We are continuing our Sell on Werner Enterprises, Inc. (WERN) as the shares are expensive on a fundamental basis, but raising our target price to $20. Second quarter EPS of $0.25 was down 15% year over year, but beat the consensus by a nickel and our $0.22 estimate, due to higher-than-expected revenues. Revenues gained 9%, reflecting fuel surcharges and a stabilizing rate market.
We are raising our diluted EPS estimates to $0.90 from $0.80 for 2008 and to $1.15 from $1.07 for 2009. WERN's trucking business should reflect higher revenues from a better-than-expected rate market and improving freight demand due to voluntary fleet cuts and trucking company failures that have reduced supply. Also, initiatives are improving fuel efficiency. Negatively, fuel surcharges will likely lag fuel costs, and gains on truck sales should be lower. We believe the dividend is safe.
The company believes that the rate market has shifted from a rate-decrease market to a rate-stable market with higher rates possible in the second half of 2008 should freight demand improve sufficiently. WERN experienced improved freight demand during the last five weeks of 2008's second quarter. Going forward, supply/demand logistics should turn more favorable as more truckers go out of business, as truck fleets are voluntarily reduced, and as Class 8 industry truck builds continue at low levels.
At its current price, the stock is trading at a slight discount to the truckload median P/E based on 2009 consensus earnings estimates, but at a premium with the group median based upon price/sales and price/book ratios. The company has no debt load and is one of the only truckload carriers that pay a dividend, which partially offset Werner's below-industry average projected growth rate.
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