USAK - USA Truck

[whatdadil9]

Interesting write-up in ADW Capital's Q1 Letter on USAK. Seems pretty compelling. Management is at Wolfe Conference today and is re-iterating targets/margins. Please see deck here:

 

http://investor.usa-truck.com/sites/usa-truck.investorhq.businesswire.com/files/event/additional/USAK_Investor_Presentation_-_May__2016_Final.pdf

 

USA TRUCK (NASDAQ:USAK)

 

One of the investments that I am most excited about is USA Truck (USAK).  Despite the name that features the word “truck”, we own the company not for its fleet of 1,500 trucks, but rather for its rapidly growing logistics business that is buried within. Given the sub $200M market capitalization, limited research coverage, and the word truck in the name - the company has been completely ignored by most investors.  If the logistics business continues to progress and the trucking business executes, we could easily have a share price three times higher than where we are today. 

 

USA Truck has been a core investment in the fund since late 2013. We were initially led to the investment by an unsolicited/”hostile” take-over offer for the Company by Knight Transportation (KNX). Knight is an extremely well-run trucking company that rarely does acquisitions. So… we certainly found it odd that Knight was going after a “trucking” business that wasn’t even turning a profit. After closer analysis, we found that the trucking industry had a number of long-term secular tailwinds ahead of it that would improve long term industry fundamentals/pricing/margins – implementation of electronic logging devices, driver shortages, improvements in fuel efficiency/technology, etc. But the trucking business wasn’t what attracted Knight or us to the investment. USA Truck had a growing logistics/brokerage segment called SCS which has now been renamed USAT Logistics. This business, under quite modest leadership, had grown revenues and profits roughly 10 times in five years – an astounding rate. At 12mm of run-rate EBIT, we estimated the logistics business, even in the unlikely event that it stopped growing, was worth more than the entire company.  Fortunately, the trucking company also provided downside protection as the trucks, trailers, and corresponding real estate were worth at least another 10 dollars (book value) or more given accelerated depreciation schedules. So, purchasing shares at low double digit dollar levels represented an attractive risk/reward.

We purchased shares under the premise that the Company generally had good corporate governance in place and that the right moves would be made to maximize shareholder value.  The path to value creation was clear. The trucking business needed to be optimized to its peer company margins or sold/liquidated, and logistics needed to expand into other segments and grow its size of the pie.

 

Realizing the upside has been harder than we expected to say the least. Like with most corporate boards, there is a natural inclination to trust existing management and to “give them more time”. USA Truck’s board was not different in that capacity. It became clear to us that while there was substantial value in the company’s assets and potential earnings power, the management team in place was not going to be able to get us to where we want to go. The Company was riddled with internal rivalry, poor incentive/compensation structures, but most importantly, a lack of a clear go-forward strategy. Over the course of the next two years, we shared much of our internal research/findings with the Board and believe helped to catalyze much of the changes that have occurred over the last six to nine months. Today, the Company has an entirely new executive leadership team that is properly incentivized and is working collaboratively to maximize shareholder value. Fundamentally, the most exciting part of this investment today is that new management is acutely focused on “return on invested capital” and the strong correlation it has over time with shareholder returns.

 

On the Company’s 1st quarter call, management laid out a roadmap that not only laid out targets for truckload operating margin in 2016 and 2017 but also a plan to reduce the capital intensity of the trucking segment (increasing owner operators) and an aggressive growth plan that would take its logistics segment to 50 percent of gross revenues. These moves would effectively take the Company’s total revenue mix to almost 65 percent “asset light” by the end of next year. JB Hunt executed on a similar strategy at the beginning of the last decade which rewarded shareholders handsomely. Based on the Company’s targets / margin guidance on the Q1 call, we think the Company could earn as much as 4.00 – 4.50 of EPS if it continues to execute on its existing share repurchase program. Companies like JB Hunt, Landstar, Hub Group, etc. often trade as high as 20x EPS based on their asset light focus. As USAK’s mix of revenue transitions to lower capital intensity, we expect its trading multiple to mirror its asset light peers. But even at a conservative 16x PE (where most pure-play truckload companies trade on their own), over the next year and a half we could see USAK appreciate to $65.00 to $70.00 a share. While we obviously know there are challenges to transportation stocks – recession fears, economic weakness, etc., we think there are a number of structural tailwinds that still favor the industry long term. We have invested a tremendous amount of “sweat equity” on our end to point the Company in the right direction and we are looking forward to updating you on its progress.    I suspect by the time we sell the shares people will be calling it a logistics company with an outstanding management team – which is a long way from the beaten down trucking company we bought 3 years ago.

