MRTN - Marten Transport: Undervalued After Recent Pullback

2023-10-09 21:38:58 ET

Summary

• Marten Transport has experienced a recent pullback due to mixed earnings but is currently undervalued.
• The company operates in four divisions: truckload, dedicated, intermodal, and brokerage, providing transportation solutions for various industries.
• Analysts rate Marten Transport as a "buy" with a 23.01% potential upside, and the company has a strong balance sheet with no debt.
• Its diversification strategy will create long-term value for shareholders.

Marten Transport (NASDAQGS: MRTN ) has witnessed solid growth over the past 5 years but has experienced a pullback recently due to mixed earnings. I believe that Marten Transport is currently a buy due to its solid balance sheet, diversification strategy, and undervaluation, assuming my DCF figures.

Business Overview

Marten Transport is divided into the following four divisions: truckload, dedicated, intermodal, and brokerage. Food and other consumer packaged items that need to be kept at a specific temperature or in an insulated environment, as well as dry freight, are transported by the truckload segment.

The Dedicated sector uses dry vans, temperature-controlled trailers, and other specialist equipment to provide unique transportation solutions for each customer's needs. The Intermodal division uses tractors and hired carriers to move clients' freight using its temperature-controlled trailers and refrigerated containers on train flatcars for some journeys.

The Brokerage division establishes contractual agreements with third-party carriers and makes arrangements for them to deliver freight for clients in dry vans and temperature-controlled trailers. A total of 3,660 tractors were in use by the firm as of December 31, 2022, including 3,564 that were owned by the business and 96 that were provided by independent contractors.

Financials

Marten's present market capitalization stands at $1.58 billion, showcasing a commendable Return on Invested Capital of 10%. The existing share price is at $19.51, slightly below its 200-day moving average of $21.05. It is worth mentioning the company's EV/EBITDA ratio of 6.41, positioning it slightly above comparable companies, and signaling a state of relative overvaluation.

Marten Transport also pays a dividend of 1.24% demonstrating a payout ratio of 20.44%. With an ROIC of 10%, I believe that the balance between income for shareholders and core business improvements using FCF is prudent for long-term shareholder value. With the business expanding to new heights in the last 5 years, I would expect this dividend to continue rising if ROIC declines due to size obstacles.

Earnings

Marten Transport reported mixed Q2 2023 earnings with EPS surpassing expectations by $0.11 at $0.39 and revenues missing estimates by $11.23 million at $285.7 million showing a -13.3% YoY decline. But, with EPS and revenues expected to recover in 2024 and 2025, Marten Transport will have adequate cash flows to expand its core business if inflation and interest rates remain tame.

Performance Compared to the Broader Market

Over the past 5 years, Marten Transport has maintained performance with the S&P 500 when adjusting for dividends. I believe that this strong performance along with the firm's recent outperformance demonstrates management's effectiveness in allocating cash flows and creating value through multiple avenues.

Analyst Consensus

Analysts in the last 3 months rate Marten Transport as a "buy" with a 1-year price target of $24 showing a potential 23.01% upside. I believe that management's bullish view of Marten demonstrates the firm's ability to continue providing solid value to shareholders.

Balance Sheet

Marten Transport also holds an excellent balance sheet showcasing no debt. With an interest coverage of 1706.91, Marten can leverage if needed to capitalize upon growth opportunities or to stabilize losses in economic downturns. Also, with such a low risk of going insolvent, Marten Transport will receive favorable rates when taking on debt. This will result in the firm capitalizing on weakness in order to continue expanding in order to outperform competitors. With a Current Ratio of 1.77 and an Altman-Z-Score of 6.55, Marten Transport will remain solvent in the medium to long term.

Valuation

In order to find an accurate fair value for Marten Transport, I decided to find the firm's Cost of Equity by using the Capital Asset Pricing Model. With a risk-free rate of 4.79% based on the 10-year treasury yield, Marten's Cost of Equity is 8.47%. This demonstrates the return demanded by investors to hold Marten Transport's equity.

Based on the Cost of Equity calculation, I utilized a discount rate of 8.47% with a 5-year Equity Model DCF using FCFE. This resulted in a fair value of $21.78 which is 10% undervalued from its current price. I decided to not add a risk premium due to the firm's strong balance sheet along with its steady performance in regard to growth historically. For revenues and margins, I utilized analyst expectations and future growth rate which have been very accurate for Marten over the years as shown below.

Diversification Resulting in Compounding Growth

Marten Transport successfully tapped into a more specialized market of refrigerated transportation by customizing its services to satisfy the particular needs of niche industries. Examples include food and pharmaceuticals, which gave them greater freedom over pricing and larger profit margins.

The approach fostered long-term agreements and relationships with customers who needed specialized, dependable, and regular transportation services. These alliances not only guaranteed a consistent flow of income but also improved the company's financial stability and profit predictability. Additionally, the company's brand image was strengthened as a result of supporting these sectors, drawing in additional customers and boosting revenue growth.

Additionally, by spreading its risks across several industries, Marten Transport was less vulnerable to economic downturns or variations in any one business. Diversification's risk reduction component enabled financial stability to be maintained even in trying times. I believe that by maintaining stable cash flows, Marten Transport can adequately allocate FCF to foster growth without leveraging itself in a harsh macroeconomic environment. This would create stability for shareholders while also creating solid long-term growth avenues.

Risks

Fuel Price Volatility: Fuel price fluctuations may have an influence on operating expenses, which may have an impact on the company's profitability and could lessen its capacity to compete in the market.

Driver Shortages and Labor Costs: The trucking business frequently has a driver shortage, and increased labor prices can increase operating costs and have an effect on the company's profitability.

Conclusion

To summarize, I believe that Marten Transport is currently a buy due to its solid balance sheet, diversification strategy, and undervaluation assuming my DCF figures.

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