RLGT- Radiant Logistics

[rpadebet]

I was trying to learn about this 3PL industry lately and I kind of like the business models and the competitive landscape here. Roll up activity has been going for a few years now here, but the industry still seems fragmented. Given the non-exclusive nature of the broker relationship business, I believe there is room for 4-5 big players at the top.

 

Below are 3 write-ups about 3 companies in this space written up by other smart individuals a few years ago.

 

RLGT

http://montesolcapital.com/uploads/RLGT-Write-up.pdf

 

CHRW

https://punchcardblog.wordpress.com/2014/10/31/c-h-robinson-and-two-sided-markets/

 

XPO

http://quinzedix.blogspot.com/2012/08/xpo-logistics-third-party-logistics.html?_sm_au_=iMVWqJnWV8NR50DD

 

 

I would have loved to be familiar with these 2-3 years ago and have the accumulated knowledge and investment philosophy I have now, but one can't turn the clock back.

 

So my question to fellow board members is, if you had to choose between one of these 3 (or even something else in the industry), which would you choose at current prices and why?

 

I would also like to hear from you, if you don't think this is a good time to invest in this industry (excluding market is toppy syndrome).

 

To me

 

-CHRW seems to be the steady leader without acquisition intentions, income seeking investors and just trying to protect its business. Its a quality business and a seemingly safe choice.

 

-XPO seems to have had some success with the roll up strategy thus far. has a seasoned executive, seeking to grow aggressively through acquisitions. It kind of reminds me of VRX in some ways, but it has grown a lot, seems pricey, EBITDA margins have increased to the top tier 6-7%, has debt but seemingly steady equity investors.  I don't know how difficult this business is to integrate, but I am worried about XPO integrating the acquisitions well given their speed of acquisitions.

 

-RLGT: Smallest of the 3. Has a good CEO. Also pursuing a roll up but not as aggressive as XPO. Price seems okay when looking at forward EBITDA guidance. Not much debt. Attractive part is EBITDA margins are still in the low-mid tier near 3%, so has potential to grow. Lots of fragmentation in the bottom tier of the industry, which obviously appeal to RLGT more than the big guys. Potential to be acquired by XPO or one of the other big guys once they grow big enough to move the needle for them. 

[KCLarkin]

Allan Mecham unloads XPO Logistics

 

Though XPO holds massive growth potential, we became increasingly uncomfortable with management’s aggressive stance of acquisitive growth. XPO induced further unease when management expressed 2017 guidance?a dangerous move in our opinion-and we sold our shares. Through a handful of name changes and three management teams our XPO investment proved rewarding over our 7-year holding period, compounding at 28%.

[Liberty]

I've also been studying the space lately. I like it very much so far. I had looked at CHRW a few years ago, but decided to pass. XPO seems to be the most interesting one these days. Scale seems to matter a lot because of network effects (in each mode, and cross-selling between modes to the same customers), and I think ultimately we might see a few very big winners, kind of like in the cable industry. Is XPO the TCI of the space? Good question.

[Liberty]

Allan Mecham unloads XPO Logistics

 

Though XPO holds massive growth potential, we became increasingly uncomfortable with management’s aggressive stance of acquisitive growth. XPO induced further unease when management expressed 2017 guidance?a dangerous move in our opinion-and we sold our shares. Through a handful of name changes and three management teams our XPO investment proved rewarding over our 7-year holding period, compounding at 28%.

 

If I'm not mistaken, that from February of this year. Since then, XPO has acquired Norbert Dentressangle and that alone should allow them (when it closes) to beat their 2017 guidance.

[rpadebet]

Allan Mecham unloads XPO Logistics

 

Though XPO holds massive growth potential, we became increasingly uncomfortable with management’s aggressive stance of acquisitive growth. XPO induced further unease when management expressed 2017 guidance?a dangerous move in our opinion-and we sold our shares. Through a handful of name changes and three management teams our XPO investment proved rewarding over our 7-year holding period, compounding at 28%.

