Covenant Logistics Earnings Call: Growth Amid Margin Strain

Covenant Logistics Group, Inc. ((CVLG)) has held its Q4 earnings call. Read on for the main highlights of the call.

Covenant Logistics Balances Revenue Growth With Margin and Debt Pressures in Latest Earnings Call

Covenant Logistics Group’s latest earnings call painted a cautiously optimistic but still challenging picture. The company delivered solid top-line growth and pointed to early signs of a firmer freight market, particularly in pricing and bid activity. Dedicated trucking operations are emerging as a bright spot, and a recent brokerage acquisition is expected to add earnings power and diversification. However, the quarter was marred by sharp margin compression, a steep drop in adjusted operating income, increased leverage, and persistent headwinds in the Expedited and Warehousing businesses. Management outlined a disciplined capital and fleet strategy aimed at repairing profitability and the balance sheet, but acknowledged that tangible improvements will take time.

Consolidated Revenue Growth Shows Top-Line Momentum

Covenant’s consolidated freight revenue increased 7.8% year over year, adding roughly $19.5 million to reach $270.6 million in the fourth quarter of 2025. This growth came despite a weak freight backdrop for much of the year and underscores the company’s ability to win business and expand customer relationships. Management highlighted the revenue performance as confirmation that demand is stabilizing and that Covenant’s diversified portfolio—spanning truckload, dedicated, brokerage, and warehousing—is attracting freight even as profitability remains under pressure.

Dedicated Segment Momentum and Fleet Expansion

The Dedicated segment stood out as a key operational and financial bright spot. It posted a 92.2% adjusted operating ratio in the quarter, its best performance of the year, signaling improved margins and cost control. Covenant grew the Dedicated fleet by about 90 tractors, roughly 6.3% year over year, relying on strong win rates in high-service, niche accounts. Management emphasized that Dedicated’s more predictable revenue and steady customer relationships make it a core pillar of the company’s long-term strategy, particularly as other segments face more volatility.

Early 2026 Market and Pricing Tailwinds

Management pointed to encouraging early signs of an upturn in freight fundamentals heading into 2026. Spot rates moved meaningfully higher in the fourth quarter and into January, and revenue trends for the first three weeks of January improved versus the prior year. Covenant is seeing an average rate improvement of about 3.5% so far in January, while bid activity is up roughly 33% from the fourth quarter, a strong indicator of future freight flow. The company has already secured several low- to mid-single-digit contractual rate increases for the first quarter and expects more to phase in during the second quarter, supporting the case for gradual margin recovery if the market continues to firm.

Strategic Acquisition of Star Logistics Solutions

Covenant’s acquisition of Star Logistics Solutions, a small truckload brokerage, broadens its exposure to asset-light earnings and niche customer segments. Star brings two specialized customer bases—government emergency response and high-service consumer packaged goods—that should provide both diversification and upside as the freight cycle improves. Management expects the acquisition to be accretive to earnings in the first half of 2026 and views Star as a platform to deepen brokerage capabilities and capture higher-margin, high-service freight opportunities beyond its core asset-based network.

Capital and Fleet Optimization to Improve Returns

A central theme of the call was capital discipline and fleet optimization. Covenant is intentionally reducing its overall fleet size, moving underutilized equipment into held-for-sale status, and lowering its expectations for used-equipment disposition prices to match a weaker resale market. For 2026, the company is guiding to modest net capital expenditures of $40–$50 million, a level designed to slow fleet growth, preserve cash, and direct capital only to the highest-return opportunities. Management framed this plan as critical to reducing leverage and boosting returns on invested capital after a year in which profitability fell well short of internal goals.

Managed Freight and Warehousing Add Revenue but Not Yet Profit

The Managed Freight segment, which includes brokerage and related services, saw stronger freight revenue in the quarter, aided by the Star acquisition, with Q4 freight revenue referenced around $80 million including the new business. Warehousing also delivered top-line growth, with freight revenue up 4.6% year over year, or about $1.1 million, driven by a large customer launch. In addition, Covenant’s minority investment in TEL contributed $3.1 million in pre-tax income, slightly above the prior year. However, these contributions were not enough to offset broader margin pressure, and both Managed Freight and Warehousing remain works in progress from a profitability standpoint.

