A Black Box Approach to Valuation for the Transports

Transcription

1 AIRFREIGHT & SURFACE TRANSPORTATION Airfreight & Logistics Market Weight Railroads Market Overweight Trucking Market Weight A Black Box Approach to Valuation for the Transports A Valuation Framework for Transports. We believe valuation should be based on a combination of an underlying company s risk, reward and returns. Our note today compares each of our transport companies relative to each other and the S&P 500 based on 6 historical and projected metrics including: Rev. and EPS growth (i.e. reward), free cash flow and return on capital (i.e. returns), and balance sheet leverage and earnings cyclicality (i.e. risk). Non-Asset Forwarders Have Earned High-End Valuation. CHRW and EXPD have historically traded at the highest valuation among the transports, and our black box not surprisingly ranks CHRW 1st and then EXPD 2nd for their combination of high-end returns, low-end risk and cyclicality, and mid- to high-end growth rates. Do WAB and Intermodal Companies Deserve Multiple Expansion? After the nonasset forwarders, WAB places 3rd in our valuation rankings and HUBG and JBHT place 4th and 7th, respectively, driven by their strong rev. growth and improving returns and cash flow. WAB is very well diversified in its freight vs. transit and domestic vs. int l segments, and is increasingly less dependent on the railcar cycle. We also argue for JBHT multiple expansion into accelerating rev. growth now that it s done shrinking its Truck fleet. Rails Rank Closer to the S&P 500. While the large-cap rails have shown high-end earnings growth the past several years, they continue to have lower-end returns and cash flow and thus generally place in the middle of the pack among the transports and similar with the S&P 500 in our valuation rankings. Within the large-cap rails, CNI and UNP rank at the top, followed by CSX, NSC and then CP. At the Bottom of our Valuation Rankings The LTLs, smaller TLs and leasing companies generally fall at the bottom of our quantitative valuation rankings. Within TL, KNX ranks highest and not surprisingly ODFL ranks highest among the LTLs. UPS also ranks well above its closest comps, FDX and TNTE. Company Price Rtg C.H. Robinson $69.50 OP Worldwide Inc. (CHRW) Canadian National $78.64 UP Railway Co. (CNI) Expeditors $42.80 OP International of Washington Inc. (EXPD) FedEx Corp. (FDX) $83.20 PP J.B. Hunt Transport $46.03 OP Services Inc. (JBHT) Knight Transportation $15.60 OP Inc. (KNX) Old Dominion Freight Line Inc. (ODFL) $39.38 PP Union Pacific Corp. $ OP (UNP) United Parcel Service $71.95 PP Inc. (UPS) Wabtec (WAB) $69.99 PP OP=Outperform, PP=Peer Perform, UP=Underperform, NR=Not Rated Edward M. Wolfe (646) EWolfe@WolfeTrahan.com Scott H. Group (646) SGroup@WolfeTrahan.com Reena Krishnan (646) RKrishnan@WolfeTrahan.com Ivan Yi (646) IYi@WolfeTrahan.com Carol A. Krakowski (646) CKrakowski@WolfeTrahan.com Charlie Legg (646) CLegg@WolfeTrahan.com DO NOT FORWARD DO NOT DISTRIBUTE DOCUMENT CAN ONLY BE PRINTED TWICE This report is limited solely for the use of clients of Wolfe Trahan & Co. Please refer to the DISCLOSURE SECTION located at the end of this report for Analyst Certifications and Other Disclosures. For Important Disclosures, please go to or write to us at Wolfe Trahan & Co., 420 Lexington Avenue, Suite 648, New York, NY WolfeTrahan.com Page 1 of 11

