Comparing current and prior data points is a key component of measuring performance, but which prior period is used for the comparison makes all the difference.
The primary ways to compare financial performance and operating metrics are on a year-over-year (y/y) or sequential basis.
Year-over-year comps measure performance from the same periods in two different years (i.e., January of one year compared to January of another, two different first quarters or the full years themselves). Year-over-year comps are used to remove differences in seasonality inherent in most business models.
For most transportation companies, the first quarter is typically the slowest. A comparison of the typically demand-subdued first quarter for a trucking company to its third or fourth quarters, which contain peak shipping season and holiday buying, would distort results.
The first quarter can also include a greater frequency of severe winter weather events that likely won’t be seen in other quarters. Thus, comparing like quarters or months from current and prior years minimizes the outsize changes that could occur when comparing months or quarters consecutively.
Year-over-year comps can also be made by aggregating the data on a year-to-date (YTD) or last-12-months’ (LTM) basis.
Sequential comps compare consecutive periods (i.e., first quarter to second quarter or April to May). These comparisons are good for a new company or a company that has launched a new product line or service. While seasonal timing of demand will impact the comparison, sequential comps help to gauge the progress of a new business or track the impacts of a new trend, like labor shortages.
Most economic reports from the government compare data sequentially: on a month-to-month basis like retail sales and industrial production or quarter-to-quarter like GDP. The government data is usually provided on both a seasonally adjusted and unadjusted basis. Some analysts will use the unadjusted data for year-over-year comparisons of the same month to prior years.
Recently, some transportation companies have begun using sequential comps, as the year-over-year comps have become greatly distorted by the pandemic.
The second quarter of 2020 was marred by widespread COVID-related lockdowns as large subsectors of the economy were knocked offline and many manufacturers were forced to shut down production lines due to protocols. Freight demand returned mightily during the third and fourth quarters as parts of the economy reopened and manufacturers resumed operations. That demand strength has continued through the first half of 2021, creating some outsize year-over-year comps.
Recent year-over-year revenue comps for established companies, which tend to see only single- or low-double-digit changes, have come in more than 50%, 100% or 200% higher, growth rates normally associated with startup companies breaking into a marketplace.
That’s why transportation providers are now using sequential comps when providing guidance, something usually only given in the form of a year-over-year comp.
Analysts also use multiyear historical averages of sequential comps to gauge whether or not the current monthly or quarterly trends are keeping pace with prior averages. They use the same math to make sure margins are performing in line with normal sequential trends.
Carriers typically see a few hundred basis points of margin improvement from the first to the second quarter every year. Analysts will extrapolate the most recent sequential changes in margins versus historical averages to establish forecasts for the out quarters and years.
2-year stacked comps
Many analysts have recently been comparing freight volumes and financial data from 2021 to the same period in 2019, which is viewed as a more typical freight market. The comparison helps to remove the COVID-related noise in the comps.
Some financial reporting now provides a two-year stacked comp, which adds the growth rates for the past two years together. Some analysts are also calling their comparisons of 2021 to 2019 a two-year stacked comp even though the math isn’t exactly the same.
Year-over-year and sequential comparisons are the primary calculations used to analyze results, but distortions in demand caused by the pandemic have made it necessary to become more creative.
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