SAIA - Saia Thriving In A Tough Market But Valuation Is Steep

2023-10-11 17:21:59 ET

Summary

• Saia, Inc. has benefited from better underlying fundamentals in the less-than-truckload space, as capacity is more limited and the failure of Yellow has created new opportunities.
• Management has executed well on a multiyear investment program that has significantly expanded the company's service coverage and driven share gains.
• Saia has opportunities for further growth through price discipline, scale leverage, and service quality improvements, and double-digit revenue growth is not out of reach.
• The valuation already anticipates robust growth and sets a high bar for future performance.

There are no hard and fast rules that always work when it comes to valuing stocks, and deciding what’s too steep a price to pay for growth is a subject of endless debate – stick too tightly to classic notions of value and you’ll never own growth, but get too lax and you risk paying prices that virtually no company can grow fast enough to justify.

Such is the case with Saia, Inc. (SAIA). I’ve been very impressed with the company’s organic expansion since 2017 , but the nearly 800% appreciation in the stock price certainly rewards a lot of that (though larger rival Old Dominion ( ODFL ) has appreciated more than 600% over that same period, while XPO, Inc. (XPO) is up more than 400% and ArcBest ( ARCB ) up more than 200%). I do still see space for further share and profit growth in the coming years, but the steep multiple today sets a very high bar for future performance.

Turning Yellow Into Green

Due in large part to the fact that the less-than-truckload (or LTL) space is much more consolidated than the truckload space, the LTL carriers have had a much better year than their TL brethren. While Schneider National ( SNDR ) has had a good year (up 31% over the past 12 months), that’s a weak performance compared to the LTL carriers (excluding United Parcel Service (UPS)).

That consolidation has helped preserve pricing – while many truckload carriers have seen double-digit price declines, Saia’s ex-fuel pricing has remained positive (up almost 3% in Q2). Volumes have also remained healthier given relatively tight capacity – Saia has seen volume declines in the last two quarters (tons/day down about 2% in Q2 2023 and 5.5% in Q1 ’23), but that’s still meaningfully better than the volumes many truckload carriers are seeing.

More recently, the sector has been shaken up by the bankruptcy of Yellow , one of the largest LTL carriers. As of the company’s mid-August report, they were already seeing a pickup in volumes from this, with July tons/day up 3.4% and August tons/day up about 6%. It remains to be seen how impactful Yellow’s collapse will be over the long term. The suddenness of the bankruptcy sent many shippers scrambling, but several LTL carriers have since reported that Yellow business doesn’t offer particularly attractive pricing/margins (at least today), so carriers may elect to decline those volumes unless and until pricing improves.

Yellow had already been an involuntary share donor to Saia for years, so I see the collapse as probably not much more than an acceleration of what was already taking place as Saia improved its service quality. Still, with the company reporting about 15% idle capacity in the second quarter, the opportunity to take on reasonably-priced tonnage that would have previously gone to Yellow is still a meaningful incremental opportunity for Saia in what is still a challenging environment.

Speaking of the environment, it’s my belief that inventory destocking hit a lot of LTL carrier volumes in the first half of this year. These carriers, Saia included, tend to be more skewed to industrial/manufacturing customers as well as apparel, and there has been some significant destocking inventory there as companies have tried to reduce inventories in the face of softening demand and improving supply chains.

Whether this process is over is yet to be determined – multiple trucking and logistics company CEOs have commented that they believe the destocking cycle is over, but we’ll see what industrial companies say in their third quarter earnings reports. Likewise, even if destocking is over, the peak season so far as been pretty lackluster (better than last year, but still not good) and weaker demand (as measured by volumes) could well be the theme of the second half of 2023.

Leveraging Self-Help

Coverage and service quality are major drivers of success in LTL trucking, and Saia has been actively working to improve these. The company started a major organic capex program in 2017 and have added more 40 terminals since then (included four this year). With that, the company now serves 45 states and can offer < 2 day delivery on about 85% of its shipments.

I still see service quality as something of a limitation for Saia. The top players in LTL trucking operate 250 or more terminals (some more than 300), and many of its rivals are able to offer 1-day service to a larger percentage of its customers. This, in part, explains why Saia has continued to lag its rivals in pricing (as measured per-hundredweight). Historically the company’s prices have been about a third below its rivals, and as recently as 2022 Saia was getting $24.70/cwt versus $30.24 at Old Dominion, $38.26 at FedEx, and $45.45 at ArcBest.

I want to be clear that price comparisons are a rather blunt instrument – there are reasons why companies price the way they do, and that often includes higher underlying costs (for overnight and/or expedited deliveries, for instance). Nevertheless, I still see this as a gap that the company can close as it further builds out its infrastructure – Saia may never need or want to be at price-parity with its peers, but I do still see opportunities to drive increased higher-margin business over time.

Likewise, I see further room for service quality improvement. MASTIO is a widely-regarded research firm in the transportation space that publishes annual service quality rankings based on a comprehensive survey that evaluates carriers on dozens of metrics. Saia ranked #14 in 2022 (and 4 ^th among national carriers), up six spots since 2018. Assuming the company continues to invest in service quality upgrades (which requires not only facilities but IT capabilities and a company-wide commitment to service quality), these numbers can improve further and drive better pricing with them.

Management has also been executing well on operating efficiency. I’ve followed Saia for a long time and remember when operating ratios in the mid-to-high 90%’s were the norm. Over the last decade, though, full-year operating ratios have been consistently below 94% and in the 80%’s the last two years (85.4% in 2021 and 83.1% in 2022, respectively). Old Dominion still sets the standard here, but Saia has improved significantly and I expect further progress in the coming years.

The Outlook

While I do see some risks to the economy in 2024, I think the odds are improving that the country avoids recession and instead just sees a year of low, but positive, demand. With a relatively tight LTL market, that should be good enough to support another year of healthy growth and profits for Saia (particularly with the opportunity to leverage select additional volumes from former Yellow customers). Longer term, I see no reason why the company wouldn’t look to continue to build out its terminal footprint and further invest in service quality upgrades.

The issue is valuation and what the Street already expects. Looking at what Old Dominion has accomplished, I think high single-digit annualized revenue growth over the next decade is possible (not easy, but possible). Unfortunately, even with that level of growth, mid-teens free cash flow margins (possible, but a big ask) wouldn't seem to support the share price today.

Multiples-based valuation approaches likewise require some stretches. Saia already trades at close to 15x my 2024 EBITDA estimate; that’s not crazy relative to what Old Dominion has traded at and relative to the company’s margins and ROIC, but it’s close to double what the sector has traded for in the past. Looking at P/E, the shares are already trading around 26x 2024 EPS; maybe not unreasonable for a growth company, but not exactly “cheap” either.

The Bottom Line

Whether Saia is a good buy probably has a lot to do with your comfort with growth stocks and an overall approach of “forget the multiples and buy the growth.” I don’t see why Saia’s growth should suddenly slow down, and I do think there are ongoing opportunities for the company to take share as it builds out its network. At this price, though, Saia, Inc. pretty much has to execute at a high level to drive further appreciation, and I generally prefer stories with a little more slack built into the valuation.

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