 

 

Kind of makes me feel warm and fuzzy that Allan Mecham and I share the same fears about aggressive roll ups. Yes after their recent acquisition, they are on track to beat their 2017 guidance this year itself and are funding it with 2bill debt and 1.5 bill new equity. So they still have 1 bill cash to go after other acquisitions this year and beyond.

 

As I said, I am worried about the speed primarily. Also EV/EBITDA is pricey indicating the confidence most investors have. For me the most important driver in favor of Radiant over XPO is the EBITDA margin. XPO already has got the scale and the top tier margin. Radiant is hoping to be at 1Bill run rate revenues at end of this year. If they gain more revenue/scale in next few years, their margins should improve closer to 5-6%. With that ROE and multiple expansion is also possible (currently I have between 9-10 EV/EBITDA with potential to go unto 15-16x given EBITDA is synonymous with cash flow in this business). Also this business can take on some debt if they have enough scale, so potential to have a couple of EBITDA turns in debt to replace equity. And they can get bought by the big guys.

 

So revenue growth, margin expansion, multiple expansion. financial leverage, followed by takeover and control premium gives me many ways to win. Seems like a multi bagger, but of course it depends on how they fund their acquisitions and how they go about scaling their revenue. If they use a lot of equity, then dilution is a risk as it is in all roll ups. The fact that they don't seem to be in XPO type hurry gives me some comfort that dilution isn't a big risk. Also CEO owns 30%, so I don't think he likes to diluted either.

 

[Liberty]

What do you think of Radiant management?

[rpadebet]

What do you think of Radiant management?

 

Decent management. Their DBA acquisition had some significant missteps, but I believe they will live and learn from it. there is no perfectly executed roll up, even VRX had its share of mistakes which Pearson admits and has changed strategy to not repeat them. I think RGLT management also given the incentives (50%+ insider owned) will be more thoughtful going forward and include earn outs and keep the key people in acquired companies.

[magno111]

What do you think of Radiant management?

 

Decent management. Their DBA acquisition had some significant missteps, but I believe they will live and learn from it. there is no perfectly executed roll up, even VRX had its share of mistakes which Pearson admits and has changed strategy to not repeat them. I think RGLT management also given the incentives (50%+ insider owned) will be more thoughtful going forward and include earn outs and keep the key people in acquired companies.

 

you should investigate further on RLGT's CEO. He was the CFO of stonepath 10 years ago. Stonepath was a roll up of 3PL like RLGT.That company committed fraud, they had to restate financials and ended bankrupt due to high debt levels after the restatement...

 

http://globenewswire.com/news-release/2004/10/01/316482/64841/en/Investor-Sues-Stonepath-Group-Inc-For-Stock-Fraud-Berman-DeValerio-Pease-Tabacco-Burt-Pucillo-Announces-STG.html

[rpadebet]

What do you think of Radiant management?

 

Decent management. Their DBA acquisition had some significant missteps, but I believe they will live and learn from it. there is no perfectly executed roll up, even VRX had its share of mistakes which Pearson admits and has changed strategy to not repeat them. I think RGLT management also given the incentives (50%+ insider owned) will be more thoughtful going forward and include earn outs and keep the key people in acquired companies.

 

you should investigate further on RLGT's CEO. He was the CFO of stonepath 10 years ago. Stonepath was a roll up of 3PL like RLGT.That company committed fraud, they had to restate financials and ended bankrupt due to high debt levels after the restatement...

 

http://globenewswire.com/news-release/2004/10/01/316482/64841/en/Investor-Sues-Stonepath-Group-Inc-For-Stock-Fraud-Berman-DeValerio-Pease-Tabacco-Burt-Pucillo-Announces-STG.html

 

Thank you.  I need to research the management more and look into the accounting techniques used here.

[kab60]

Did you find anything worrisome on management? Seems the lawsuit was dismissed.

