Covenant Transp: Zacks’ Bull of the Day Play

Covenant Transportation (CVTISnapshot Report) has been on an absolute tear lately. The company has delivered three consecutive positive earnings surprises and has seen earnings estimates soar as a result. The company also recently issued very bullish guidance for Q1.

It is a Zacks Rank #1 (Strong Buy) stock.

Since I last wrote about Covenant Transportation on October 8, 2014, the stock has soared more than 90%. With strong earnings momentum and reasonable valuation, there appears to be plenty of upside potential left.

Covenant Transportation Group, Inc. is a freight transportation and logistics services company. It is the holding company for several operating units, including Covenant Transport, Southern Refrigerated Transport, Star Transportation, Covenant Transport Solutions, Transport Financial Solutions and Transport Enterprise Leasing. These operating units provide service-demanding, truckload and intermodal freight transportation (dry-van and refrigerated), logistics, freight brokerage, factoring services, as well as tractor/trailer sales and leasing.

Strong Fourth Quarter Results

Covenant Transportation delivered better-than-expected fourth quarter results on January 21. Earnings per share came in at $0.82, beating the Zacks Consensus Estimate by 8 cents. This was a 273% increase over the same quarter last year.

Total revenue jumped 17% year-over-year to $206.8 million, crushing the consensus of $187.0 million. This was driven in large part by a 23% increase in freight revenue as average freight revenue per tractor per week increased from $3,568 to $4,300.

The company also benefited from lower fuel costs as net fuel expense was approximately 8.7 cents per company mile compared with 11.1 cents per company mile in the same quarter last year. Operating income soared 176% year-over-year as the operating margin improved dramatically, from 6.3% to 14.3% of total revenue.

Strong First Quarter Guidance

It looks like these strong results have carried over into Q1. On March 10, the company issued a press release in which it provided bullish Q1 guidance. The company stated that it “has experienced year-over-year improvements in its operating results for the two months ended February 28, 2015, and these improvements have continued into March.”

Management expects Q1 EPS between $0.24 and $0.30, which was significantly above the Zacks Consensus Estimate at the time. As you might expect, this prompted a flurry of positive estimate revisions from analysts.

Estimates Soaring

Following bullish first quarter management guidance, the Zacks Consensus Estimate for Q1 doubled from $0.14 to $0.28. And the overall 2015 consensus increased from $1.70 to $1.90, while the 2016 consensus jumped from $1.96 to $2.08.

This sent the stock to a Zacks Rank #1 (Strong Buy).

You can see that consensus estimates have been surging over the last several months as Covenant Transportation has delivered three consecutive positive earnings surprises:

Valuation

As consensus estimates have soared, so has the stock price. But the valuation picture still looks reasonable. Shares trade around 18x 12-month forward earnings, which is a discount to the industry median of 20x. Its enterprise value to cash flow ratio of 10 is also below the industry median of 13.

The Bottom Line

With strong top-line growth, expanding margins, exceptionally strong earnings momentum and reasonable valuation, Covenant Transportation still offers investors attractive upside potential.

Todd Bunton, CFA is a Stock Strategist for Zacks Investment Research and Editor of the Income Plus Investor and Surprise Trader services.

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