Sharp Decline in Adjusted Operating Income

Despite higher revenue, Covenant’s consolidated adjusted operating income fell 39.4% year over year to $10.9 million in the fourth quarter. The drop highlights the severity of margin compression across multiple business lines, driven by higher operating costs, underutilized assets, and a freight market that, while improving, has not yet normalized pricing power across all segments. This disconnect between revenue growth and profit decline sits at the core of investors’ concerns and underscores why management is emphasizing cost discipline, mix improvement, and capital efficiency in the coming year.

Expedited Segment Underperformance and Fleet Pullback

The Expedited segment was a notable drag in the quarter. It posted an adjusted operating ratio of 97.2%, materially missing internal operational expectations and falling short of its long-term target operating ratio in the 80s. Performance was negatively impacted by a U.S. government shutdown that lasted nearly half the quarter, disrupting a key lane of demand. In response, management is trimming exposure in Expedited, planning to reduce that fleet by roughly 25 tractors per quarter, and is refocusing the business on higher-yield, higher-service freight where it believes it can better leverage its capabilities and secure more attractive margins.

Margin Compression in Managed Freight and Warehousing

While Managed Freight and Warehousing delivered revenue growth, both segments faced profitability headwinds. Managed Freight margins compressed as the costs to secure quality brokerage capacity rose, squeezing spreads despite incremental revenue from the Star acquisition. In Warehousing, the 4.6% revenue increase was overshadowed by a $1.6 million decline in adjusted operating income, largely due to start-up inefficiencies and higher labor costs, including overtime, tied to new customer implementations. Management acknowledged that these segments need improved execution and cost management to deliver the mid-single-digit operating margins they target over time.

Rising Net Indebtedness and Elevated Leverage

Covenant’s balance sheet became more stretched over the past year. Net indebtedness increased by $76.9 million to $296.6 million compared with the end of 2024, resulting in an adjusted leverage ratio of about 2.3x and a debt-to-capital ratio of 42.3%. Management attributed the higher debt load in part to share repurchases and acquisition-related payments. With return on average invested capital dropping to 5.6% from 8.1% the prior year, the company is under pressure to improve returns and reduce leverage, making its conservative 2026 CapEx plan and fleet-rightsizing efforts especially important for investors watching the balance sheet.

Equipment Market Pressure and Asset Actions

Softness in the used equipment market and previous trade deferrals also weighed on results. Covenant allowed its average tractor age to rise to 24 months from 20 months, while accumulating underutilized units as freight softened. With used tractor values declining, the company marked a block of assets as held for sale and lowered its assumptions about what those assets will fetch. These factors contributed to the decline in adjusted return on invested capital to 5.6% and have prompted management to aim for a modestly smaller fleet by year-end 2026, focusing on productivity and profitability per unit rather than raw equipment count.

Near-Term Risks From Seasonality, Weather and Policy Events

Management cautioned that the first quarter could be soft, even with improving structural fundamentals. Typical seasonality, combined with extreme weather events and a freight market that is still finding its footing, pose near-term risks to volume and margin improvement. The company also flagged the potential for further U.S. government shutdowns, which previously hurt Expedited results, as an ongoing macro risk. These factors suggest that investors should expect a choppy path to recovery rather than a straight-line rebound.

Guidance and Outlook: Gradual Recovery With a Focus on Execution

Looking ahead, Covenant’s message was one of gradual recovery anchored by disciplined execution rather than aggressive growth. Management highlighted improving freight fundamentals, with spot rates already higher, roughly 3.5% average rate improvement in early January, and bid activity up about 33% versus the fourth quarter. The company expects additional low- to mid-single-digit rate increases to take hold in the first quarter and early second quarter, providing incremental pricing support. Strategically, the Star acquisition is expected to be accretive in the first half of 2026 and to help Managed Freight trend toward mid-single-digit operating margins over time. On the asset side, Covenant aims for a modestly smaller fleet, continued reduction of the Expedited tractor count, and net CapEx capped at $40–$50 million in 2026 to lower leverage and improve returns. Longer term, management is targeting an Expedited operating ratio in the 80s and a Dedicated operating ratio around 88–90%, while seeking to capture operating leverage as demand and pricing strengthen through 2026.

In closing, Covenant Logistics’ earnings call balanced clear progress in revenue growth and Dedicated performance with sobering realities around margins, asset efficiency, and leverage. The company is leaning into a conservative capital strategy, fleet optimization, and a sharper focus on high-yield freight, while betting that improving market conditions and the Star acquisition will support earnings recovery. For investors, the story remains one of cautious optimism: the building blocks for better profitability are being put in place, but the hard work of execution and balance-sheet repair still lies ahead.