2 Investment Conclusion In today s note, we take a closer look at the valuation drivers for the transports. Generally, we believe the companies with the best mix of risk, reward and returns should trade at the highest valuations over a cycle. While there are many ways to measure these factors, we have chosen six relatively objective criteria including (1) revenue growth, (2) EPS growth, (3) return on invested capital, (4) free cash flow, (5) earnings volatility, and (6) balance sheet leverage. Exhibit 1 summarizes our findings and ranks our 33 companies under coverage (ex. YRCW) based on a simple average of these six factors. As shown, CHRW and EXPD are listed at the top of our valuation rankings while CVTI, PACR, AAWW and SAIA finish at the bottom. Exhibit 1. Valuation Summary for Our Transportation Coverage Universe (Lower Average Ranking = Higher Valuation) Revenue Growth EPS Growth ROIC Free Cash Flow Return Earnings Risk Balance Sheet Lev. Average CHRW EXPD WAB HUBG KNX LSTR JBHT FWRD HTLD CNI UNP GWR WERN UPS CSX S&P ODFL NSC UTIW UACL KSU FDX RA SWFT CNW TNTE CP ABFS CGI R SAIA AAWW PACR CVTI Note: Revenue growth based on 5-year CAGR from E. EPS growth based on 5-year CAGR from E. ROIC based on average from E. Free cash flow return based on average from E. Earnings risk based on average of y/y earnings declines in 2001 and Balance sheet leverage is average ranking of net debt ratio and net debt to EBITDAR multiple. Net debt ratio = (total debt including OBS debt cash) / (total debt including OBS debt cash + shareholders equity). Net debt to EBITDAR ratio includes OBS debt and associated rental expense. WolfeTrahan.com Page 2 of 11

3 Next, Exhibit 2 provides a more granular look at our valuation rankings by transport sub-sector. Among the large-cap rails, CNI and UNP are listed at the top of our valuation rankings. Overall, the rails rank pretty in line with the S&P 500 as the rails have in-line revenue growth, above market EPS growth, but materially lower returns and cash flow relative to the overall market. Within our truckload coverage, KNX ranks at the top as it has high-end revenue growth, above average returns, and less cyclical earnings performance with no debt. Similarly, ODFL ranks at the top among the LTLs with much better revenue and EPS growth, but weak returns, cash flow and high earnings volatility like its peers. Among the small package carriers, UPS ranks well above its closest comparables FDX and TNTE with much better free cash flow and returns, offset somewhat by low-end revenue growth. Perhaps most interestingly, CHRW ranks above EXPD in our valuation paradigm, although EXPD has traded at a higher valuation over the past 3-, 5- and 10-years. However, we believe CHRW has earned a higher valuation over the past few years as it was the only company we cover to grow net revenue and EPS every quarter in , while earnings for EXPD fell 32% at its bottom in 3Q:09. We also believe EXPD and international