 

[glorysk87]

Sounds interesting, but I guess my question would be - what's their competitive advantage?  They're the 26th largest truckload carrier.  I know more than a few of the 25 competitors above them have logistics businesses as well. So what's their value proposition that would allow them to take share from the multitude of companies they compete against?

 

To me it sounds like a lot has to go right for value to be realized here, and in the meantime there's a lot that can go wrong...though I admittedly know very little about the company or the space. But the headline thesis doesn't quite grab me.

[Foreign Tuffett]

I agree with glorysk87. The trucking and LTL logistics businesses are tough, and the margins tend to be paper thin. The desirability of a capital light operating structure in the business is obvious.....obvious enough that I see "owner operators wanted" stickers on half the semi trailers I drive pass on the highway.

 

In fairness though, I know absolutely nothing about USA Truck except that it was the target of some hedge fund activism several years ago by Baker Street and Stone House. Who knows, maybe it's found a way to differentiate itself somehow?

[Deepdive]

USA Truck was trading at around $5 in 2013, so I feel like the easy money has already been made.The business is an asset heavy one as opposed to a freight forwarder one.  I think that ADW Capital is very smart and owns a large block in USAK.  If there were a negative development, ADW would sell and drive down the price before you would have adequate time to process the information.

[KJP]

Here's an amusing snippet from the most recent conference call.  The backstory is that during the quarter management bought back a big amount of stock at around $19/share while the business was struggling and about to report weak quarterly results, which caused the share price to decline nearly 50%.  Don Broughton is from Avondale Partners.

 

Donald Broughton

 

Help me out with some, because I am looking at the results here and just to comment on the elephant in the middle of the room. Margins and your logistics business have gone down on a year-over-year basis. I suspect you may be the only publicly traded logistics business that reported that kind of the results, pretty sure you are. And obviously margins at your asset base business deteriorated dramatically. Yours’ is a business in which operating fundamentals, you know what financial results are going to be before you actually do the math. We see what the deterioration of these operating fundamentals. You had to early on in the quarter know that there was a high likelihood you were going to print a loss, a negative number. Is that not correct?

 

Joseph Kaiser

 

Don, I think this was the rate environment was what deteriorated on us and it was very -- it was progressively over the quarter. There’re number of different things and a lot of puts and takes in this that we needed to evaluate. Obviously, we’ve been reorienting our network, adding new customers, reducing certain lanes with existing customers because they don’t fit our network and be much more disciplined in our network approach. Obviously, the dedicated losses affected us. And so, I think there were so many puts and takes. It was a pretty significant effort to truly understand the impact of that and we needed to work through that more towards the end of the quarter.

 

Donald Broughton

 

So you did, or didn’t see this coming?

 

Randy Rogers

 

The customer losses were not -- and quite honestly we’re still working with some of these customers. So, these were specific lanes that we lost. And some of them we decided, or at least in one case, we decided not to, as they adopted one way rates, not to participate. And that’s simply because it didn’t fit our new network. And this is -- I’ll give an example of a West Coast move. Now that we’ve taken out all of our capacity in the West Coast, focusing on our footprint in the East, that simply didn’t make sense for us. So, these were very quickly, these changes were fairly quickly implemented and we also had new business that we were generating from existing customers in different lanes. And so, we had to see how that shaped out, so it was very difficult to get a very clear picture of the overall impact, very quickly.

 

Donald Broughton

 

Let me help you out with where I am going with this. If you’re looking at the quarter, and as things are proceeding, it becomes increasingly obviously that you’re going to lose money, not make money. How do you sit in front of your Board and say we’re being fiduciarily responsible to go out and repurchase 8.3% of our outstanding shares, 718,000 shares of our own stock when we know we’re about to put money losing quarter. How do you justify that?

 

Randy Rogers

 

I mean, I think it was -- we’ve certainly repurchased one of the three pillars of our model to increase shareholder value over time. We believe the stock is a long-term value…

 

Donald Broughton

 

But if you’re losing money and you’re paying 2 times book for the stock, there is a whole host of people that would argue that’s not being feduciariliy responsible. But all right. Good luck gentlemen. It’s a tough environment out there, I know.

[Travis Wiedower]

Jeeze that's bad. Sounds like he doesn't understand shareholder value, but he knows investors like share repurchases so he clicks that button whenever he gets the opportunity.

[AccentricInv]

Wow that's a very amusing quote.  I remember speaking with the guys at Stone House Capital (seeded by Ackman) in 2014 about the name, and they seemed pretty intelligent.  I'm surprised at 18% ownership, they haven't replaced him yet.