MRTN - Marten Transport: A Very Fair Price To Get In At

2023-07-12 06:13:46 ET

Summary

• Marten Transport Ltd saw a YoY decline in net income in Q1 2023 due to rising operating expenses, including higher fuel prices. However, operating revenues grew 3.8% YoY despite a challenging market environment.
• MRTN is expanding its business into Mexico, benefiting from the reshoring of manufacturing to North America and increased delivery between the US and Mexico.
• The company's revenues from temperature-sensitive shipments are also expected to increase.
• Despite challenges from higher fuel charges and expenses, MRTN grew its revenues to nearly $300 million which was reassuring to see.

Investment Rundown

2022 proved to be a record year for Marten Transport Ltd ( MRTN ) as the demand placed on the shipping and transportation industry was very high. The same does seem to hold in the first quarter of 2023 and MRTN had a YoY decline in net income as the operating expenses started to climb once again, caused by higher fuel prices.

The market and industry that MRTN is highly dependent on fuel and the rates to make a decent profit. If like Q1 FY2023 has higher overall costs applied to these companies we will see volatile earnings reports from the companies in the sector. But in the long run that does dilute somewhat and the results balance out eventually. What I find more important to view is the revenues for the business as this is something the company can somewhat be in charge of given the capability they have to fulfill demand and expand new market share. For MRTN this seems right now quite positive as the operating revenues grew 3.8% YoY, despite a tough market environment. The share price for MRTN stock is below its 52-week high of $23.43 and sits at an FWD p/e around 17 right now, making it appealing to start a position right now in my opinion.

Company Segments

Marten Transport operates as a temperature-sensitive truckload carrier for shippers and customers primarily in the United States, but also in Canada and Mexico. The company has divided its business model into four primary segments, those being: Truckload, Dedicated, Intermodal, and finally Brokerage.

The first segment focuses on the transportation of food and other consumer packaged goods. These items and shipments are often temperature sensitive which is why MRTN is such a good candidate here. MRTN hasn't yet gathered up a large chunk of the potential market share but it seems to be growing right now at least. The Dedicated segment primarily focuses on offering customers the ability to have customized transportation solutions with dry vans and temperature-controlled trailers. This segment primarily serves individual customers apart from larger groups.

In terms of the segment responsible for the largest portion of revenues, it remains the Truckload segment. One can see the impact that higher fuel prices have had on the margins by looking at the average revenue per tractor per week. In Q1 FY2023 for the Truckload segment, it netted $4.517 whilst in Q1 FY2022 it was close to $5.000. This difference does make a significant impact on the bottom line. But as I mentioned, this seems to be a short-term headwind and MRTN is close to its best operating ratio ever, 88.6% in Q1 FY2023.

Reshoring Brings Demand To Mexico

Some of the significant trends that will affect MRTN will be the reshoring of manufacturing back to the US. Even though MRTN does focus on temperature-sensitive shipments, they still ship other things as well, which aren't as sensitive.

MRTN is expanding into its business more south and into the Mexican market. The company has acquired facility expansions for all three of the MRTN de Mexico entry ports, with the Otay Mesa facility being moved into quite recently, on June 22. Manufacturing in Mexico is increasing as more companies moving manufacturing back to North America see Mexico as a solid opportunity to get both labor forms and cheaper materials and products. This increases the amount of delivery between the two countries, which of course benefits MRTN. But seeing as MRTN also generates some of its revenues from temperature-sensitive shipments, the amount of agricultural shipments between the US and Mexico is strongly on the rise and amounted to $44 billion in 2022, the highest it has ever been.

Earnings Highlights

In terms of the last quarter for MRTN, it was a challenge for them to successfully deliver strong results when they have to battle with higher fuel charges and expenses. The bottom line of the business did drop on a YoY basis to $0.28 per share, down from $0.33 a year earlier. This decrease wants to be reflected in the top line and MRTN grew revenues to nearly $300 million for the quarter.

Looking ahead for MRTN they see the net capital expenditures for the business continuing to climb steadily and in 2023 it's expected to be $225 million, a reflection that MRTN does see solid growth potential ahead as they are diverting ample amounts of cash towards this. For the coming quarters, however, I think the operating ratio will be a key point to watch. Seeing a further decrease would be proof that MRTN can efficiently battle the higher-cost environment. This would show a robust business model that can grow through downturns in the cycle.

Risks

In terms of risks that are facing MRTN right now the primary ones seem to be circulating a lower activity in freight shipments. Increasing inventory levels among customers would create a lower demand for continuous shipment deliveries and orders. If the companies themselves can't get their products out the door, they won't see a point in actively maintaining high inventory levels. This would leave the truck fleet of MRTN idle and decrease the ROA that they have, which currently sits at 10.76% using the TTM numbers. If the fuel prices remain sticky and aren't decreasing it will mean that MRTN will have to perhaps pass on some costs to customers which could create backlash and them seeking opportunities with other competitors.

Final Words

Looking at Marten Transport right now I think that investors need to be aware of the big picture. If we continue to see a shift in that manufacturing is returning to the US the demand for MRTN will remain high and I expect to see continued growth in both the top and bottom line, with the estimation that the fuel prices aren't spiking causing the operating expenses to shoot up. That would create a very difficult situation for MRTN but so far they seem to have handled the situation as the operating ratio sits close to all-time lows at 88.6%.

As for the p/e valuation right now MRTN is below its 5-year averages by around 6 - 7% which presents less of a downside risk to customers. I think that investing in MRTN is a bet that continued activity in the freight shipments market will continue and that right now high fuel prices are short-term pain. I am rating MRTN a buy as a result.

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