trade are showing signs of becoming more mature as EXPD s international air and ocean volumes fell 4% and 2% y/y in 3Q:11, similar with the overall market. Thus, it appears EXPD is not currently showing the same market share gains it once showed. Exhibit 2. Summary of Results in Exhibit 1 Above Sorted by Freight Subsector (Lower Average Ranking = Higher Valuation) Average Average Ranking Ranking Large-Cap CNI 13.3 Express/ UPS 14.3 Railroads UNP 13.5 Parcel FDX 20.2 CSX 15.2 TNTE 22.0 NSC 17.2 CP 22.0 Non-Asset Based CHRW 3.2 Forwarders EXPD 4.7 Small- and GWR 13.7 Mid-Cap Rails KSU 19.7 Asset-Light HUBG 10.3 RA 21.0 Forwarders LSTR 11.0 JBHT 11.8 Truckload KNX 10.5 FWRD 12.3 HTLD 12.3 UTIW 19.2 WERN 13.8 UACL 19.7 SWFT 21.0 PACR 29.3 CGI 25.3 CVTI 32.0 Other WAB 7.3 R 26.0 LTL ODFL 16.3 AAWW 27.5 CNW 21.7 ABFS 24.8 SAIA 26.8 S&P Note: Revenue growth based on 5-year CAGR from E. EPS growth based on 5-year CAGR from E. ROIC based on average from E. Free cash flow return based on average from E. Earnings risk based on average of y/y earnings declines in 2001 and Balance sheet leverage is average ranking of net debt ratio and net debt to EBITDAR multiple. Net debt ratio = (total debt including OBS debt cash) / (total debt including OBS debt cash + shareholders equity). Net debt to EBITDAR ratio includes OBS debt and associated rental expense. In Exhibit 3 below, we show actual current and historical valuations across our coverage universe. As shown, only 5 of our 33 companies under coverage (excluding TNTE which lacks sufficient historical data) have traded below the market on average over the past five years, although valuations are much more balanced WolfeTrahan.com Page 3 of 11

4 above and below the S&P 500 using ten-year average valuations. EXPD and CHRW lead the way with historical five-year average forward P/E multiples of 27x and 25x. WAB and JBHT also stand out as names that seem poised for multiple expansion, while CSX also seems to be trading too low relative to our valuation rankings above. Conversely, HTLD, FWRD and KSU seem at risk of multiple contraction when we compare their actual valuation relative to their quantitative scores in the two exhibits above. Exhibit 3. Transport Universe Current Forward Rolling 12 month P/E (Based on WT and Cons. EPS) and Historical Forward P/E Multiples (Ranked Based on 5-Year Averages) Ranked by Current Forward P/E Average Forward P/E 5-Year Avg WT Cons 1-Year 3-Year 5-Year 10-Year 1 EXPD 20.9x 20.8x 24.8x 25.4x 26.9x 28.7x 2 CHRW 22.9x 22.4x 25.6x 24.4x 24.6x 25.8x 3 FWRD 19.0x 16.9x 19.2x 23.5x 21.3x 21.6x 4 KNX 17.1x 17.4x 18.8x 21.8x 21.3x 22.0x 5 HUBG 16.7x 15.3x 19.6x 20.5x 20.3x 17.4x 6 HTLD 18.0x 17.4x 18.9x 20.6x 19.9x 20.4x 7 LSTR 18.5x 17.4x 18.4x 19.6x 19.7x 19.8x 8 RA 16.0x 15.9x 17.5x 19.4x 19.4x 13.6x 9 KSU 20.5x 19.6x 18.0x 18.9x 19.1x 20.8x 10 UACL 12.2x 12.1x 15.1x 20.4x 18.6x 18.4x 11 JBHT 19.6x 18.7x 19.0x 19.7x 18.6x 17.7x 12 CGI 13.9x 11.4x 15.3x 19.3x 18.1x 16.2x 13 GWR 19.5x 18.8x 18.8x 17.8x 17.9x 16.3x 14 WERN 15.5x 15.2x 16.4x 18.5x 17.7x 17.0x 15 ABFS 20.0x 13.5x 26.3x 26.0x 17.6x 14.1x 16 UPS 15.2x 14.8x 15.6x 17.6x 17.1x 19.9x 17 CNW 15.1x 12.9x 17.6x 20.1x 