KEX - Kirby Corporation: Pricey For Now And Not For The Right Reasons

2023-08-21 05:12:35 ET

Summary

• Marine transportation industry experienced growth and higher fees during supply chain issues, benefiting companies like Kirby Corporation.
• Kirby Corporation operates in the US canals and has a solid market position in inland transportation.
• Aging infrastructure and lack of reliability in the inland canal system pose risks to Kirby Corporation's operations.

Investment Summary

Marine transportation was a pretty hot topic for a while, especially during the supply chain issues we experience a while ago. This resulted in companies in the industry being able to make significantly higher fees and charge higher rates than in previous years, which catapulted the growth and earnings of the companies. The circumstances were very beneficial to companies like Kirby Corporation ( KEX ) but it seems that the high multiple and premium set to the company persisted; right now, investors are left with in my opinion an overpriced business that lacks significant catalyst in the near to medium term.

The company has two various segments that make up the business and the focus revolves around marine transpiration services and towing vessels transporting bulk liquid products. I think as we see more and more competitiveness and an easing of supply chain issues, companies are going to start undercutting themselves and that will eventually lead to lower rates and earnings for KEX. As for the quality of the business, it's still solid, and I will be rating them a hold for now.

A Look At The Market Conditions

As we know, KEX operates in the marine transportation industry, where it has differentiated itself from other shipping companies in that it heavily supplies the routes and canals of the US, rather than journeying and shipping from the US to Europe instead.

Relying on the canals of the US brings its set of issues and challenges, something we are covering more down below here. In short, KEX could be described as a domestic tank barge in the US that is divided into two different segments, Marin Transportation and Distribution and Services.

The company has a pretty equal dividend between the two segments, with the first one taking the lead, generating around 58% of the total revenues for 2022. Acquisitions as been plenty in both of the segments and in total the company has performed 62 successful acquisitions. This hasn't necessarily ensured that KEX has grown substantially in terms of revenues. The market isn't very prone to massive upswings in demand, I think, and revenues have only averaged a 3.37% yearly growth over the last 10 years.

As we enter into times where both companies and people are becoming more and more aware of the impact their choices have on the environment, it appears that the transportation services that KEX has are some of the best ones for the environment. Without a significant footprint left behind, I think companies might want to consider making shipments with KEX where it is possible.

With a leading market position, KEX is one of the best ways to bet on the growth of inland transportation and shipments in the US via canals, especially for companies and industries along the Mississippi River. But I think it would be dangerous to have all revenues come from these areas. KEX has over the years also started focusing on coastal shore transcription as well and with the only competition coming from American companies it seems that KEX is unlikely to face significant competition in the medium term I think. With shortages across other transportation methods like trucking, KEX has the opportunity to take on some of that market as well. Perhaps not by engaging and beginning with trucking, but more for companies to offload some of the shipments and transportation to KEX and their vessels instead.

Recent Results

From the last quarter , we did see an 11% YoY increase in revenues, but it seems that the underlying risks are still present for the company. Demand and operations rely on the reliability of the infrastructure of canals within the US. But despite that, one has to say the quarter was solid with triple-digit growth in the bottom line as last year and 2021 were difficult years for the company as demand was lacking. The company is expected to post an EPS increase of around 25 - 30%, which sort of puts the actual performance for the quarter into reality a little better. The company is recovering from a couple of poor last years.

For the inland segment, it was great to see the spot rates increasing on a year-over-year basis at least, which puts the company in a better position to generate stronger earnings.

Risks

The foundation of KEX operations rests significantly on the integrity and efficiency of the inland canal system within the United States. This extensive network encompasses a staggering expanse of over 12,000 miles of waterways, strategically designed to facilitate commercial navigation. Supporting this intricate web are an impressive 240-plus locks and dams, representing crucial infrastructure that serves a multifaceted purpose.

The state of the inland canal system within the United States is a subject of growing concern, as the signs of deterioration have become increasingly evident. A notable aspect contributing to this unease is the aging infrastructure, particularly the locks that form the critical nodes of the waterway network. An alarming statistic reveals that over fifty percent of these essential locks have exceeded the half-century mark in terms of age. I think the lack of reliability is perhaps the biggest concern to investors. The funding necessary is not something that KEX themselves can provide, and lobbying to do so is also quite capital intensive. There needs to be a move and incentive from either larger corporations or from politicians themselves to ensure sufficient funding and restorations happen.

One of the most immediate consequences of aging locks is the heightened frequency of maintenance outages. As these locks continue to weather the years, they become increasingly susceptible to wear and tear, technical glitches, and functional limitations. This vulnerability translates into a scenario where maintenance and repair activities become more frequent and unavoidable. Consequently, operational downtime becomes a recurring reality, causing delays that reverberate through the intricate web of commercial activities relying on timely navigation. Watching margin development for the company will be key and something investors should pay attention to. Bottom line margins are trending down, and this is a considerable risk for investors to have in mind.

Financials

As for the financials of the company, there have been some shifts over the last 12 months where the cash position has decreased, and the long-term debt has decreased as well. The only real positive is the debt decrease. The $36 million in cash compared to nearly $1 billion of debt is a tough situation to be in. With FCF margins of 4.4% as well, there is a necessity to build up the cash, but it doesn't seem to be happening in the near term, unfortunately.

Luckily, the company is still generating quite strong EBITDA, and concerning the net debt we have a ratio of around 2.3 which is below where the threshold goes for a company to be considered risky. In upcoming reports, seeing a consolidation or increase of the cash position would be reassuring to a hold case.

Valuation & Wrap Up

KEX operates in the marine transportation industry and right now sits at a pretty high earnings multiple in my option. The company has a p/e of 22, which is nearly 20% higher than the sector. With historically lowering net margins, I think the valuation seems out of line and a lower one should be applied.

Paying such a premium doesn't make sense for the growth you are getting. However, the market position and the leading position the company has does make me optimistic enough to at least rate KEX a hold. For a buy case to be made, I think a significant discount to the sector of about 15 - 20% would be necessary to make it appealing.

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