2024-01-08 00:32:51 ET
Summary
- Andlauer specializes in supply chain management and logistics for healthcare customers, focusing on the unique needs of the industry.
- The company has made several acquisitions to enhance its services and expand its presence in the US market, growing overall revenues by 134% over the last five years.
- Despite near-term headwinds, the company is still very profitable, with a balance sheet that should support future M&A growth.
- At 9.9x EV/EBITDA, Andlauer is a growth company trading at a value price.
Please note all $ figures in , not , unless otherwise stated.
Company Overview
Andlauer Healthcare Group Inc. ( AND:CA ) has a niche within supply chain management and logistics, focusing on the unique requirements of healthcare customers. This niche involves catering to the specific needs of its customers in the space; needs which often go unmet by larger players in the field.
For instance, when it comes to delivering vaccines, maintaining the integrity of the "cold chain" is imperative. In the case of vaccines, for example, they must be stored at precise temperatures throughout transportation and storage to ensure their potency and efficacy. And so Andlauer serves its customers by managing these aspects in the healthcare supply chain.
And it's not just vaccines. Pharmaceuticals, biologics, nutraceuticals, over-the-counter, and cosmetics are just a few of the many types of product categories Andlauer manages and transports to serve manufacturers, distributors, and wholesalers. Along with transportation, Andlauer also provides inventory management, secure warehousing and storage, air freight forwarding, and packaging solutions. Some of these clients include major pharmaceutical manufacturers like Merck ( MRK ), Pfizer ( PFE ), and Teva ( TEVA ), along with retailers, wholesalers, and distributors like London Drugs, Shoppers Drug Mart, and McKesson ( MCK ).
Through its in-house brands like ATS Healthcare, Credo, Nova Pack, Boyle Transportation, and Skelton Truck Lines, Andlauer has a full coverage of both Canada and the United States via its truckload coverage and specialized infrastructure with 31 leased facilities and six third-party cross-docks.
Investment Thesis
One of the things that first stood out to me about Andlauer was the number of acquisitions it has done since its IPO in 2019, which have been a key part of its overall growth. Some notable ones include purchasing 100% of Skelton's Canadian operations and 49% of its U.S. operations in February 2021 for $114.7 million, an acquisition that helped them expand their services in temperature-controlled shipments. Later that year, Andlauer purchased the remaining 51% of Skelton for $72.3 million and also bought Boyle Transportation, which does specialized transportation services to life sciences (75-80% of revenue) and government/defense sectors (20-25% of revenue).
With several other acquisitions including purchasing a Quebec-based third-party logistics provider in 2022 to enhance its warehousing, distribution, and order management services for specialty pharma, Andlauer has quickly become a leader in the industry as an essential provider of specialized logistics for the healthcare space.
In my view, this is significant for two reasons. Firstly, with a strong, well-known brand, Andlauer can build a sense of trust with its customers; something that is especially critical in situations where medical supplies are sensitive to temperature, must be delivered in a timely manner, and where the integrity of these supplies cannot be compromised. Among its largest clients, Andlauer has an average relationship of 15+ years with its top 20 clients, indicating that once a relationship is formed with Andlauer, customers rarely switch and become a partner of choice for them to do business with.
Secondly, the aforementioned acquisitions of Boyle and Skelton USA in particular highlight a focus for Andlauer to grow in the U.S. market. With a combined fleet of 180 trucks and 300 trailers, Andlauer not only gains a larger geographic footprint but also strengthens its ability to offer comprehensive, end-to-end logistical solutions to a wider range of clients. I believe that the substantial fleet of trucks and trailers resulting from these acquisitions should serve as a platform for future growth. This expanded fleet enhances the company's ability to not only maintain and improve its current services but also to develop new ones, thereby expanding its offerings.
Recent Results
When looking at Andlauer's most recent quarter for Q3 , revenues and EBITDA clocked in at $156.8 million and $39.0 million, down 4.9% and 11.5% respectively, from Q3 2022.
Most of the drop in revenues can be attributable to weakness in the company's healthcare logistics segment, where revenues fell 12.3% to $42.1 million. Some of this was a result of losing a packaging customer in Q1 (which was previously disclosed, but nevertheless, provided a tough comp against last year). This hit packaging solutions sales, which fell 31%. We also saw lower volumes and lower fuel surcharges which hit the logistics and distribution part of the segment.
In the specialized transportation segment, sales were flat, down 1.9%. Contributing to this weak performance were U.S. truckload rates and lower fuel surcharges, which were somewhat offset by 6.0% organic growth in Canadian ground transportation ex-fuel surcharges.
