Werner Enterprises (WERN)

trucking

Key Statistics

Enterprise Value = $2.16 billion

Operating Income = $220.44 million

EV/Operating Income = 9.79x

Earnings Yield = 8%

Price/Revenue = .85x

Debt/Equity = 10%

The Company

Werner Enterprises is a trucking and logistics company headquartered in Omaha. The company was founded in 1956 by C.L. Werner, who was also a trucker. Over the decades, the company has expanded into one of the biggest trucking companies in the country, posting $2.4 billion in sales in 2018 and operating over 7,000 trucks.

The stock has been on a steady upward trajectory for a long time, as the trucking freight gradually expands with the American economy.

Side note: There is a close relationship between truck tonnage and the performance of the Russell 3,000. It’s not a leading indicator, but truck tonnage gives you a real time pulse on the American economy.

trucksrussell3k.JPG

My Take

Because trucking relates closely to the performance of the economy, markets have been conditioned to look at this as a cyclical industry subject to the volatility of fuel prices. Another element adding to the cyclicality of this business is shortages of truckers, which inflates wages and pushes up operating costs. It also creates challenges with retention because a big wage spike fuels job hopping.

The cyclicality is a concern, but not as much as it has been in the past. Companies like Werner have been diversifying their business into logistics services, rather than being purely a freight company.

Werner takes steps to reduce the cyclicality of the business. They have fuel surcharge programs with their customers. This practice lets them pass on most of the cost of a fuel increase to the customer, so they don’t have to eat those costs when fuel is volatile.

The logistics business represents 25% of revenue. This logistics segment helps reduce the volatility of earnings due to the cyclicality of the trucking segment. The logistics segment helps Werner connect their customers to shipping and freight services all of the world to accomplish their needs. They help their customers create a global supply chain, which is necessary regardless of what the macro economy is doing.

The extended operating performance of the company is excellent. They remained profitable throughout the financial crisis. Since then, their return on equity has remained in a healthy range of 9-15%. The consistency of the business is one of my main attractions to it.

The stock has declined recently due mainly to concerns about a recession and the trade war having an impact on freight. It is currently 25% off of its 52-week high. There is also anxiety because Amazon is threatening the freight business with its launch of Freight Waves, which will dig into the profitability of the freight industry. There are also concerns that the trade war will decrease trade volumes with Canada and Mexico, something else that is weighing on the stock.

Werner has a high degree of financial quality. The debt/equity ratio is only 10%, compared to an industry average of nearly 100%. They have an Altman Z-Score of 4.03, which means that the probability of bankruptcy is low. The Beneish M-Score is -2.7, which means the likelihood of earnings manipulation is low.

Werner trades at a discount to its average valuation. It currently has a P/E of 12, which compares to a 5-year average P/E of 18.8. An increase to this level would be a 56% increase in the stock price. A boost to the 52-week high would be a 43% increase. On an Enterprise Value/EBIT basis, they trade at 9.7. The 5-year average is 13.75. In 2017, they traded as high as 20x.

On a price/sales basis, they currently trade at .85x. This valuation isn’t quite at the depths that the stock traded at during the Great Recession, but it’s slightly below the levels it traded at in 2010, a time in which the US economy and freight industry were in a much weaker position. The current valuation implies that a bulk of the market’s worries are already priced in. It also eases my mind that the company weathered the last recession well and maintained profitability.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.