EFTA01387105.pdf

22 February 2018 Trucking U.S. Transportation Company Specific Thoughts On the back of 40 results we have increased conviction in our positive stance on Knight Transportation (KNX), XPO Logistics (XPO) and CSX Corp (CSX). We remain comfortable with our sole-Sell ratings on Old Dominion (ODFL) and Canadian National (CNI), while our Buy on UPS was wrong and we are using this report to downgrade our rating to Hold. Our company-specific thoughts are below, and see details within this note for our industry takeaways post results: • KNX - best earnings revision potential across our coverage universe: For KNX we see potential for EPS to approach $3.60 per share in 2019, which is 30% above current consensus. This is based on 15% operating margin on 201% revenue ex. fuel, which is 200bps better than what KNX-SWFT achieved on a consolidated basis in 4Q'17- despite being in the early innings of integration and cyclical recovery. Our bullishness is supported by highly accommodative cyclical and non-cyclical factors, such as high-single-digit growth in U.S. truck tonnage and contract rates, double-digit improvements in yield, and plenty of low-hanging cost opportunity at Swift. See Figure 1 below for our walk to mid-teens operating margin. I Figure 1: Walk to KNX 15% operating margin in 2019 2017 2018 2019 Revenue ex-fuel KNX 1,025.7 1,102.6 1,157.7 SWFT 3,606.3 3,876.8 4,070.6 Total Revenue, net of fuel 4,631.9 4,979.3 5,228.3 YoY Chg. 7.5% 5.0% Adjusted EBIT KNX 128.8 151.8 168.4 SWFT 360.6 455.3 523.1 Synergies 50 75 Reduced Rental Expense 125 250 Incremental 0&A (99) (197) Consolidated EBIT 489.4 683.6 819.5 Organic Incremental Margin KNX 30% 30% SWFT 35% 35% Consolidated 55.9% 54.6% Operating margin (ex-fuel) KNX 14.5% SWFT 12.9% Consolidated 10.6% 13.7% 15.7% Nom Wen sawn.,g non>ibm• OR et 90% few SIWTor•• 2017 San.. 0..00* Bak C0,0•11, MIMS Deutsche Bank Securities Inc. Page 3 CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0089206 CONFIDENTIAL SDNY_GM_00235390 EFTA01387105