Knight Transportation, Inc. (KNX)  Mid-Cap

Company Overview

Description:  Knight Transportation is a truckload carrier headquartered in Phoenix, AZ. and is one of the nation's eight largest publicly traded truckload carriers in terms of revenue, but is one of the three largest carriers by market cap. They transport general commodities for shippers, throughout the USA. They provide regional truckload carrier services from their dryload van service and their temperature controlled service centers. During 2005 they began providing brokerage services. As of March, 2006 Knight operated 22 dry van service centers, 3 temperature controlled service centers and 3 brokerage service centers. As of Dec 2005, they operated a fleet of over 3,000 tractors and nearly 7,900 trailers.

How the Company Makes Money: The primary way the company generates revenue is by transporting freight for customers. They enhance their revenue by charging for tractor and trailer detention, loading and unloading activities, storage, brokerage services, as well as the collection of fuel surcharges to mitigate the impact of increases in the cost of fuel. The company plans to aggressively grow both the reefer ( cold storage) and brokerage divisions. The primary revenue growth has been their ability to open and develop new regional service centers in selected areas and operate them at or near targeted margins within a relatively short period of time. 

The company's operating strategy solely focuses on the regional short to medium haul lanes. This makes up approximately 80% of all truckload freight movement. Management strives to increase company market share by operating in high density, predictable lanes in select geographic regions. This focus drives greater freight volumes and higher revenue per loaded mile, enhancing driver recruitment and attrition. This focus should continue to drive operational efficiencies. Knight is the industry leader in annual operating ratios.

Financials: Knight has recorded double digit growth in both revenue and net income for 15 consecutive years through a combination of organic growth, acquisitions, operating efficiencies, and exemplary cost control during both strong and weak economic environments. Knight should continue to increase its return on average total capital in both 2006 and 2007 with returns of 19.5% and  19.8% respectively. They have a strong balance sheet, with no debt and $21.1 million in available cash. However expansion likely will necessitate that Knight continue to make significant investment in new revenue equipment. Estimate for 2006 capital expenditures will be $120 million, which should be comfortably funded by operating cash flow of $129 million.

On the attached 1999 - 2005 comparative income statement you can see that Knight has Y/Y revenue growth in the double digits from 1999 thru 2005 with estimates thru 2007. Operating income and EPS growth also shows double digit growth.

Business Outlook:

Outlook on the Company:  Knight's has strong management and will continue revenue growth by a combination of fleet expansion, adding new service centers and increasing revenue from complimentary added services. They plan to grow the fleet by 15% per year. They have one of the best operating ratios in the Trucking Industry. Management guidance on pending lawsuits, is no affect what ever the outcome.

 Outlook on the Industry: The TL market is very competitive, no economic moats here. The TL market represents over $300 billion in annual sales. Low barriers to entry exist, as new entrants require little more than a license and a tractor. Because of this, there is high fragmentation, with the top 10 carriers representing less than 10% of the overall market. TL carriers compete intensely on price and service quality, and face competition from rail intermodal service, customer's private fleets and freight brokers employing independent truckers.

Judgments:  I based my SSGS on Preferred Procedure - Manifest/Valueline Growth figure of 14%, my PE's on Manifests average PE of 17.9. and applied the 1/3 rule for the high and low. This puts Knight in the Buy range with an 3.3 to 1 upside.

Wachovia valuation range for Knight is 22-24x the current 2007 EPS estimate of $1.06, which implies a share price of $23-25, representing a potential upside of 12-22%.

S&P has the worst forecast. They estimate  2006 EPS at $.86 and expects 12% growth to $.96 in 2007, representing a 12 month target price of $19.00.

Knights guidance for 2006 -2007 EPS is $.86 and .96.

 July, 2006