ArcBest (ARCB)

truck

Key Statistics

Enterprise Value = $746.83 million

Operating Income = $142.67 million

EV/Operating Income = 5.23x

Price/Revenue = .22x

Earnings Yield = 9%

Debt/Equity = 42%

The Company

ArcBest is a logistics company that is split up into two segments: asset heavy (mainly shipping freight, and this is 69% of revenue) and asset-light (31% of revenue). The asset heavy segment is a trucking freight company, with a specialty in less-than-truckload (LTL) shipping. LTL is exactly as it sounds: it’s for shipping freights that aren’t big enough to comprise a full truckload. The light asset division provides logistics services.

The LTL business usually picks up goods at an individual company that isn’t large enough to fill an entire truck. Small shipments are then consolidated at a service center. From the service center, they’re then delivered with smaller vehicles from the service center to the end customer. Pulling this off requires infrastructure and heavy staffing. This creates a low margin capital intensive business, but it also creates significant barriers to entry. ABF Freight, ArcBest’s asset-based carrier, operates 245 service centers throughout the United States. This is a large enterprise that is difficult to duplicate.

The asset-heavy line of the business is also labor intensive. Truckers are expensive, and there is currently a shortage of them. Labor costs represent 51.9% of revenues.

My Take

ArcBest operates in a tough business but maintains decent cash flow generation and a stable financial position, with a debt/equity ratio of 42%, compared to 99% for the industry.

The stock is down 47% over the last 52 weeks, and it is due to the usual suspects. The market is worried about a recession, and that would significantly reduce freight throughout the US. The trade war and tariff worries are also weighing the stock down.

LTL is a brutal business, but it is a growing one. I think it is likely to grow more as e-commerce and total freight expands throughout the United States. Customers are ordering large goods online. As people order things like couches online, the demand for LTL services will grow. Trucking is also something that grows organically with the economy, as you can see from the below truck tonnage data from FRED.

trucktonnage

Meanwhile, ArcBest’s asset-light businesses (Fleet Net, Panther Logistics, ABF Logistics) are good businesses and are growing significantly. In 2013, these divisions produced $571 million in revenue. This has grown to $971 million in 2018. These businesses use technological solutions to help their clients navigate complex supply chains.

ArcBest has a high degree of financial quality. The debt/equity ratio is only 42%. The Altman Z-Score is 3.34, implying a low probability of bankruptcy and a permanent loss of capital. The F-Score is a solid 6. ArcBest also maintains a large cash stockpile, currently at $9.60 share, representing 37% of the current market capitalization. I suspect ArcBest keeps such a significant cash position because they contribute to a multiemployer pension plan for current and former employees. This can result in payments outside of expectations, which is why ArcBest likely stays on the safe side and maintains a significant amount of cash.

The current P/E of 11 compares to an industry average of 16. On a price/sales basis, Arcbest currently trades at 22% of revenue, compared to an industry average of 99%. The stock currently trades at 4x cash flow. The EV/EBIT multiple is currently 5.23x, compared to a 5-year average of 14.57. As recently as 2018, the company traded at 10x EV/EBIT, which seems right for a company of this kind.

ArcBest certainly faces some uncertainty, but I think it is currently mispriced by the market and it is in a strong financial position which makes up for the tough business it is engaged in. They are also growing their asset-light division, which ought to improve returns on capital over the long run.

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.

Miller Industries (MLR)

tow

Key Statistics

Enterprise Value = $326.36 million

Operating Income = $47.34 million

EV/Operating Income = 6.89x

Price/Revenue = .42x

Earnings Yield = 11%

Debt/Equity = 14%

The Company

Miller Industries manufacturers towing and recovery equipment. They maintain multiple brands operating in three segments: (1) Wreckers – These are used to tow cars and trucks from car accidents. They make a variety of wreckers, including one-off tow trucks and more heavy-duty equipment. (2) Car carriers – These are flatbed vehicles with hydraulic tilts (an example is pictured in the stock photo). (3) Transport trailers – These are the vehicles you typically see on the highway stacked up with cars usually transporting new cars to an auto dealership.

Miller has a nice little niche with well-known brands in the industry, such as their Century line. The company as it exists today, is a result of a significant amount of consolidation over the years, as they’ve acquired multiple brands under the Miller umbrella.

Miller grows with the economy. As the economy improves, the miles which are driven in the US and internationally also grows. As driving mileage grows, so do car accidents. Miller’s success with wreckers, for instance, is tied to increasing numbers of car accidents that come naturally through more driving and more activity. In 2007, for example, there were 6,024,000 car accidents in the United States. This then declined with the recession to 5,338,000 in 2011. By 2016, the number of car accidents increased to 7,277,000.

miller

My Take

Obviously, this a cyclical industry. Miles driven is extremely cyclical. Miller also has international operations that can be affected by Trump’s trade wars. The stock is down significantly since Trump started escalating the trade war and is down 22% from its 52-week high, which was only reached back in May. This has been hammered by the usual subjects: trade war and recession jitters.

If we do have a recession, one advantage that Miller has is that most of its products are manufactured upon order. In other words, expenses can quickly be reduced if the economy dries up. This leads to the remarkable consistency in Miller’s margins. Their net margins, for instance, are typically around 4-6% regardless of the direction of revenue. In 2009, during the depths of the recession, Miller was still able to eke out a profit of $.51 per share, a year in which most firms produced losses. The stock price did collapse in the last recession, but it also traded at a much higher valuation at the peak of the last cycle. In 2007, it traded at 5x book value (it currently trades at 1.3x book).

While the market is speculating that a recession and trade war will adversely affect Miller, the company itself continues to execute. In the most recent quarter, for instance, income was up 29% over the same quarter a year ago.

Miller has a high degree of financial quality. Debt/equity is low, at 14%. The F-Score is 6, which is pretty solid. The Altman Z-Score of 4.16  implies a very low probability of bankruptcy and a permanent loss of capital.

If Miller simply continues to do what they’re doing and the market speculation about trade wars and recession subside, the multiple ought to increase significantly. Right now, from an EV/EBIT perspective, the company trades at 6.8x. The 5-year average is 8.6x, which would be a 26% increase from current levels. The P/E of 8.74 compares to an industry average of 20.94 and a 5-year average for Miller of 14.7. Miller currently trades at 42% of sales, which compares to an industry average of 129%. Quite recently, Miller traded at 55% of sales.

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.