SAIA - Saia Is A Good Buy At Current Levels

• In the event of an economic downturn, revenue growth should be driven by pricing actions and market share gains.
• The company is investing in opening new terminals in existing markets to improve efficiency and drive profitability.
• Valuations are attractive.

Investment Thesis

Saia's ( SAIA ) stock price has increased 26.32% vs. a 5.72% change in the S&P 500 since our last article . The company's relatively higher exposure towards the industrial sector vs retail is helping its business as the industrial sector is experiencing healthy demand due to lower inventory levels. While there is rising concern about the slowdown in the economy which should impact the company's volume growth, the company is focusing on gaining market share and using price hikes to offset some of its impact. In terms of profitability, the company is investing in opening new terminals and relocating the existing ones to improve efficiency in the existing markets. This should also help increase the pricing during the contract renewals as the customer service level improves.

SAIA's Q2 FY22 Earnings

Saia recently reported its second quarter FY22 financial results that were better than expected. The company's revenue in the quarter grew 30.5% Y/Y to $745.55 mn (vs. the consensus estimate of $724.69 mn). The EPS in the quarter was up 75% to $4.10 (vs. the consensus estimate of $3.55). The revenue growth in the quarter was driven by a 2.8% Y/Y growth in tonnage, and yield (including fuel surcharge) increased 26.3% Y/Y. The operating ratio ('OR') in the quarter improved 510 bps Y/Y to 80.4% due to higher sales growth, resulting in EPS growth.

Revenue Growth Outlook

The tonnage in Q2 FY22 grew ~2.8% Y/Y with ~1.8% Y/Y growth in shipments and ~1.1% Y/Y growth in average weight per shipment. The majority of revenue came from pricing in the quarter. The yield (revenue per hundredweight) in the quarter was up 26.3% Y/Y at $25.05. Excluding fuel surcharge revenue per hundredweight was up 14.9%Y/Y at $19.44. The company has been implementing pricing actions to offset the inflationary cost pressures. In the coming fall season, most of the large carriers will be coming out with their guidance for GRI (General Rate Increase), which should give us some direction on the outlook for the next price hike by the company. I am optimistic about it though as the company is focusing on improving service levels to get better pricing and its efforts are paying off. The company's contract pricing grew by 11.7% Y/Y in Q2 FY22 as its customers appreciated higher service levels. I believe the contractual rate should improve further due to SAIA's better service and its efforts to reach near its customer locations by opening new terminals. However, the rate of growth may not be that high as the contractual rate faces tougher comps from Q3 FY22 onwards (contract pricing was 14.7% in Q3 FY21).

In June, tonnage was up 1% Y/Y, while in July it further improved to 2.5% Y/Y. The company is experiencing healthy demand from the industrial sector compared to that of the retail sector. SAIA's exposure to the industrial business is approximately 65% to 70% which is higher than its peer Old Dominion Freight Line's ( ODFL ) 55% to 60% as well as most other LTL carriers. The inventory levels in the industrial sector remain at lower levels compared to retail, and as these industrial customers move to bring inventory to normalized levels, the company's revenue should benefit in 2H FY22. The company plans to take further price hikes if inflation continues and intends to offset any potential decline in volume growth due to macroeconomic reasons through pricing actions and market share growth.

Margin, Service Levels & Terminal Growth

SAIA opened four new terminals in Q2 FY22 and five new terminals in 1H FY22. Apart from this, the company recently opened its new facility in Binghamton, New York in August 2022. The company plans to open a new facility in Chicago by the end of August and, beyond that, it plans to open 5 to 7 additional new terminals by the end of FY22. This should help achieve its goal of 10 to 15 new terminals, which was laid out in FY21.

The opening of new terminals should enhance the service offering of the company and should improve its efficiency in the existing markets, benefiting the margin growth. In Atlanta, the company witnessed higher growth and profitability because of the new terminal on the northeast side of town. The company opened a new facility in December 2021, and is already seeing some improved services to its customers and synergies for sales and operations as a result of it. The Atlanta market is expected to further benefit from the June openings of terminals in Macon and Valdosta, along with an additional Metro Atlanta opening planned for FY23. While the company's business is still in its initial stages in this region, I am optimistic about its long-term prospects looking at its initial success.

Although there are incremental costs associated with opening a new terminal and relocating an existing one, there are also savings and synergy around it. As the terminal count grows, the company should be able to reduce stem times. Stem time is the time between the departure of a truck from the distribution center and the initial delivery. This is a benefit to the customers as well and helps the company gain an incremental share of the customer's businesses as well as market share because of the service, benefiting the operating ratio over time.

SAIA is focusing on driving the profitability and mix of the business, investing in the business, and maintaining the service levels. The company plans to invest $500 million in FY22, with $250 million in equipment. It recently received the delivery of new trailers that were ordered and were supposed to be delivered in the previous year but were caught up due to supply chain constraints. The company is also investing in training and having appropriate tools on the docks to reduce inefficiency and improve the claims ratio. The claims ratio in Q2 FY22 was 0.57%. SAIA's good cash flow over the last couple of years has helped it reduce its total debt and provided it with the liquidity to invest in its business.

Looking forward, the company plans to drive its profitability by improving the efficiency of its existing market by adding new terminals. This should also benefit the service levels of the company and improve the contractual renewal rates as well as the claims ratio. Additionally, the pricing action taken by the company should more than offset the inflationary costs, improving profitability.

Valuation & Conclusion

The stock is currently trading at 16.75x FY22 consensus EPS estimate of $13.92 and 17.02x FY23 consensus EPS estimate of $13.69, which is lower than its five-year average forward P/E of 23.71x. Despite the concerns about declining volume growth, the company should be able to grow its revenue through pricing actions and market share gains. In terms of profitability, the company is improving efficiency in its existing markets by opening new terminals and better servicing its customers. Hence, I have a buy rating on the stock.

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