Knight-Swift Transportation confirmed the durability of its more diverse business model Thursday after the market closed. The carrier issued full-year 2023 adjusted earnings guidance of $4.05 to $4.25 per share, safely above the $4 mark it had previously indicated would be the new trough. As the fourth quarter progressed, it appeared that number may be in jeopardy as trucking markets continued to deteriorate before firming in December.

The 2023 expectation was in line with the consensus estimate of $4.14 at the time of the print. That’s a big leap from the $2.17 the carrier posted heading into the pandemic or the $2.56 it produced during the 2018 peak.

Guiding to it and achieving it, of course, are two different things. Analysts were relieved the guide didn’t signal a more material step down but at the same time questioned if a 17% year-over-year (y/y) reduction was enough given numerous risks on the horizon while there is still a fair amount of clock to run out on the downside of the cycle.

“The guidance does embed a seasonal inflection in freight flows later this year, which is entirely reasonable, but we suspect some folks may have wanted more of a ‘kitchen sink’ [to numbers] given risks to the outlook,” Deutsche Bank (NYSE: DB) analyst Amit Mehrotra told clients shortly after the release.

Knight-Swift (NYSE: KNX) reported adjusted fourth-quarter earnings per share of $1, 11 cents worse than the consensus estimate, according to Seeking Alpha, and 61 cents lower y/y. The number included a 7-cent adjustment to its third-party carrier insurance program due to increased claims severity and frequency. Lower gains on sale were a 4-cent-per-share headwind compared to a year ago, but that was more than offset as it booked income in its investment portfolio versus logging an expense in the 2021 fourth quarter (a 7-cent reversal y/y).

Full-year 2022 adjusted EPS of $5.03 came in lower than management’s most recent guide of $5.17 to $5.22.

“We’re not sitting here looking at a market that’s about to slow,” President and CEO Dave Jackson stated on a call with analysts. “Spot rates peaked 13 months ago. We already are well into this.”

Jackson noted that spot rates appear to have already bottomed and in most cycles contract rates follow inflections in spot rates by six to eight months. He said unlike past cycles, carriers struggled to take on incremental capacity over the past three years due to supply issues at the OEMs, which is why the company’s contract rates held up through 2022.

Revenue in the company’s truckload unit fell 7% y/y to $921 million excluding fuel surcharges. Revenue per tractor was down 9% y/y as loaded miles declined 3% and rate per loaded mile (excluding fuel) was down 4% to $3.18 (only 4 cents lower than in the third quarter).

The unit recorded an 82.7% adjusted operating ratio, which was 800 basis points worse y/y and 90 bps worse than the third quarter. Management said it expects TL rates to decline by mid- to high-single-digit percentages y/y, turning positive in the fourth quarter. Miles per tractor are expected to step higher in the back half of the year alongside an easing in cost inflation.

Jackson believes the inventory overhang will clear through the spring, providing a more normal market in the back half of the year. He said conversations with customers are indicating a pickup in demand by June or July.

The fourth quarter didn’t have a peak, which may make the bridge to the typically weakest quarter of the year, the first, more subdued.

“The freight market continues to show signs of life here as we go through January,” Jackson said. “There’s a good chance that after we complete the first quarter we’ll look back and this might have been the most benign change sequentially from a fourth to a first.”

Knight-Swift’s less-than-truckload segment grew revenue (excluding fuel) 15% y/y to $204 million, but adjusted operating income jumped 71% in the quarter. Revenue per hundredweight (up 13% excluding fuel) accounted for the bulk of the increase as a 5% increase in shipments was offset by a similar decline in weight per shipment. The segment recorded an 85.5% adjusted OR, 480 bps better y/y.

The logistics unit saw revenue drop 42% y/y to $173 million. Loads were down 19% and revenue per load fell 29% y/y (flat with the third quarter). Notably, gross margin improved 140 bps to 22.1%. The division booked an 86.4% adjusted OR in the period, 150 bps worse y/y but 40 bps better sequentially.

Moving forward, Knight-Swift’s guidance for the logistics segment calls for volumes and revenue per load to move lower sequentially in the first quarter and then improve throughout the year. The segment’s OR is expected to deteriorate to the high 80s to low 90s.

“The key question for KNX is how the business is holding up in a very difficult freight environment,” Mehrotra said. “We think the company passed its first important test with 4Q results. But pressures will accelerate in 1Q, so there is still more to prove, but we remain optimistic.”

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