Summary
- ArcBest is undervalued despite seeing explosive growth and being well-positioned for more.
- The company's asset-light model will likely remain in high demand even if shipment volumes fall on the asset-based side.
- Although worthy of a buy rating, investors should keep an eye on insider selling and relative profit margin weakness.
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ArcBest Corp. ( ARCB ) is an undervalued, high-growth stock with major upside as customers look for supply chain solutions that go beyond just moving freight. The company is focused on fulfilling this need with its Asset-Light service offerings that will likely remain strong even if shipments fall. In addition, the stock is trading at a P/E of 7.6 versus a sector median of 19 with annual sales growing at a 45% clip, and EBITDA up 92% year-over-year. All of these factors taken together make me believe ArcBest is an attractive long-term investment and worthy of a buy rating.
However, there are some risks that require vigilance as red flags have gone up due to recent insider selling, weaknesses versus peers in key profit metrics, along with the possibility of falling LTL and truckload rates as capacity loosens to pre-pandemic levels.
I will first look at key aspects of ArcBest's market opportunities before getting into the details of why the company is well-positioned to exploit them. I will then point out some key fundamentals and close by assessing risks.
From Shipping Freight To Value-Added Solutions
There are certainly valid concerns over shippers sitting on inventory, rising interest rates, and the onset of a recession, but the need for the Arkansas-based logistics provider's expertise, especially with respect to supply chain planning solutions, remains in high demand.
The supply chain crisis, fueled by the pandemic, talent shortages, and geopolitical tensions, has eased to a certain extent in recent months, however, corporations across all sectors are saying there is still a long way to go. Although the New York Fed's Global Supply Chain Pressure Index fell for the third straight month , it remains at historically high levels.
Meanwhile, a recent McKinsey survey of industry leaders revealed that despite the resort to maintaining higher inventories, nearly half of respondents still complain of supply chain visibility and transparency issues. In addition, more than two-thirds said they expect to tap their existing supply chain providers for solutions, which is significant because this is one of ArcBest's key selling propositions.
As the GS Analytics research firm explained in a July piece for Seeking Alpha, ArcBest's shift a few years ago from an asset-based pure-play less-than-truckload ((LTL)) player, which includes ABF Freight, to an integrated logistics firm has provided extensive cross-selling opportunities. The Asset-Light side of the equation includes offerings such as supply chain optimization services, managed transportation, and freight brokering.
Overall, according to its annual report , the size of the company's target market is approximately $355 billion, which includes $42 billion in potential asset-based LTL sales. However, more importantly for ArcBest going forward is that the Asset-Light side opportunity is $312 billion. The LTL market is a crowded and competitive industry that has become seen as more of a commodity, unlike the other side of the business. As of its most recent annual report, the $4.9 billion company gets 54% of its revenue from the LTL segment and 46% from the Asset-Light segment, which is where the company has been shifting its focus.
CEO Judy McReynolds in ArcBest's most recent earnings call underscored this strategic shift, arguing that the company's breadth of solutions allows customers to fulfill their requirements across multiple modes without switching service providers. This is why disrupted supply chains, although bad news for some transportation companies, is good news for firms like ArcBest. As per the call transcript:
'As the supply chain continues to be disrupted, it's never been more important for customers to have better visibility, better transparency and more flexibility,' Reynolds said. 'We can identify roadblocks, stay agile, pivot and offer more creative approaches to drive our customers' success.'
Chief Customer Officer Dennis Anderson on the same call said they are seeing double digit growth in the number of customers using multiple ArcBest services because shippers are recognizing increasing value and trusting them with more of their supply chain needs. This is driving outsized growth in areas like managed transportation solutions, which saw revenues double year over year in the second quarter.
The Asset-Light segment's second quarter revenue increased by 91% versus the prior year period. This is pivotal, because it shows evidence that the fastest growing portion of the business is within the target market with the biggest upside. As this slide illustrates from their Q2 presentation, the company has shifted its revenue mix to solving logistics challenges versus purely shipping freight.
Value And Growth
When I identify a stock with a solid narrative, I immediately check Seeking Alpha's quant scores to ensure the stock is reasonably valued and has a proven track record of high growth. And ArcBest makes the cut with an overall quant rating of 4.4 and a B+ in valuation, growth, profitability, and EPS revisions, along with an A- in momentum (as of Aug. 28, 2022). In terms of valuation, ArcBest is trading at a P/E ratio of 7.6 while the sector median is 2.5x higher and forward P/E is looking just as strong.
The P/E ratio is especially remarkable when considering the company's historical growth figures in terms of sales, profits, and earnings per share. Revenue is up 45% year over year, EBITDA over 92%, and EPS diluted almost 124 percent. I put more weight in proven growth than estimates, but long term EPS growth ((CAGR)) is projected at 26 percent. The company has also beaten EPS estimates in each of the previous four quarters.
Growth-wise, especially over the past three years, ArcBest has even outperformed the best of the best of its competitors, including Yellow Corporation ( YELL ), Saia ( SAIA ), XPO Logistics ( XPO ), and Old Dominion Freight Line ( ODFL ).
Not to mention, the stock price rose by more than 23% in the past year while the S&P 500 fell by more than nine points. In addition, ArcBest has a healthy balance sheet with a long-term debt to equity ratio of 25.7. And the financials reveal that the long-term debt is shrinking year over year, always a positive sign.
Risks
Some risks that investors need to keep an eye include weakness in profit levels vis-à-vis ArcBest's main competitors, insider selling, and market weakening.
The company has taken steps to lower its operating ratio on the asset-based side, which was a major concern last year. The ratio, which measures the company's ability to manage cost structure, especially in the area of salaries, wages, and benefits, fell to 85.5% in Q2 vs. just over 90% in the same quarter last year.
Industry-wide on the LTL and trucking side, there is a chance prices will soften to the pre-pandemic levels as capacity constraints loosen. Finally, on Aug. 24, McReynolds sold about 30% of her shares for $2.2 million, according to an SEC filing, which need not mean she is concerned about the stock's future value, but is something to keep on the radar.
Conclusion
ArcBest is undervalued, growing explosively, and well-positioned to further penetrate a $355 billion target market with integrated logistics solutions that differentiate it from the competition at a time of high demand as supply chains remain in need of untangling and improved visibility. At the same time, it is important to keep an eye on how ArcBest addresses the profit margin challenges, in addition to tracking insider selling.
For further details see:
ArcBest: Poised To Exploit Disrupted Supply Chains For More Growth