While results looked pretty weak, I view these more as short-term headwinds and fluctuations outside the company's control (barring perhaps a customer loss on the packaging side). Operationally, management continues to have a focus towards improving the pricing and margins of the U.S. business by having more focus on temperature-controlled markets, which tend to be less commoditized and more specialized.
If we zoom out, from 2018 to 2022, revenues have more than doubled , up 134%. EBITDA growth has also been strong, up 171% with margins expanding 370 basis points over this time period. With low capex and returns on capital close to 20%, the business is still very profitable. So while 2023 might look a bit weak given the macro environment, I think it's important to remember that the growth story isn't over here and it's better to think of 2023 as more of a slow down or cooling period.
Highlighting the growth potential here, in a report by Technavio, the North American outsourced healthcare logistics and transportation market is expected to increase at a 9.4% CAGR until 2028, faster than the 5.7% CAGR from the 2015-2020 period. With favorable industry tailwinds like an ageing population, increasing life expectancy, and an increasing number of healthcare and related products with specialized logistical needs, I believe Andlauer is well-positioned to benefit from these trends. With above-average organic growth in excess of GDP and potential for acquisitive growth through tuck-in acquisitions to grow their U.S. presence, I'm not too worried about seasonal and short-term weakness on the revenue front. Longer term, the story here is quite compelling.
Financials
When looking at Andlauer's financials, the company has grown revenues at a 16.5% CAGR and EBITDA at a 19.6% CAGR over the last seven years (S&P Capital IQ). While much of this growth has been driven by acquisitions, the long-term organic growth outlook looks favorable given the ever-growing interconnectedness of healthcare systems, an ageing population, and increased spending by governments and healthcare companies to support healthcare infrastructure.
From a balance sheet perspective, at quarter end, Andlauer had $68.3 million of cash on its balance sheet with total current assets of $181.3 million against $76.8 million of current liabilities for a current ratio of 2.4x. With total debt of $156.0 million (78% of which are leases), Andlauer has a debt/equity ratio of 0.34x and Net debt/ EBITDA of 0.9x, which indicates that its liquidity and debt carrying capacity remain strong.
In my view, as these ratios have improved strongly over the last year, I believe Andlauer has ample room to take on debt should it want to finance acquisitions through the use of moderate leverage. In 2023, Andlauer wasn't active on the M&A front and didn't announce any tuck-ins. While management doesn't do acquisitions just for the sake of M&A, should potential targets come up this year in 2024, the company will be in a flexible position to consider strategic acquisitions.
Valuation
Based on the 5 equity research analysts with one-year target prices on Andlauer's stock, the average target price is $47.66, with a high estimate of $55.00 and a low estimate of $41.00. From the average price of $47.66, this implies potential upside of 17.6% over the next year, suggesting analysts are bullish on the company's outlook.
While some analysts did downgrade their target prices after the quarter, all analysts maintained their ratings. While lower forecasts and minor short-term adjustments may influence price near term, the weaker-than-expected Q3/23 revenue gives long-term investors an opportunity to buy Andlauer's stock at a fair valuation.
At 9.9x EV to EBITDA, Andlauer is trading below its 5-year average multiple of 15.1x EV to EBITDA, suggesting the company may be undervalued on a historical basis. Given that the company is expected to experience above-average growth going forward, has a clean balance sheet, and has maintained high margins, and high returns on capital, I believe that as an industry leader, Andlauer deserves a higher mention. As mentioned, with the future growth rate of the industry being higher (+9.8%), compared to the 5.7% CAGR from 2015-2020, the outlook is looking better for Andlauer so there should be room for multiple expansion going forward in my view.
Conclusion
Andlauer is a leading logistics and supply chain management company serving the steadily growing healthcare industry. With strong industry tailwinds from an ageing population, increasing life expectancy, and increased spending on healthcare-related services, Andlauer is poised to experience strong secular growth in the years ahead. With a steady business model serving major customers who remain with the company for decades, Andlauer is taking this strategy to the U.S. market where it leverages its existing base as a platform to grow. With a conservative balance sheet and low debt levels, Andlauer is well-positioned to continue to execute its strategy and continue to grow both organically and by acquisition. Finally, with an EV/EBITDA multiple well below its historical average, I believe shares of Andlauer are undervalued when we consider how much more room there is for the company to grow.
For further details see:
Andlauer Healthcare Group: A Growth Company At A Value Price