 

Update: I did a bit of work on this name and like it at these levels. I love the 3PL business and Radiant seems to trade at around 7 x EV/EBITDA. The company did an equity offering in the summer at 6.75 (when I'd say it was overpriced) for some 35m USD. Now it's trading at 3.5 with leverage < 1,5 EBITDA so they have powder to continue their rollup strategy while their targets might have become a wee bit cheaper.

 

Management sold a bunch of shares around the equity offering date and I can't blame them cause I'd say it was overpriced. If that's why they did the equity offering kudos. CEO still owns 20 percent of the shares, but obviously I'd like to know if he's a scumbag. There are some critical articles on SA but I think most of stuff is pretty silly and it seems like they don't know how these businesses are valued.

 

3PL is about software and people, and I'd like to know how good their software is, but I don't suppose anyone here would know?

[ratiman]

Didn't Crain say there was going to be a huge SAP implementation, across both Wheels and the old Radiant? It's a big project and certainly it makes Radiant more unpredictable.

[flesh]

Love this one, been following for a year and now have a large position at current prices.

 

I see 50% gain from here over next two years conservatively, with possibilities for more.

 

Trading just over 14x  ntm owners earnings with 60m available at 3.5%. Buying 2m ebitda companies at 4-5x ebitda often times consolidating back offices. Before future acquisitions, guiding to 30-34 m ebitda ntm. This all excludes Bohn Crain's 1-2m cost savings initiative mainly being driven sharing back offices from recent large acquisitions. As a bonus we have a strengthening dollar benefit as many of their logistics are exports from canada. If that's not enough we have organic growth coming from "onboards", small logistics companies piggy backing on their system which costs nothing and RLGT gets 10% of their gross margin and these onboards create a relationship that sometimes leads to clear choices for acquisitions. Bohn has guided 4-5% organic growth through these onboards and gdp.

 

Doing an equity raise at 6.75 was a no brainer, even though their coc was 3.5% it was so overvalued at 6.75 that it was basically a wash, however, it gave them another 60m to deploy, I suppose it may have been difficult at the time to get access to that much capital another way, certainly as inexpensively and was a conservative move. This is the definition of a coiling spring/lollapalooza. One of the few investments I feel confident about these days.

 

 

 

 

 

 

[kab60]

Didn't Crain say there was going to be a huge SAP implementation, across both Wheels and the old Radiant? It's a big project and certainly it makes Radiant more unpredictable.

I didn't read that it was huge but that they were switching/upgrading from one SAP system to another. Where did you read more about it?

[kab60]

Sorry for the ignorance, but how do you figure that the COC is 3,5 percent? They have 20m preferred shares paying 9,75% while their BAC credit I believe is double digit. Their CND loans related to Wheelers is 6.X-something%. Couldn't seem to find their effective blended interest in the 10K. I picked up a position at 3.44.

[ratiman]

In one of the recent conference calls Crain was saying that SAP was being considered to replace both Cargowise in freight forwarding and the legacy systems at Wheels, so that's a huge implementation.

[kab60]

Yes, found it. They already use SAP so I suppose that'll make it easier. As to Wheelers it seems like they'll tinker a bit and figure out what makes most sense. Sound very pragmatic. Hate it when somebody wants to start from scratch to do the perfect software setup since these things always evolves.

[flesh]

Sorry for the ignorance, but how do you figure that the COC is 3,5 percent? They have 20m preferred shares paying 9,75% while their BAC credit I believe is double digit. Their CND loans related to Wheelers is 6.X-something%. Couldn't seem to find their effective blended interest in the 10K. I picked up a position at 3.44.

 

Bank of America Credit Facility

The Company has a $65.0 million senior credit facility (the “Credit Facility”) with Bank of America, N.A. (the “Lender”) on its own behalf and as agent to the other lenders named therein, currently consisting of the Bank of Montreal (as the initial member of the syndicate under such loan), pursuant to an Amended and Restated Loan and Security Agreement. The Credit Facility includes a $2.0 million sublimit to support letters of credit and matures August 9, 2018.