17.0x 15.7x 18 UTIW 16.1x 14.3x 18.4x 16.2x 16.8x 20.4x 19 ODFL 14.9x 14.3x 16.0x 18.2x 16.2x 14.9x 20 WAB 16.8x 16.3x 17.4x 15.7x 15.5x 17.0x 21 SAIA 13.2x 11.6x 14.7x 18.7x 15.5x 14.0x 22 FDX 15.7x 11.9x 13.8x 16.1x 15.4x 16.6x 23 CVTI 18.5x 11.3x 13.9x 14.0x 15.2x 18.1x 24 SWFT 11.5x 9.7x 12.3x NM 15.2x 16.5x 25 R 13.7x 12.9x 14.8x 16.0x 14.3x 13.6x 26 UNP 13.3x 13.2x 13.6x 13.5x 14.1x 14.3x 27 CP 15.2x 14.4x 13.9x 14.0x 14.0x 13.5x 28 CNI 15.2x 14.6x 14.3x 14.1x 13.9x 13.8x 29 S&P x 12.3x 12.8x 13.6x 16.7x 30 CSX 12.1x 11.3x 12.9x 12.6x 13.6x 13.5x 31 NSC 13.5x 12.6x 13.1x 13.0x 13.0x 13.6x 32 PACR 12.5x 11.6x 14.8x 13.8x 12.4x 14.1x 33 AAWW 10.6x 7.1x 9.2x 9.7x 10.7x 10.8x 34 YRCW NM NM NM NM 9.9x 10.0x Note: FWRD, HTLD and KSU are boxed above to signal potential for valuation contraction, while JBHT, WAB and CSX are shaded above to signal potential for valuation expansion. In the remainder of this note, we take a closer look at the 6 criteria we have used in our valuation rankings. WolfeTrahan.com Page 4 of 11

5 Key Points Expanded Revenue Rankings Topped by Companies with Acquisitions. To investigate potential reward, we first ranked our companies based on revenue growth using a five-year revenue CAGR from 2006 through 2011E. The top-ranked names in terms of revenue growth are GWR, WAB, and HUBG, with 5-year CAGRs of 12.3%, 12.2% and 11.4%, respectively. Not surprisingly, these companies have all made material acquisitions over the past five years. On the negative side, PACR, AAWW, and HTLD have the worst revenue CAGRs of -4.7%, -2.3%, and -1.5%, respectively. For comparison, the S&P 500 had an average revenue growth rate of about 3.6% over the past five years, ranking towards the middle of our transport coverage. Exhibit 4. Transport Universe Revenues ($ Millions) and 5 Year Revenue CAGRs ( E) ($ million) E CAGR Rank GWR % 1 WAB 1,088 1,360 1,575 1,402 1,507 1, % 2 HUBG 1,609 1,658 1,861 1,511 1,834 2, % 3 CHRW 6,556 7,316 8,579 7,577 9,274 10, % 4 FWRD % 5 ODFL 1,279 1,400 1,538 1,245 1,481 1, % 6 UTIW 3,561 4,369 4,544 3,568 4,550 4, % 7 JBHT 3,328 3,490 3,732 3,203 3,793 4, % 8 EXPD 4,632 5,235 5,634 4,092 5,968 6, % 9 KNX % 10 KSU 1,660 1,743 1,852 1,480 1,815 2, % 11 TNTE 5,756 6,551 6,926 6,208 7,053 7, % 12 UNP 15,578 16,283 17,970 14,143 16,965 19, % 13 CSX 9,566 10,030 11,255 9,041 10,636 11, % 15 CNW 4,221 4,387 5,037 4,269 4,952 5, % 14 FDX 34,162 36,674 38,378 32,782 37,538 41, % 16 S&P % 17 NSC 9,407 9,405 10,661 7,969 9,517 11, % 18 SAIA , , % 19 RA % 20 CGI % 21 CNI C$7,929 C$7,897 C$8,482 C$7,367 C$8,297 C$8, % 22 CP C$4,583 C$4,708 C$5,349 C$4,402 C$4,982 C$5, % 23 UPS 47,549 49,692 51,485 45,296 49,541 53, % 24 UACL % 25 SWFT 3,201 3,265 3,400 2,571 2,930 3, % 26 LSTR 2,518 2,493 2,646 2,010 2,402 2, % 27 ABFS 1,860 1,831 1,833 1,473 1,658 1, % 28 WERN 2,081 2,071 2,166 1,666 1,815 2,004 (0.7%) 29 R 6,307 6,566 5,999 4,887 5,136 6,050 (0.8%) 30 CVTI (0.8%) 31 HTLD (1.5%) 32 AAWW 1,476 1,575 1,607 1,052 1,338 1,313 (2.3%) 33 PACR 1,888 1,970 2,088 1,574 1,503 1,485 (4.7%) 34 Note: CGI and FDX on calendar year basis. WolfeTrahan.com Page 5 of 11

