Covenant Logistics Group (NYSE:CVLG) executives struck an optimistic tone on the company’s fourth-quarter 2025 earnings call, saying freight fundamentals appear to be improving even as results reflected margin pressure across several business lines. Management said the company is positioning for a more balanced market through fleet optimization, a reduced capital spending plan, and the integration of a small brokerage acquisition completed during the quarter.
Management sees freight market moving toward equilibrium
In prepared remarks, the company said it believes the freight market is “continu[ing] to evolve towards equilibrium between shippers and carriers,” and suggested the industry “might be at equilibrium now.” Management noted spot rates rose meaningfully during the fourth quarter and said revenue trends in the first three weeks of January improved meaningfully year-over-year across all business units.
On the Q&A portion of the call, CEO David Parker said the company’s average rate increase across the first three weeks of January was “around that 3.5% number,” while cautioning it was too early to declare a full trend. He also said January bids were up 33% versus the fourth quarter, attributing the activity to customers trying to get ahead of capacity constraints and to Covenant receiving bids from new customers. Parker added that cargo theft has “ticked up a little bit” in recent months and said some customers are increasingly asking for high-value programs and asset capacity.
Equipment impairment and a smaller capital plan
The company devoted a portion of its opening comments to an equipment impairment charge and its broader capital plan. Management said a safe, fuel-efficient late-model fleet requires continuous cycling of equipment, but that intentional fleet reductions and declining used equipment values in 2025 led the company to defer some trades, creating “too much underutilized equipment.”
To improve operations and the balance sheet, Covenant moved a group of assets to held-for-sale status and reduced its disposition price expectations. Management said it does not plan to replace all units disposed, noting the current size of the asset-based fleet is not generating the desired return on capital. The company expects a modestly smaller fleet at the end of 2026 and guided to $40 million to $50 million of net capital expenditures for the year.
In Q&A, executives characterized the held-for-sale action as a “mark to market” accounting requirement and said they do not expect an unusually large gain or loss on sale in the first quarter tied to the change. Management also indicated depreciation should be “flattish” sequentially on an adjusted basis, and said the company generally aims to minimize noise from gains or losses on equipment sales.
Star Logistics Solutions acquisition adds asset-light growth lever
During the fourth quarter, Covenant acquired the assets of a small truckload brokerage and will operate it as Star Logistics Solutions. Management described two niche customer bases: state and federal government emergency management departments, which the company said can be episodic and highly profitable during disaster response; and high-service consumer packaged goods customers, which management said can provide leverage to freight cycles that asset-based truckload operations lack.
With expected synergies, Covenant said Star should be accretive to earnings in the first half of 2026. In Q&A, management said Star’s business will not require additional equipment, and indicated the company is attempting to shift some freight that is not economical on asset-based teams toward managed freight where appropriate.
Quarterly results: revenue up, margins compressed
For the fourth quarter, consolidated freight revenue increased 7.8% year over year, up about $19.5 million to $270.6 million. Consolidated adjusted operating income declined 39.4% to $10.9 million, which management attributed primarily to margin compression in Expedited, Managed Freight, and Warehousing, partially offset by improved operating income in Dedicated.
Balance sheet metrics also shifted. Net indebtedness at December 31 increased $76.9 million to $296.6 million compared to the prior year-end, producing an adjusted leverage ratio of about 2.3x and a debt-to-capital ratio of 42.3%. Management said the increase reflected the share repurchase program and acquisition-related payments.
Operationally, the average tractor age increased to 24 months from 20 months a year earlier, which management attributed to reductions in the high-mileage expedited fleet and growth in the less capital-intensive dedicated fleet. On an adjusted basis, return on average invested capital was 5.6% versus 8.1% a year ago.
- Expedited: Adjusted operating ratio of 97.2%, which management said did not meet expectations. Executives cited the U.S. government shutdown, which lasted nearly half the quarter, as a partial headwind and said the segment also fell short of operational standards. Management plans to continue reducing fleet size and focusing on higher-yield freight, with a strategy of targeted rate increases and exiting less profitable business.
- Dedicated: Adjusted operating ratio of 92.2%, the best quarter of the year for the segment. Dedicated grew average tractors by 90, or about 6.3%, as the company won new business in “high-service niches.” Management said it intends to grow agricultural-related dedicated business while shrinking or stabilizing fleets exposed to more commoditized freight.
- Managed Freight: Freight revenue improved significantly in the quarter due to the Star acquisition, but margins were pressured by the rising cost to secure quality brokerage capacity. Management said mid-single-digit operating margins can generate acceptable returns given the asset-light nature of the segment.
- Warehousing: Freight revenue rose 4.6% ($1.1 million) after launching a new customer, but adjusted operating income fell $1.6 million due to startup costs, onboarding inefficiencies, and higher labor expenses including overtime. Management said it is targeting a high single-digit operating income margin over time and told analysts it expects results to improve sequentially, with Q1 better than Q4 and Q2 better than Q1.
- TEL minority investment: Pretax net income contribution was $3.1 million versus $3.0 million a year ago, with pressure from compressed leasing margins, a soft used equipment market, and incremental bad debt expense.
2026 outlook: improvement expected later in the year
Management said it remains optimistic about improving freight fundamentals, better equipment utilization, and the ability to capture operating leverage in 2026, though executives cautioned that improvements are likely to come later in the year. They flagged first-quarter headwinds including seasonality, extreme weather, a still-developing freight market, and a potential margin squeeze in Managed Freight.
On segment targets, Parker said he would not be satisfied until Expedited’s operating ratio is “in the 80s,” while Dedicated’s longer-term target is “88, 90.” Management also emphasized that 2026 will focus on execution, including integrating Star, reallocating capital toward higher-performing opportunities, and reducing leverage to provide flexibility as the freight cycle evolves.
About Covenant Logistics Group (NYSE:CVLG)
Covenant Logistics Group provides a comprehensive suite of transportation and logistics services across North America. The company’s core offerings include less‐than‐truckload (LTL) and full truckload hauling, temperature‐controlled freight, intermodal transportation and freight brokerage. Covenant also delivers specialized solutions such as expedited “hot‐shot” deliveries, cross‐border shipping to Canada and Mexico, and dedicated contract carriage for time‐sensitive or high‐value shipments.
With a network of service centers, terminals and partner carriers strategically located throughout the United States, Covenant supports diverse industries including food and beverage, automotive, retail, energy and manufacturing.
