Forward Air Stock: Two Major Downgrades, Loss Above 90%

Forward Air is in turmoil. Following the disastrous acquisition of Omni Logistics last year, the company has faced significant financial and operational challenges. Here’s what’s been happening.

The Numbers

• Stock Decline: Forward Air’s stock has plummeted nearly 91% since July 2023.
• Debt Rating Downgrade: Moody’s downgraded Forward Air’s debt to B2 from Ba3, and Fitch downgraded it to B from BB-.
• Debt-to-EBITDA Ratio: Moody’s estimates a ratio of 6.5X, significantly higher than the anticipated 3.5X at the time of the merger.

Recent Developments

Forward Air’s challenges have been compounded by a series of unfortunate events and decisions:

1. Moody’s Downgrade: Moody’s downgraded Forward Air’s debt rating due to higher than expected leverage and sustained softness in the freight transportation industry. The outlook was shifted from stable to negative, indicating deep uncertainty about the company’s ability to manage its debts.
2. Fitch Downgrade: Fitch also downgraded Forward Air’s default ratings, though it maintained a stable outlook. Fitch expects modest sequential improvement in operating earnings and a focus on reducing debt through deleveraging-focused capital allocation.
3. Leadership Changes: The company has seen significant leadership turnover. CEO Thomas Schmitt, who led the Omni acquisition, left shortly after the merger. Rebecca Garbrick, CFO since 2020, has also departed, replaced by Jamie Pierson on an interim basis. Shawn Stewart, an ex-CEVA Logistics executive, is the new CEO.
4. Legal and Governance Issues: The legal battle to terminate the Omni deal has raised governance concerns. Moody’s cited management’s attempt to cancel the acquisition and subsequent litigation as significant factors in the rating downgrade.

Market Reaction

Interestingly, Forward Air’s stock jumped 21.65% yesterday. This could be due to a few factors:

• Short Covering: Investors who were betting against the stock might be covering their positions.
• Positive Analyst Reports: Wolfe Research upgraded Forward Air to "Peer Perform," possibly boosting investor confidence.

John Kingston from FreightWaves highlighted the severity of the situation: “The ratings downgrade and negative outlook reflect Moody’s view that Forward Air’s credit metrics will remain weaker than previously expected through 2025.”

Broker Recommendations

• Buy Ratings: 3
• Hold Ratings: 5
• Consensus Price Target: $76.43

The Road Ahead

Forward Air faces an uphill battle. The company must navigate its financial woes, stabilize its operations, and rebuild investor confidence. Fitch remains cautiously optimistic, citing potential improvements in operating execution and earnings. However, the path to recovery will be challenging.

• Focus on Deleveraging: Forward Air is expected to prioritize reducing its debt load and suspending dividends.
• Potential Divestitures: Fitch suggested that divestitures could be a possibility, although they were not factored into the current rating.

Sources: FreightWaves | Defense World