6 Rails Generally Rank as Top EPS Growers. The next factor is EPS growth, which we view as the best measure of potential reward. Exhibit 5 below outlines EPS CAGRs for each company under our coverage from E. On average, our transport universe has shown a flat EPS CAGR during this period, while the rails have clearly led the pack with KSU, CSX, UNP, WAB and GWR averaging +17% growth. The non-asset based forwarders, CHRW and EXPD, are also among the top EPS growers in our group with an average EPS CAGR of +12%. Aside from ODFL which is a significant outlier at +14%, the LTLs, CVTI, and PACR have exhibited the worst EPS CAGRs at -26% on average. The TL and Asset- Light names typically fall in the middle of the pack with TL companies, excluding CTVI, averaging flat growth and Asset-Light names, excluding PACR, averaging +2% growth. The rails have benefitted from a strong secular pricing story while the highly fixed-cost LTL models are very cyclical and mostly reported EPS losses during the downturn. Lastly, UPS has a higher EPS CAGR over the past five years, although FDX has a better revenue growth CAGR. Exhibit 5. Transport Universe EPS and 5 year EPS CAGRs ( E) EPS E CAGR Rank KSU $1.08 $1.57 $1.86 $0.62 $2.07 $ % 1 CSX $0.74 $0.90 $1.17 $0.90 $1.38 $ % 2 UNP $2.95 $3.45 $4.47 $3.56 $5.54 $ % 3 WAB $1.76 $2.23 $2.67 $2.36 $2.56 $ % 4 GWR $1.44 $1.54 $1.85 $1.55 $2.15 $ % 5 ODFL $1.27 $1.26 $1.23 $0.62 $1.35 $ % 6 CHRW $1.53 $1.86 $2.08 $2.13 $2.33 $ % 7 EXPD $1.06 $1.21 $1.37 $1.11 $1.59 $ % 8 SWFT $0.37 ($2.28) ($2.03) ($1.83) ($0.55) $ % 9 AAWW $2.83 $6.17 $1.34 $3.45 $5.78 $ % 10 NSC $3.57 $3.69 $4.54 $2.74 $3.92 $ % 11 JBHT $1.47 $1.49 $1.53 $1.10 $1.58 $ % 12 CNI C$3.39 C$3.40 C$3.70 C$3.24 C$4.20 C$ % 13 HUBG $1.17 $1.49 $1.58 $0.95 $1.16 $ % 14 LSTR $1.93 $2.04 $2.09 $1.37 $1.81 $ % 15 WERN $1.25 $1.08 $0.94 $0.78 $1.10 $ % 16 RA $0.71 $0.68 $0.32 $0.33 $0.61 $ % 17 UPS $3.86 $4.13 $3.50 $2.31 $3.56 $ % 18 S&P 500 $83.76 $86.54 $67.46 $44.54 $79.44 $ % 19 FWRD $1.56 $1.50 $1.46 $0.49 $1.10 $ % 20 HTLD $0.79 $0.78 $0.70 $0.50 $0.63 $0.72 (1.8%) 21 R $3.96 $4.26 $4.53 $1.56 $2.25 $3.49 (2.5%) 22 KNX $0.83 $0.74 $0.65 $0.60 $0.72 $0.72 (2.9%) 23 FDX $6.61 $6.34 $5.21 $2.73 $4.51 $5.56 (3.4%) 24 CP C$3.95 C$4.32 C$4.11 C$2.53 C$3.86 C$3.27 (3.7%) 25 UACL $1.30 $1.11 $1.07 $0.36 $0.60 $1.08 (3.7%) 26 UTIW $0.92 $1.02 $0.91 $0.45 $0.69 $0.76 (3.7%) 27 CGI $1.03 $0.56 $0.31 ($0.01) $0.46 $0.70 (7.3%) 28 TNTE $0.39 $0.21 $0.27 $0.20 (12.7%) 29 CNW $3.97 $3.40 $2.48 $0.61 $0.47 $1.65 (16.1%) 30 SAIA $1.92 $1.24 $0.63 ($0.66) $0.08 $0.68 (18.7%) 31 CVTI ($0.05) ($1.19) ($1.33) ($0.85) $0.20 ($0.23) (34.8%) 34 PACR $1.80 $1.62 $1.54 ($0.64) $0.08 $0.35 (27.7%) 32 ABFS $3.45 $2.29 $1.16 ($2.38) ($1.35) $0.51 (31.7%) 33 Note: CGI and FDX shown on calendar year basis. WolfeTrahan.com Page 6 of 11