Borrowings accrue interest based on the Company’s fixed charge coverage ratio at the Lender’s base rate plus 0.0% to 0.50% or LIBOR plus 1.50% to 2.25%. The Credit Facility provides for advances of up to 85% of the eligible Canadian and domestic accounts receivable, 75% of eligible accrued but unbilled domestic receivables and eligible foreign accounts receivable, all of which are subject to certain sub-limits, reserves and reductions. The Credit Facility is collateralized by a first-priority security interest in all of the assets of the U.S. co-borrowers, a first-priority security interest in all of the accounts receivable and associated assets of the Canadian co-borrowers (the “Canadian A/R Assets”) and a second-priority security interest on the other assets of the Canadian borrowers.

Borrowings are available to fund future acquisitions, capital expenditures, repurchase of Company stock or for other corporate purposes. The terms of the Credit Facility are subject to customary financial and operational covenants, including covenants that may limit or restrict the ability to, among other things, borrow under the Credit facility, incur indebtedness from other lenders, and make acquisitions. As of September 30, 2015, the Company was in compliance with all of its covenants.

As of September 30, 2015, based on available collateral and $286,800 in outstanding letter of credit commitments, there was $49,706,000 available for borrowing under the Credit Facility and excluding any availability attributed to accounts receivable of SBA.

 

Sorry I was deep into 9 point beers last night. I should have said coc on future acquisitions not blended coc. Future acquisitions will be accretive to earnings. They have 10m cash as well.

[kab60]

Sorry I didn't get back to you but I'm a bit confused about the wording. How do you interpret/understand the wording in that one--that it's 0-0,5%+LIBOR? It seems that way, I just thought they said on a CC that their rates were higher but that must've been in regards to their other facilities. Not significant to the thesis but they could optimize their financial structures which they've also talked about. Believe the preferred can be called without penalty in 2017. By the way, you might've seen this, but I only just noticed this somewhat recent presentation: https://www.sec.gov/Archives/edgar/data/1171155/000156459015010732/rlgt-ex991_6.htm - nothing new but thought it was pretty good.

[KJP]

Sorry I didn't get back to you but I'm a bit confused about the wording. How do you interpret/understand the wording in that one--that it's 0-0,5%+LIBOR? It seems that way, I just thought they said on a CC that their rates were higher but that must've been in regards to their other facilities. Not significant to the thesis but they could optimize their financial structures which they've also talked about. Believe the preferred can be called without penalty in 2017. By the way, you might've seen this, but I only just noticed this somewhat recent presentation: https://www.sec.gov/Archives/edgar/data/1171155/000156459015010732/rlgt-ex991_6.htm - nothing new but thought it was pretty good.

 

Also, Radiant can start to repay (with a 3% prepayment penalty) the 12% subordinated term loan beginning in April 2016.  There is no prepayment penalty after April 2017.

[flesh]

Sorry I didn't get back to you but I'm a bit confused about the wording. How do you interpret/understand the wording in that one--that it's 0-0,5%+LIBOR? It seems that way, I just thought they said on a CC that their rates were higher but that must've been in regards to their other facilities. Not significant to the thesis but they could optimize their financial structures which they've also talked about. Believe the preferred can be called without penalty in 2017. By the way, you might've seen this, but I only just noticed this somewhat recent presentation: https://www.sec.gov/Archives/edgar/data/1171155/000156459015010732/rlgt-ex991_6.htm - nothing new but thought it was pretty good.

 

Also, Radiant can start to repay (with a 3% prepayment penalty) the 12% subordinated term loan beginning in April 2016.  There is no prepayment penalty after April 2017.

 

Yep, something to watch. If they don't pay it by 17', that's a problem. This may be the reason Bohn was hesitant at the last ec about buybacks. In the past he bought opportunistically, of course, being such a large shareholder, maybe he prefers the stock being lower without a buyback put so he can buy them back cheaper. There's so many ways to win with their new financial structure and the private public market multiple arbitrage still being meaningful as a % of mkt cap. Selling for a reasonable current fcf yield to boot. The only thing they are missing is a growing transportation tailwind, perhaps they will get some from the Canadian exports with the strong dollar. Either way, this thing is really positioned well right now.

