Knight-Swift Transportation (KNX) Can Deliver Good Returns

Knight-Swift Transportation was formed in 2017 by merging the two trucking companies still described in its now-hyphenated name. Doing so made KNX America's largest player in full truckload deliveries. Post-merger, the firm has been consistently profitable, and 2020 and 2021 are both expected to establish new records in terms of sales, cash flow, book value and earnings. The dividend was just raised from $0.06 to $0.08 quarterly, a 33.3% increase. KNX carries just 5% in total debt. It has no defined pension to worry about, no preferred shares and held over $240 million in corporate cash as of Sep. 30, 2020. Its brief history in the current iteration suggests a normalized multiple would run about 15x current estimates. That implies end of 2021 and 2022 goal prices of around $48 and $52.50, respectively. In today's ZIRP world, expectations for low double-digit total returns on conservative stocks are nothing to scoff at. Those target prices are far from upper limits. At the stock's two should have sold moments (red-starred, above), KNX fetched 20.1x and 17.3x earnings. Value Line thinks the firm's sustainable long-term multiple should be 18x. Yahoo Finance calls for $51.88 for KNX by this time next winter, implying north of 20% in year-ahead total return. Value Line's three-to-five-year view is very much aligned with my own feeling that KNX can deliver 10%-20% annual total returns on a sustainable basis. That's a decent return, which could be made much better via judicious use of option techniques. The graphic that follows shows actual pricing for KNX's Jan. 20, 2023 expiration date options, with the shares at $43.34. Selling naked puts at strikes ranging from $35 to $50 would drop worst-case, forced purchase prices into very attractive territory. Built-in margins of safety would run from 14.1% on the $50 strike to as high as 30.1% on the most-conservative, $35 strike. Having to own KNX at $30.30 would be like buying this fine company's shares at what should be about 8.7x its 2022 estimated EPS. That's one of the beautiful things about writing long-term puts. It gives the underlying company almost two years to continue growing its fundamentals, making itself even more valuable. If you accept that KNX is likely to reach at least $52.50 by Dec. 31, 2022, then committing to potentially own it at the break-even prices shown should not be scary. Setting up a very low-risk Jan. 20, 2023, $45 strike price buy/write combination could be even more lucrative. Actual prices for those trades, with KNX at $43.34, are shown below. Reaching the best-case scenario illustrated next would only require the stock to go up 3.9%, to $45 or better by expiration day. If that occurs, the following transactions would play out. That very modest minimum gain would morph into a 71.38% total return in a bit less than two years. Adjust for the extended holding period and the annualized rate of return is a solid 36.95%. If someone offered you that rate and allowed you to lock it in until Jan. 2023, you'd probably say, Sign me up. You have that exact chance right now. What if KNX somehow fails to reach and hold $45? If so, the worst-case scenario detailed below would unfold. Barring a true calamity, even that is not really scary. Combination writers would end up owning double-sized positions in KNX, but at average costs of just $35.48 per share. The one-year chart, below, shows that KNX hasn't changed hands for less than $36 since the Covid-induced panic of March-April of 2020. Traders who bought, not sold, during that insanity have already been well rewarded. Despite Covid-19, KNX posted excellent results last year and appears poised for much better results going forward. Buy some KNX shares, sell some long-term puts, or consider setting up full buy/write combos out to January of 2023.

Knight-Swift Transportation Can Deliver Good Returns

KNX is set to produce sustainable returns, and these options plays can make this stock even more appealing.

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