7 Forwarders and Then Rails Hold Up Best in Downturns. Turning to risk, our next factor is EPS cyclicality and below we show the average EPS declines for our companies in 2001 and The exhibit shows that the non-asset based forwarders, and to a lesser extent the rails, maintained earnings growth much better than their peers. Average transport earnings in 2001 and 2009 fell 42% y/y, but the rails only fell 16% on average while the forwarders were still able to grow earnings 6% on average (+10% for CHRW and +1% for EXPD) with strong EPS growth in The forwarders generally have extremely variable cost models in addition to generally strong secular market share trends which have buoyed earnings growth during past downturns. On the other end of the spectrum, the LTLs again suffered the most during the aforementioned downturns, with earnings falling 125% on average. TL earnings also generally held up better than the overall market in 2001 and 2009 as TL carriers have variable models as they pay their drivers by the mile (rather than per hour) and fuel is a very large but variable expense. Exhibit 6. Transport Universe Earnings Risk Y/Y % Change in EPS in 2001 and 2009 Y/Y % Change EPS Average Rank CHRW 18% 3% 10% 1 RA 13% 5% 9% 2 KNX 21% (8%) 7% 3 EXPD 21% (19%) 1% 4 CNI 12% (13%) (0%) 5 GWR 11% (16%) (2%) 6 UNP 4% (20%) (8%) 7 HTLD 10% (29%) (9%) 8 WERN (2%) (17%) (10%) 9 WAB (21%) (12%) (16%) 10 LSTR (4%) (35%) (19%) 11 CP (7%) (38%) (23%) 12 UPS (12%) (34%) (23%) 13 CSX NM (23%) (23%) 14 SWFT (39%) (10%) (25%) 15 UTIW (14%) (50%) (32%) 16 JBHT (38%) (28%) (33%) 17 FDX (19%) (48%) (33%) 18 S&P 500 (35%) (34%) (34%) 19 ODFL (26%) (49%) (37%) 20 NSC NM (40%) (40%) 21 HUBG NM (40%) (40%) 22 FWRD (15%) (66%) (41%) 23 KSU (18%) (66%) (42%) 24 R (20%) (66%) (43%) 25 TNTE NM (46%) (46%) 26 CVTI (71%) (36%) (53%) 27 UACL NM (67%) (67%) 28 AAWW (76%) NM (76%) 29 CNW (81%) (75%) (78%) 30 PACR (47%) (142%) (95%) 31 CGI NM (105%) (105%) 32 ABFS (54%) (305%) (179%) 33 SAIA NM (206%) (206%) 34 Note: CGI and FDX on calendar year basis. Ranked by average change in EPS from 2001 and excluded for CSX and NSC because of Conrail acquisition; for CGI and HUBG because y/y changes are not material; for TNTE, UACL and SAIA with no available data; 2011 excluded for AAWW due to new DHL contract. WolfeTrahan.com Page 7 of 11

8 Non-Asset Forwarders and TL Carriers Have Least Balance Sheet Leverage. To capture balance sheet risk, which takes on heightened importance during severe downturns, we looked at both Net Debt ratios and Net Debt/EBITDAR over the past 5 years. The companies with least balance sheet risk include EXPD, HTLD, ABFS, CHRW, and UACL, showing that the non-asset forwarders top the group with net cash positions and negative Net Debt/EBITDAR multiples as they effectively run their businesses without debt. On the other hand, our companies with the most leverage include SWFT, AAWW, CVTI, and PACR (although PACR is now debt free). Exhibit 7. Transport Universe Balance Sheet Leverage (Net Debt Ratio and Net Debt / EBITDAR) from E Balance Sheet Leverage Net Debt Ratio Net Debt / EBITDAR Average E E Rank Average Rank Average Rank EXPD 1 EXPD (51.0%) 1 EXPD -1.3x 1 HTLD 2 HTLD (38.4%) 2 HTLD -1.0x 3 ABFS 3 ABFS (36.5%) 3 ABFS -1.1x 2 CHRW 4 CHRW (32.8%) 4 CHRW -0.6x 5 UACL 5 UACL (15.5%) 5 UACL -0.6x 4 HUBG 6 HUBG (9.7%) 6 HUBG -0.3x 6 KNX 7 KNX (7.7%) 7 KNX -0.2x 7 WERN 8 WERN (0.9%) 8 WERN 0.0x 8 FWRD 9 FWRD 14.3% 9 FWRD 0.5x 10 LSTR 10 LSTR 21.0% 12 LSTR 0.3x 9 WAB 11 WAB 17.7% 10 WAB 0.7x 11 TNTE 12 TNTE 17.9% 11 TNTE 0.9x 12 UTIW 13 UTIW 29.6% 13 UTIW 1.0x 14 