2023-06-26 17:21:26 ET
Summary
- ArcBest Corporation is a strong buy due to its effective use of FCF, solid balance sheet, and network expansion.
- The company is currently undervalued by approximately 36%, with a fair value estimate of around $132.63.
- ArcBest's network expansion in the Southeastern United States has increased accessibility and response to consumer needs, resulting in overall growth.
ArcBest Corporation ( ARCB ) has demonstrated strong growth over recent years but has experienced a price pullback due to weak earnings. I believe that the company is currently a strong buy due to its effective use of FCF, solid balance sheet, undervaluation, and network expansion.
Business Overview
The ArcBest Corporation provides comprehensive logistics and freight transportation services. The Asset-Based, ArcBest, and FleetNet segments make up its three main operating divisions.
Transporting a variety of ordinary commodities, such as food, textiles, furniture, chemicals, machinery, automotive components, and more, is the main focus of the asset-based segment. It offers less-than-truckload services, which entail packing a single truck with smaller cargo from various clients. Through collaborations with trucking firms, the division additionally provides motor carrier freight transportation services in Mexico.
The ArcBest division focuses in providing government and commercial clients with accelerated freight transportation services. To satisfy certain linehaul needs, it offers top-notch logistical services, which may involve the use of specialist machinery. The section also provides ground, sea, and air forms of international freight transportation. Additionally, it functions as a third-party transportation agency, sourcing various capacity solutions and offering a range of services including flatbed, dry van, and intermodal shipping. Among the additional services are warehouse, distribution, controlled transportation, moving services, and customized solutions like trade show shipping, time-sensitive product launches, retail logistics, and last mile delivery.
For both private and public fleets, the FleetNet division is committed to offering roadside repair options and vehicle maintenance management services. It oversees a network of outside service providers to make sure fleet cars receive prompt repairs and effective upkeep.
Financials
ArcBest Corporation has a market capitalization of $2.04 billion and boasts a strong return on invested capital of 13%. Currently trading at $85.37, the stock price is slightly higher than its 200-day moving average of $84.17. It's worth noting that ArcBest's GAAP price-to-earnings ratio stands at 8.67, positioning it at a comparatively lower valuation than many other companies within its industry.
ArcBest yields an annual 0.56% dividend which represents a safe 5.29% payout ratio. This exemplifies the company's commitment to expansion and to remaining competitive as they are able to leverage the company's strong ROIC to outpace the industry and capture the critical market share necessary for growth. As the ArcBest continues to scale, I believe that the company will reach a point where its size limits its ability to grow quickly with FCF, resulting in a larger dividend over the years which will provide shareholders with constant income as excess FCF becomes more common.
Earnings
With disappointing Q1 2023 earnings for ArcBest, the share price has fallen from its highs demonstrating exposure to macroeconomic headwinds. Earnings fell short by $0.38 per share at $1.58, and revenues missed by $60 million at $1.1 billion showing a -13.4% year-over-year decline. I believe that this miss exemplifies the need for ArcBest to hedge against these headwinds through broad operations as additional geographic utility would suggest higher price points are feasible for customers.
In the future, expectations for ArcBest are anticipated to be slow in 2023 and recover over the years demonstrating the company's ability to recover from declines and volatility in fuel prices and interest rates hindering the company's ability to leverage its FCF to grow.
ArcBest in Comparison to the Broader Market
Over the past 10 years, ArcBest has underperformed the S&P 500 when adjusting for dividends. This performance deficit has recently declined which demonstrates ArcBest's recent ability to utilize FCF and leverage its size to continue growth.
Analyst Consensus
Analysts currently rate ArcBest as a buy with an average 1Y price target of $110.6 which presents a potential 29.55% upside. This demonstrates analyst's positive outlook on the company's long-term strategy along with growth prospects.
Balance Sheet
ArcBest Corporation also demonstrates a strong balance sheet, evidenced by its current ratio of 1.33. This indicates that the company possesses sufficient liquidity to cover its expenses and obligations. This financial strength positions ArcBest to be more resilient during economic downturns and gives it a competitive edge over its peers.
With ArcBest paying off a large amount of its debt in Q1 2023, it demonstrates the company's ability to remove strains if needed and transform into a more fortified balance sheet in harsh times.
Valuation
Before formulating my assumptions and performing a discounted cash flow analysis, I recognized the importance of calculating ArcBest's Cost of Equity and Weighted Average Cost of Capital using the Capital Asset Pricing Model. Taking into account a risk-free rate of 3.74% based on the 10-year treasury yield , my calculations indicated that ArcBest's Cost of Equity is 7.50%. This figure represents the anticipated return that investors demand to offset the risks inherent in holding ArcBest's equity.
Starting with the provided Cost of Equity value, I conducted a thorough analysis to determine ArcBest's Weighted Average Cost of Capital. As a result, I calculated the WACC to be 7.3%, which is lower than the industry average of 13.51%.
Based on an analysis using an Equity Model DCF approach, with a focus on Free Cash Flow to Equity, I have determined that ArcBest is currently undervalued by approximately 36%. This conclusion considers a fair value estimate of around $132.63. The valuation was conducted using a discount rate of 10% over a 5-year timeframe. The discount rate incorporates a risk premium of 2.5% to account for macroeconomic challenges associated with transporting a diverse range of goods. I have also predicted mid-single-digit revenue growth over the years to account for the company's network expansion.
To exemplify ArcBest's value, even a discount rate of 16% would result in the company being undervalued according to my sensitivity analysis, demonstrating the company's long-term potential in future years.
Network Expansion Fostering Growth Through Additional Utility
Network optimization is a key component of ArcBest Corporation's strategy for ensuring effective product delivery and transportation. This entails investing in and strategically planning the expansion of service facilities, terminals, and fleet capacity in significant markets.
The extension of ArcBest's network coverage in the Southeastern United States is one illustration of this method for network optimization. The business noticed rising client demand in this area and saw a chance for expansion. ArcBest consciously developed new terminals and service facilities in significant Southeast cities like Atlanta, Charlotte, and Nashville. These areas were picked because they are close to busy highways and a concentrated population of customers.
ArcBest increased its accessibility and response to consumer needs in the Southeast by extending its network footprint there. As a result, transit times were shortened, transportation expenses were decreased, and operational efficiency was raised. Greater service excellence and quicker delivery times benefited Southeast customers, giving ArcBest a competitive edge in the market.
Additionally, by extending its network in the Southeast, ArcBest was able to fortify its ties with current clients and draw in new ones who valued the company's extensive coverage and dependable transportation services. This tactical choice helped the business expand its market share in the Southeast United States and experience overall growth.
Risks
Fuel Price Volatility: The majority of ArcBest's operating expenses are related to fuel. The profitability and operating margins of the company may be impacted by changes in gasoline prices. While fuel surcharge revenue may be impacted by falling prices, rising prices might raise operating costs.
Regulatory Compliance: ArcBest is subject to several federal, state, and local restrictions because it works in a heavily regulated sector. These laws must be followed in order to be in compliance, including environmental laws and standards for road safety. Regulation non-compliance can result in fines, legal responsibilities, and reputational harm.
Conclusion
To summarize, I believe that ArcBest is currently a strong buy due to its effective use of FCF, solid balance sheet, undervaluation, and network expansion creating utility for customers which will outpace competitors.
For further details see:
ArcBest Corporation: Network Expansion Fostering Growth Through Additional Utility