JP Morgan is upgrading
Werner Enterprises (NASDAQ:WERN) to Overweight from Neutral with a $24 price target (prev. $18).
According to the analyst, WERN is one of the names within their coverage space that reflects low expectations and potential for significant upside surprise. They believe that WERN’s 2Q results are likely to show significant traction on cost-cutting initiatives while it provides attractive leverage to a turn in the economy in the medium term. They also believe the combination of low expectations and traction on cost cutting supports an attractive reward to risk profile even if the TL cycle turn takes time.
Low expectations support attractive risk to reward. Short interest of 24% of the float for WERN versus 11% on average for the other TL and LTL names JP Morgan covers is one indication of market skepticism regarding WERN, while its low 4.2x EV/ EBITDA valuation on 2010 estimates (vs. 8.2x on average for KNX and HTLD) reflects caution. Sell-side skepticism is also apparent with only 1 Buy rating out of 15 total ratings.
Serious approach to cost cutting could provide upside surprise. The firm believes a combination of aggressive non-driver cost reduction and further fuel efficiency gains can provide better than expected margin and EPS performance for WERN in 2Q09, and WERN’s cost-cutting activity should provide support for EPS as a TL turn may take patience.
Early cycle name with leverage to a turn. Historically the TL group including WERN performs well coming out of a downturn with WERN up 21% and 38% on average in the six and twelve months following the last quarter of the two most recent recessions (vs. the S&P 500 returns of 12% and 15%). They also note WERN’s significant EPS sensitivity of $0.13/ share to a 100 bp improvement in its operating margin.
Raising EPS estimates. JP Morgan is raising their 2Q09 EPS estimate from $0.18 per share to $0.22 per share and full-year 09 EPS from $0.72 to $0.78. 2010 EPS also rises. Stronger cost side performance is a key driver of the increases to our EPS forecasts.
Notablecalls: I like this call from the trading perspective. If JP Morgan is right about the potential significant upside surprise in the coming quarters, this one is going to zoom higher. The 24% short interest in the name is going to make sure of that.
Usually, when a tier-1 firm like JP Morgan comes out with a positive piece (estimates getting bumped higher), smaller firms tend to follow. This is how short squeezes develop.
I suspect this call will put some fire under the shorts today pushing the stock markedly higher. I see 5-7% upside in the name (just gut feel).
