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 Portfolio managers from Goldman Sachs, Fidelity, and Federated
Investors were among the 65 funds that added Swift shares to their
portfolios over the last three months, an 80 percent jump in
institutional purchases from the quarter before, according to
Morningstar.
Portfolio managers have been attracted to the company, which is one
of the largest in its industry and has a market value of $3.8
billion. They expect falling fuel costs and a jump in shipping
volumes as a result of increased consumer spending to send Swift's
above-average margins higher.
Yet Swift might not benefit from low oil prices as much as some
investors expect, analysts say. About 90 percent of its fuel costs
are borne by its customers in the form of surcharges that are reset
weekly to the current price of gas, said analyst Todd Fowler of
KeyBanc Capital Markets in Cleveland. As a result, a drop in gas
prices only benefits Swift in the relatively short intervals when
trucks are not carrying goods.
Wages for drivers are a far bigger cost for the company, he said,
accounting for about 30 percent of spending. Before the oil price
drop attracted new investors, Swift shares traded largely on driver
pay. They fell 17 percent on July 15 after the company announced the
largest salary increase in its history to try to attract new drivers
to offset the number of retiring baby boomers.
"Most millennials or Gen Xers have no interest in being a truck
driver, no matter what you pay them" because of the stress of
meeting deadlines and being tracked by software that records every
moment behind the wheel, said Stifel Nicolaus & Co Inc analyst John
Larkin. "This is not the cowboy trucker's world anymore."
The challenge of recruiting drivers affects competitors such as
Con-way Inc and JB Hunt Transport Services Inc as well, yet they
typically had higher pay rates that Swift is now trying to catch up
to, Larkin added.
For 2014, shares of Swift are up 24.3 percent, while Con-way has
risen 22.6 percent and JB Hunt is up 4 percent.
Swift stock is trading at 27.8 times trailing earnings, or nearly 75
percent more than the Standard & Poor's 500 index. With its
valuation already rich, investors are looking at the possibility
that Swift will have to raise driver pay annually for at least the
next three years, said BB&T Capital Markets analyst Thom Albrecht.
Albrecht sees Swift's fiscal 2015 net income forecast of $1.62 to
$1.72 per share as "doable," but that will hinge mostly whether the
company achieves its goal of attracting 200 drivers this quarter to
meet demand.
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"Drivers will be the primary determinant to any potential upside in
earnings to Swift," Albrecht said.
BETTING ON CUSTOMERS
Investors say they expect the company to pass on its additional
costs of drivers to its customers, which tend to be large retailers
such as Wal-Mart Stores Inc and Best Buy Co Inc.
"If you are a customer, it's a lot easier to pay more when you see
your sales are increasing due to low fuel prices," said Eric
Marshall, who helps manage the Hodges Small Cap fund. He said he
recently bought Swift and other trucking companies for the first
time in more than a decade.
New federal regulations, expected to take effect by September, will
require truckers to use electronic log monitoring devices and will
probably lead to consolidation in the fragmented industry, Marshall
said.
Swift is likely to expand its reach and number of drivers through
acquisitions, he said.
But Larkin, the Stifel Nicolaus analyst, said driver costs would
continue to weigh on Swift for the foreseeable future.
"The long-term outlook for Swift is spectacular," he said, "but
near-term, you have to take driver's pay up in order to keep the
trucks full."
(Reporting by David Randall; Editing by Lisa Von Ahn)
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