 

It doesn't hurt future acquisitions will help the optics since they will be gaap earnings positive as well.

[flesh]

Doubled my position today, cost basis is now 3.30, 20% position.

 

This buyback is good for 10% of shares outstanding and if done at current prices would cost about 15m which can be done from cash on hand. If you look back a few years ago you'll see Bohn/ceo will do large buybacks when he feels his stock is undervalued. I really can't see why people don't see what I see, it's rare at these market valuations to find a great company with a great ceo with a proven track record and great capital allocation selling currently at 12x ntm fcf excluding future acquisitions that will be accretive to gaap eps with enough credit available to add 12m ebitda at a purchase price of 4-5x ebitda. Also excluding bohn's projected 1-2 m in cost savings from recent acquisitions sharing back offices. If it goes down another 10% I'll buy more.

 

BELLEVUE, WA, January 7, 2016 – Radiant Logistics, Inc. (NYSE MKT: RLGT), a third party logistics and multimodal transportation services company, today announced that its board of directors has authorized the repurchase of up to five million shares of the Company’s common stock through December 31, 2016. As of December 31, 2015, the Company had 48,743,581 shares outstanding.

 

The share repurchases may occur from time-to-time through open market purchases at prevailing market prices or through privately negotiated transactions as permitted by securities laws and other legal requirements. The Company expects to fund all purchases from existing cash balances, cash available under the Company’s revolving credit facility and future cash flows from operations. The program allows the Company to repurchase its shares at its discretion. Market conditions, price, corporate and regulatory requirements, alternative investment opportunities, and other economic conditions will influence the timing of the buyback and the number of shares repurchased. The program does not obligate the Company to repurchase any specific number of shares and, subject to compliance with applicable securities laws and other legal requirements, may be suspended or terminated at any time without prior notice.

 

Bohn Crain, Founder and CEO, said, “We believe the current share price does not accurately reflect Radiant’s recent success and long-term growth prospects, and therefore, represents an excellent investment opportunity for both the Company and our shareholders.”

[ratiman]

If Radiant has demonstrated one thing, it's that there is never margin expansion or cost savings. I can't think of a single deal that has performed better than the announced number. Virtually every deal has underperformed.

[flesh]

If Radiant has demonstrated one thing, it's that there is never margin expansion or cost savings. I can't think of a single deal that has performed better than the announced number. Virtually every deal has underperformed.

 

I agree that this has been the case thus far. In fact, after wheels and the other two that happened in quick succession late spring early summer bohn gave guidance. In the latest ec he reiterated the same guidance however they made another small acquisition since. When an analyst asked about whether or not the guidance changed with the new acquisition, bohn said no, it's the same. Maybe you know of other cases like this?

 

That being said, 2015's acquisitions do allow for a larger reduction in back office costs if for no other reason that they were larger in nature and therefore the total amount of savings should be greater although not greater in % terms.

 

I think the margin of safety is still there.

 

 

[kab60]

Anyone here knows the full story of Stonepath where Crain was former CFO? I found some different lawsuits and thought this was most troubling and I don't even think it is very troubling, but if anyone knows more or remembers the story please do tell: http://securities.stanford.edu/filings-documents/1032/STG04-02/200643_r02m_044515.pdf

 

Apparently Stonepath bought a Company in 2001 that ownerstated earnings (by understating costs) so that the founder of the rolled up Company could reach it's earn-out targets - costing Stonepath dearly. Obviously it's somewhat troubling that it could happen, but Crain didn't become CFO till 2002, so he couldn't have been responsible for the eventual (lack of) due dilligence on the acquired Company. The lawsuit against Stonepath and Crain was also dismissed.

[ratiman]

EBITDA estimates are all the way down to $28-$30M. There is no organic growth and the deals always underperform, so I don't know how Radiant grows without destroying value. That's the big problem. The 5x deals at this point are too small to make a dent. Buying back shares is by far the best option.