2023-10-04 05:56:49 ET
Summary
- Covenant Logistics is a provider of truckload transportation and logistics services, founded in the mid-80s and went public in 1994.
- The company has a fleet of approximately 2,500 tractors and generated a revenue of 1.14 billion in the trailing twelve months.
- Shares reached an all-time high in July but have since declined by 25%, and the CVLG's performance is below average in the long run.
Covenant Logistics ( CVLG ) is a provider of high-service truckload transportation and logistics services. They were founded in the mid-80s and went public in 1994. Below is the long term share price performance:
Below is their revenue breakdown:
They have a fleet of approximately 2,500 tractors, and TTM revenue is 1.14 billion.
Below are the return metrics versus peers:
Company | Revenue 10-Year CAGR | Median 10-Year ROE | Median 10-Year ROIC | EPS 10-Year CAGR | FCF/Share 10-Year CAGR |
CVLG | 6.1% | 13.3% | 6.5% | 32.8% | n/a |
4.9% | 14% | 12% | 10.3% | n/a | |
7.1% | 10.2% | 10.2% | 15.2% | n/a | |
23% | 12.2% | 10.6% | 15.6% | n/a | |
12.9% | 14.6% | 13.4% | 14.9% | 16% | |
10.4% | 31.6% | 24.6% | 15.6% | 14.2% |
Capital Allocation
They only began paying a dividend last year, and while repurchases have ticked up over the past three years, there has been no long term reduction in share count. The table below shows where capital was allocated:
Year | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 |
EBIT | 20 | 40 | 68 | 32 | 28 | 59 | 16 | 5 | 63 | 80 |
FCF | -95 | -90 | -96 | -10 | -28 | 50 | -74 | -31 | 38 | 59 |
Acquisitions | 106 | 39 | ||||||||
Debt Repayment | 82 | 153 | 936 | 1,140 | 1,405 | 1,697 | 1,790 | 1,637 | 717 | 78 |
Repurchases | 5 | 17 | 10 | 85 | ||||||
SBC | 1 | 1 | 1 | 1 | 5 | 1 | 2 | 9 | 7 |
They've used acquisitions to integrate into the supply chain in order to reduce fundamental volatility. As you can see, they've paid down a lot of debt over the years.
Q2 and Q3
Shares reached an all-time high in July, but have come down about 25% since that point. While the business clearly benefits from a strong economy versus a recession, I wouldn't characterize today's conditions as either, it lies somewhere in the middle. They usually beat on earnings, so I expect a similar beat this quarter as last.
Risk
There are things I like and don't like about this business. I do like the revenue growth and future runway, I like the 30% insider ownership for a company this size, and I obviously like the impressive ROIC for the past two years 15% and 23%. These numbers reflect a higher quality business, but whether this is only a temporary phase is the key question.
The fundamental business risk is low, but keep in mind that the performance is still below average over the long run. Since we already know this is not a long term growth stock, the main risk would be buying during the wrong time of the cycle. This brings us to valuation
Valuation
First let's look at the multiples comp, followed by historical multiples:
Company | EV/Sales | EV/EBITDA | EV/FCF | P/B | Div Yield |
CVLG | 0.7 | 7.2 | 13.2 | 1.7 | 0.9% |
WERN | 0.7 | 5.9 | 68.3 | 1.6 | 1.4% |
MRTN | 1.2 | 6.6 | 49.5 | 2.1 | 1.2% |
KNX | 1.4 | 6.8 | 15.9 | 1.1 | 1.1% |
FWRD | 1 | 6.9 | 7.7 | 2.6 | 1.4% |
LSTR | 0.9 | 11.8 | 10.2 | 6.3 | 0.7% |
Looking at CVLG's multiples in isolation might lead you to believe there is a discount to be had, but when compared to peers we see that this isn't the case. Since this doesn't help us much, let's look at the dcf next. I used a more normalized EPS number, as I think the past two years' earnings will definitely mean revert eventually.
I don't think the market necessarily overreacted to results in July, but in the long term I don't see EPS growing very much from here. On this basis, I'm giving this stock a "hold" rating. They are in a good spot right now, and if a soft landing is the reality, then they definitely have more upside. I will wait to see how aggressive they get with repurchasing shares, as this is one factor that could drive EPS over the long run.
Conclusion
CVLG has been very cyclical, and a long term underperformer versus the market. The stock did hit an all-time high over the summer, but I don't see this as a new era where the company can consistently crank out such high returns on capital and EPS. There are several things to like about the company fundamentally, but right now isn't the time to make a bet one way or the other.
For further details see:
Covenant Logistics: The Earnings Won't Stay This High, Keep Watching