ODFL 14 ODFL 33.3% 14 ODFL 1.2x 16 FDX 15 FDX 41.2% 20 UPS 1.0x 13 S&P S&P % 16 S&P x 17 SAIA 17 SAIA 39.2% 17 SAIA 1.3x 18 CNI 18 CNI 37.5% 15 CNI 1.7x 20 UNP 19 UNP 39.3% 18 UNP 1.8x 21 CNW 20 CNW 44.6% 22 CNW 1.3x 19 NSC 21 NSC 39.6% 19 NSC 1.8x 23 JBHT 22 JBHT 54.3% 28 JBHT 1.1x 15 UPS 23 UPS 45.2% 24 FDX 1.8x 22 CSX 24 CSX 45.1% 23 CSX 1.9x 24 GWR 25 GWR 43.6% 21 GWR 2.7x 28 CP 26 CP 47.6% 25 CP 2.6x 27 CGI 27 CGI 55.2% 29 CGI 2.3x 26 R 28 R 66.3% 30 R 2.1x 25 KSU 29 KSU 52.8% 27 KSU 3.4x 31 RA 30 RA 48.7% 26 RA 3.7x 32 PACR 31 PACR 67.4% 31 PACR 2.9x 29 CVTI 32 CVTI 68.7% 33 CVTI 3.3x 30 AAWW 33 AAWW 67.8% 32 AAWW 4.6x 34 SWFT 34 SWFT 103.3% 34 SWFT 3.9x 33 Note: CGI and FDX on calendar year basis. Net debt ratio = (total debt including OBS debt cash) / (total debt including OBS debt cash + shareholders equity). Net debt to EBITDAR ratio includes OBS debt and associated rental expense. WolfeTrahan.com Page 8 of 11

9 Forwarders Exhibit Highest Returns on Capital. Moving on to returns, the exhibit below ranks our transport universe based on average return on invested capital the last five years through 2011E. The nonasset and asset-light names, CHRW, LSTR and EXPD, have very high returns on capital which is not surprising considering their minimal need for capital investment. However, UPS also has high returns on capital, averaging 19% the last five years despite its asset-intensive nature due to its high concentration of Ground business and growing Forwarding segment, along with a largely depreciated balance sheet as much of its property is fully depreciated. Around two-thirds of our coverage universe has lower returns on capital than the average company in the S&P 500, including all of the large-cap rails except for CNI. Each of the LTLs also falls below the S&P 500 in this valuation metric, while the TLs are mixed with KNX and HTLD above the S&P and WERN and SWFT below. Exhibit 8. Transport Universe Return on Invested Capital ( E) ROIC E Average Rank CHRW 27.7% 29.4% 30.7% 30.5% 31.3% 32.6% 30.4% 1 LSTR 24.5% 27.1% 25.7% 16.2% 21.7% 25.0% 23.4% 2 EXPD 21.9% 22.0% 22.0% 15.5% 19.6% 20.8% 20.3% 3 UPS 19.9% 19.8% 18.0% 14.1% 19.8% 21.9% 18.9% 4 JBHT 20.8% 18.8% 18.2% 13.4% 17.9% 20.9% 18.3% 5 HTLD 17.1% 17.6% 19.0% 15.2% 17.5% 20.2% 17.8% 6 HUBG 15.4% 19.4% 16.3% 8.8% 10.3% 12.8% 13.8% 7 FWRD 23.1% 19.7% 14.9% 3.0% 9.0% 12.7% 13.7% 8 KNX 18.5% 13.6% 11.3% 9.8% 11.2% 11.6% 12.7% 9 CNI 12.9% 12.0% 11.4% 9.7% 12.2% 13.2% 11.9% 10 WAB 13.1% 14.0% 13.2% 9.4% 9.1% 12.3% 11.9% 11 S&P % 10.8% 9.1% 7.2% 9.2% 12.9% 10.1% 12 WERN 10.2% 8.3% 8.3% 7.7% 11.5% 14.3% 10.1% 13 NSC 10.1% 10.1% 11.5% 7.1% 9.3% 11.0% 9.9% 14 SWFT 8.3% 6.7% 5.4% 4.9% 25.1% 8.3% 9.8% 15 CSX 8.2% 8.9% 10.5% 8.3% 11.0% 11.6% 9.8% 16 UACL 16.2% 11.8% 10.5% 3.4% 5.6% 9.7% 9.5% 17 UNP 7.4% 8.0% 9.4% 7.4% 10.5% 11.5% 9.0% 18 ODFL 11.5% 9.3% 8.1% 4.2% 7.6% 11.0% 8.6% 19 CP 9.9% 9.4% 8.5% 6.9% 9.0% 7.9% 8.6% 20 CNW 14.9% 10.9% 8.2% 4.0% 3.3% 6.9% 8.0% 21 GWR 7.8% 7.3% 7.7% 6.5% 7.4% 8.9% 7.6% 22 UTIW 10.2% 8.4% 7.5% 4.0% 5.4% 5.7% 6.9% 23 FDX 8.7% 9.1% 7.3% 4.6% 5.0% 6.4% 6.9% 24 KSU 5.5% 6.2% 6.0% 3.6% 6.4% 8.3% 6.0% 25 R 7.5% 7.2% 7.3% 3.9% 4.6% 5.5% 6.0% 26 RA 5.5% 6.2% 