Freight and logistics provider Covenant Logistics (NASDAQ:CVLG) missed Wall Street’s revenue expectations in Q3 CY2024, with sales flat year on year at $287.9 million. Its non-GAAP profit of $1.09 per share was 2.5% above analysts’ consensus estimates.

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Company Overview

Started with 25 trucks and 50 trailers, Covenant Logistics (NASDAQ:CVLG) is a provider of expedited long haul freight services, offering a range of logistics solutions.

Ground Transportation

The growth of e-commerce and global trade continues to drive demand for shipping services, especially last-mile delivery, presenting opportunities for ground transportation companies. The industry continues to invest in data, analytics, and autonomous fleets to optimize efficiency and find the most cost-effective routes. Despite the essential services this industry provides, ground transportation companies are still at the whim of economic cycles. Consumer spending, for example, can greatly impact the demand for these companies’ offerings while fuel costs can influence profit margins.

Sales Growth

A company’s long-term performance can indicate its business quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last five years, Covenant Logistics grew its sales at a sluggish 4% compounded annual growth rate. This shows it failed to expand in any major way and is a rough starting point for our analysis.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Covenant Logistics’s history shows it grew in the past but relinquished its gains over the last two years, as its revenue fell by 3.6% annually. Covenant Logistics isn’t alone in its struggles as the Ground Transportation industry experienced a cyclical downturn, with many similar businesses seeing lower sales at this time.

Covenant Logistics also breaks out the revenue for its most important segment, Freight revenue. Over the last two years, Covenant Logistics’s Freight revenue revenue (moving cargo) averaged 2.5% year-on-year declines. This segment has outperformed its total sales during the same period, lifting the company’s performance.

This quarter, Covenant Logistics missed Wall Street’s estimates and reported a rather uninspiring 0.3% year-on-year revenue decline, generating $287.9 million of revenue.

Looking ahead, sell-side analysts expect revenue to grow 7% over the next 12 months, an acceleration versus the last two years. Although this projection illustrates the market thinks its newer products and services will fuel better performance, it is still below average for the sector.

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Operating Margin

Operating margin is a key measure of profitability. Think of it as net income–the bottom line–excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Covenant Logistics was profitable over the last five years but held back by its large cost base. Its average operating margin of 5.1% was weak for an industrials business. This result isn’t too surprising given its low gross margin as a starting point.

On the bright side, Covenant Logistics’s annual operating margin rose by 7.1 percentage points over the last five years.

In Q3, Covenant Logistics generated an operating profit margin of 5.6%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

Earnings Per Share

We track the long-term growth in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth was profitable.

Covenant Logistics’s EPS grew at an astounding 23.8% compounded annual growth rate over the last five years, higher than its 4% annualized revenue growth. This tells us the company became more profitable as it expanded.

We can take a deeper look into Covenant Logistics’s earnings quality to better understand the drivers of its performance. As we mentioned earlier, Covenant Logistics’s operating margin was flat this quarter but expanded by 7.1 percentage points over the last five years. On top of that, its share count shrank by 24.7%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

Like with revenue, we analyze EPS over a more recent period because it can give insight into an emerging theme or development for the business. For Covenant Logistics, its two-year annual EPS declines of 14.6% mark a reversal from its (seemingly) healthy five-year trend. We hope Covenant Logistics can return to earnings growth in the future.

In Q3, Covenant Logistics reported EPS at $1.09, down from $1.12 in the same quarter last year. Despite falling year on year, this print beat analysts’ estimates by 2.5%. Over the next 12 months, Wall Street expects Covenant Logistics’s full-year EPS of $4.06 to grow by 22.9%.

Key Takeaways from Covenant Logistics’s Q3 Results

It was good to see Covenant Logistics beat analysts’ EPS expectations this quarter. On the other hand, its revenue missed due to underperformance in its Freight segment. Overall, this was a softer quarter. The stock traded down 4.1% to $49.40 immediately following the results.

Covenant Logistics didn’t show it’s best hand this quarter, but does that create an opportunity to buy the stock right now?We think that the latest quarter is only one piece of the longer-term business quality puzzle. Quality, when combined with valuation, can help determine if the stock is a buy. We cover that in our actionable full research report which you can read here, it’s free.