debt commitments from Morgan Stanley, and
Goldman Sachs will act as financial adviser to Swift's special committee. One firm (Morgan Keegan)
would not be surprised if Mr. Moyes recapitalizes the company over the next 24 months through a
public offering.
If either party terminates the definitive merger agreement, then the buyout group would be required to
pay a $20.0-$40.0 million termination fee to walk away from the merger agreement. On the other hand,
SWFT would be required to pay a $10.0-$40.0 million termination fee if the proposed transaction is not
consummated, depending on whether or not SWFT was purchased by another financial or strategic
buyer within 12 months.
Potentially Severe problems
At this point the price very much reflects the buyout offer. If the deal does not go through, the price will
be impacted.
Long-Term Growth
The company’s long term growth rate as provided by Zacks Research Digest, ranges from 10.0% (Bear
Stearns, Wachovia) to 14.0% (BB&T), with an average of 11.3%.
The company is in the middle of a transition from a revenue growth-oriented model to a focus on
margin improvement and bottom line performance. Cost controls and operating efficiency are priorities
for the company.
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Most firms expect minimal growth in SWFT’s over-the-road fleet over the next two years, as it focuses
on profitability. There are two emerging growth areas: Mexico operations, though representing less than
5% of revenue, Mexico operations are expected to grow 15%; Dedicated Operations, which is
estimated 15% of revenue, is now a focus of growth.
According to most of the firms, Swift’s move to expand into Intermodal rail service is a positive strategic
move, as the company could leverage its existing relationships with large retailers, who are the largest
users of Intermodal rail. One firm (R W. Baird) finds SWFT’s Intermodal rail service a positive strategic
move, given SWFT's relationships with large retailers and desire to divest asset ownership.
Some firms are concerned that driver shortage problem may worsen for the public carriers in the long
term.
Individual Analyst Opinions
POSITIVE RATINGS (10.0%)
BB&T – Buy ($40.00 target price) – 03/19/07: The firm has maintained Buy rating with the price target
of $40.00.
NEUTRAL RATINGS (80.0%)
B. of America – Neutral ($32.00 target price) – 03/23/07: The firm has maintained the price target of
$32.00. INVESTMENT SUMMARY: Despite the on-going positive turnaround at the company, the firm
believes margins will decline in the near-term owing to increasing cost pressure in TL (truckload)
sector.
Bear Stearns – Peer perform (no target price) – 03/23/07. INVESTMENT SUMMARY: The firm
believes the stock will not trade on the company’s fundamentals, but on the likelihood of the deal with
Jerry Moyes.
Deutsche Bank – Hold ($31.55 target price) – 03/01/07. INVESTMENT SUMMARY: The firm
believes the shares will trade close to the accepted tender offer of $31.55 per share.
J.P. Morgan – Neutral (no target price) – 02/06/07.
Morgan Keegan – Market perform (no target price) – 02/01/07: The firm has maintained a Market
perform rating on the stock.
R W. Baird – Neutral ($32.00 target price) – 01/25/07: The firm has maintained a Neutral rating on
the stock.
Stifel Nicolaus – Hold (no target price) – 01/25/07: The firm has maintained a Hold rating on stock of
SWFT. INVESTMENT SUMMARY: While arbitrageurs may find SWFT’s shares an interesting company
to trade and make profits, the firm believes mainstream investors will find more attractive longer-term
investment opportunities available elsewhere in the freight transportation space.
Wachovia – Market perform (no target price) – 01/26/07: The firm has suspended its valuation range
as a result of the definitive merger agreement with Jerry Moyes. INVESTMENT SUMMARY: It expects
the stock to trade around the $31.55 per share buyout price.
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NEGATIVE RATINGS (10.0%)
Wall Street Strategies – Sell ($27.00 target price) – 02/01/07: The firm has maintained Sell rating
with the price target of $27.00. INVESTMENT SUMMARY: It believes the shares have a limited upside
at the current levels and SEC will approve the transaction with Jerry Moyes. The firm finds better
investment opportunities elsewhere given the pending buyout offer.
Research Analyst: Sweta Killa
Reviewed By:
Copy Editor: Oindrila Banerjee
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