6.5% 4.5% 5.4% 6.0% 5.7% 27 SAIA 10.0% 6.6% 4.6% (0.6%) 2.5% 5.5% 4.8% 28 AAWW 3.5% 6.2% 1.8% 3.4% 5.6% 4.0% 4.1% 29 CGI 7.2% 7.5% 2.5% 1.0% 1.6% 4.6% 4.1% 30 TNTE 5.1% 2.9% 4.5% 3.3% 3.9% 31 PACR 8.8% 7.7% 7.7% (4.5%) (0.0%) 2.5% 3.7% 32 ABFS 14.3% 8.5% 4.0% (9.8%) (5.8%) 2.8% 0.7% 33 CVTI (0.5%) (1.1%) (2.1%) (0.8%) 2.2% 5.9% 0.6% 34 Note: ROIC defined as (net income + tax affected interest) / (total debt including OBS debt + total shareholders equity). WolfeTrahan.com Page 9 of 11

10 Forwarders Lead Free Cash Flow Returns on Capital. Similar to ROIC, the non-asset and asset-light forwarders again rank highest in our transport universe on average free cash flow ROIC the past five years. These business models generate strong free cash flow with almost no capex requirements other than for a few consolidation facilities and IT systems. LSTR s 35% free cash flow ROIC leads our group as they have far fewer capex requirements than their asset-light peers. On the other hand, the LTLs generally have very high capex requirements and overall poor cash flow metrics, so once again they exhibit the lowest returns on a cash flow basis. The rails also have below average free cash flow returns, with only CNI ranking above the S&P 500. Exhibit 9. Transport Universe Free Cash Flow Returns ( E) E Average Rank LSTR 65.3% 34.5% 27.0% 30.6% 20.5% 30.3% 34.7% 1 CHRW 32.2% 24.6% 36.6% 28.7% 24.7% 31.0% 29.7% 2 EXPD 18.2% 18.8% 25.5% 19.0% 20.2% 20.9% 20.4% 3 UPS 12.7% (7.5%) 29.8% 22.1% 15.2% 26.3% 16.4% 4 HTLD 11.6% 21.3% 25.0% 6.0% 30.1% 4.2% 16.4% 5 WAB 20.9% 16.1% 14.6% 12.5% 11.8% 13.2% 14.8% 6 JBHT 10.1% 14.5% 24.2% 9.7% 16.5% 8.1% 13.8% 7 WERN 4.5% 22.4% 17.5% 13.2% 15.9% 1.4% 12.5% 8 FWRD 16.9% 6.9% 11.1% 8.7% 11.2% 13.2% 11.4% 9 HUBG 13.2% 21.9% 12.9% 10.2% 3.0% 0.4% 10.3% 10 KNX 1.4% 5.8% 12.3% 6.2% 15.1% 7.1% 8.0% 11 CNI 10.6% 8.4% 3.4% 6.0% 8.8% 9.2% 7.7% 12 S&P % 6.8% 6.6% 8.9% 7.8% 8.2% 7.6% 13 CGI (4.7%) 7.6% 1.7% 20.7% 9.5% 9.8% 7.4% 14 CNW 10.4% 13.0% 4.4% 10.8% 0.5% 2.4% 6.9% 15 PACR 8.2% 13.2% 5.4% 5.1% 2.9% 5.3% 6.7% 16 UACL 10.5% 4.6% 15.4% 0.7% 1.7% 7.4% 6.7% 17 NSC 6.8% 6.6% 7.6% 3.7% 7.4% 7.4% 6.6% 18 ABFS 4.8% 8.4% 8.8% 5.2% 2.9% 1.1% 5.2% 19 CSX 2.8% 2.6% 7.1% 3.6% 8.1% 5.7% 5.0% 20 UNP 3.4% 3.3% 4.8% 3.7% 5.4% 7.4% 4.6% 21 TNTE 6.1% 3.0% 2.3% 2.1% 3.4% 22 GWR 2.3% (4.5%) 5.6% 5.2% 6.8% 3.5% 3.2% 23 FDX 5.6% 3.2% 2.3% 1.4% 1.4% 2.8% 2.8% 24 R (10.0%) 4.5% 7.2% 14.0% 5.9% (5.6%) 2.7% 25 CP 4.4% 5.0% 3.4% 0.7% (1.4%) 0.2% 2.1% 26 SWFT 6.0% (4.5%) (0.7%) 5.9% (3.6%) 6.2% 1.5% 27 UTIW (12.3%) 0.8% 6.2% 7.0% 0.9% 4.8% 1.2% 28 KSU 1.5% (0.3%) (2.3%) (0.9%) 4.6% 3.3% 1.0% 29 RA (1.0%) (0.4%) 1.8% (3.0%) 4.1% 2.2% 0.6% 30 AAWW 4.0% 5.6% (13.1%) 5.7% 8.2% (10.9%) (0.1%) 31 SAIA (10.2%) (12.0%) 12.6% 3.2% 6.2% (4.2%) (0.7%) 32 ODFL (5.7%) (2.8%) 2.0% (7.6%) 3.4% (3.0%) (2.3%) 33 CVTI (0.2%) 5.0% (5.3%) (8.2%) (3.0%) (4.9%) (2.8%) 34 Note: Free cash flow return on total capital defined as (cash flow from operating net capital expenditures before dividends, acquisitions, and share repurchases) / (total debt including OBS debt + total shareholders equity). WolfeTrahan.com Page 10 of 11

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