2023-07-29 06:33:38 ET
Summary
- Daseke is expected to announce financial results for Q2 of its 2023 fiscal year, with recent share price performance being less than ideal.
- Revenue for the first quarter of 2023 declined by 5% compared to the previous year, largely due to drops in the owner operator freight and Flatbed Solutions segments.
- Net profits fell from $13 million to $0.5 million, with increased costs and a reduction in demand for the company's services contributing to the decline.
- Even with this pain and more pain likely to continue, shares look attractively priced.
In the coming days, the management team at logistics company Daseke (DSKE) is expected to announce financial results covering the second quarter of the company's 2023 fiscal year. Even though shares of the company have been historically cheap, recent performance from a share price perspective has been less than ideal. This is because of fundamental weakness caused by challenging industry conditions that has materialized in the form of lower revenue, profits, and cash flows. While I fully expect this trend to continue, I do think that the overall picture for the company is positive. But as with any investment, it's imperative to keep a close eye on things to see what might change. And there is no better time to do so than when a large chunk of data such as earnings data is to be reported.
Times have been painful
Although the transportation and logistics market is not viewed by many as being all that appealing, I have been a fan of the space over the past couple of years. Supply chain constraints proved to be very bullish for the companies in this industry. But now, the picture is changing some. Consider how Daseke performed during the most recent quarter for which data is available. This is the first quarter of the 2023 fiscal year. According to management, revenue for that time came in at $399.8 million. That represents a decline of 5% compared to the $421 million the company reported one year earlier.
This drop, according to management, was largely the result of two key parts of the business. The owner operator freight part of the company, for instance, saw revenue drop from $129.8 million to $112.2 million over the course of one year. Some of this decline involved the Specialized Solutions segment of the company, with revenue under the owner operator freight category dropping from $42.1 million to $38.3 million. The biggest driver of this seems to have been a reduction in owner operator miles from 10.6 million to 8.7 million. Although the data is not conclusive, since we only know the rate per mile for the segment as a whole as opposed to only the rate per mile we would like to see from the owner operator freight category, a decline in per mile revenue from $3.36 to $3.31 also impacted the company negatively.
The Flatbed Solutions business experienced a similar decline, with revenue under the owner operator freight category dropping from $87.7 million to $73.9 million as miles fell from 34.2 million to 31.6 million. The rate per mile for this segment as a whole dropped from $2.58 to $2.34. When applied to the owner operator miles only, this decline, while seemingly small, accounted for $7.6 million of missed revenue.
Other pain for the company came from its brokerage operations. Revenue here plunged from $78.2 million to $60.6 million. This decline, management said, was driven entirely by the Flatbed Solutions segment and can be chalked up to macroeconomic conditions that resulted in lower available freight volumes and an intentional shift in the direction of loading company owned tractors as opposed to third-party tractors.
On the bottom line, the picture for the company was even more problematic. Net profits fell from $13 million to only $0.5 million. While the drop in revenue certainly hurt the business, increased costs were also problematic. Salaries, wages, and employee benefits, for instance, jumped from 23.2% of sales to 26.3%. That alone had a negative impact of $12.4 million on the company's bottom line on a pretax basis. Operations and maintenance costs were poor, jumping from 8.4% of sales to 10.5%. In fact, the picture for the business would have looked far worse had it not been for a massive reduction in purchase freight costs from $171.6 million to $144.4 million. Purchased freight expenses involve payments to owner operators like fuel surcharge reimbursements, payments to third-party capacity providers, and more. This reduction, about 15.9% year over year, can really be chalked up to a reduction in demand for the company's services.
Other profitability metrics unfortunately followed suit. The one exception to this was operating cash flow. It actually managed to rise from $29.2 million in the first quarter of 2022 to $31 million the same time this year. But if we adjust for changes in working capital, we would see that the metric fell from $30.2 million to $26.1 million. Meanwhile, EBITDA for the company dropped from $49.6 million to $46.8 million.
Expect pain to continue
It would be misleading of me to say that the first quarter was a one-time event and that everything will be alright. Almost certainly, the pain that was experienced during that time will continue for the foreseeable future. Even management has indicated as much. In their first quarter earnings release they said that they expect market conditions to remain challenging. These challenges include soft freight rates and inflationary cost pressures. Of course, this doesn't mean that the company is doing nothing in the meantime. They did recently decrease their guidance for capital expenditures, expecting the metric to now come in at between $135 million and $145 million. This is down from the $145 million to $155 million the company initially planned to spend when it announced financial results covering the entirety of 2022. And in a vote of confidence regarding the company's future, management, in May of this year, redeemed shares of perpetual preferred stock for $20 million and allocated $50 million as a cash prepayment to the firm's term loan facility.
Of course, this picture could change at a moment's notice. Before the market opens on August 3rd, management is expected to announce financial results covering the second quarter of the company's 2023 fiscal year. The current expectation by analysts is for revenue to come in at $424.7 million. That would represent a rather sizable decline of 11.8% compared to the $481.3 million in revenue generated one year earlier.
Even though the top line is expected to come in week, the bottom line is something that analysts are optimistic about to some extent. Their current forecast is for earnings per share to come in at about $0.30. That would represent an increase over the $0.24 in profits the company generated during the second quarter of 2022. But this is a bit deceptive. That's because the company, through a major strategic transaction completed last year, repurchased a great deal of its stock outstanding. Overall share count from the first quarter of 2022 to the first quarter of this year, for instance, dropped about 31%. When you adjust for this and look solely at net profits, you get an estimate of $13.5 million for the second quarter this year. That would be down from the $17.7 million that the business reported one year earlier.
Unfortunately, analysts have not provided any reliable guidance when it comes to other profitability metrics. But some of the important ones that investors would be very wise to pay attention to would be operating cash flow, adjusted operating cash flow, and EBITDA. The first of these was $22.7 million during the second quarter of 2022. On an adjusted basis, the metric came in even higher at $47.1 million. And finally, EBITDA was a robust $70.8 million.
In addition to paying attention to all of these metrics, investors should also see whether the company will revise its guidance for the 2023 fiscal year. The current expectation is for the firm to report EBITDA of between $210 million and $220 million. This would be down from the $234.9 million that management reported for the 2022 fiscal year in its entirety. Obviously, a downward revision is possible. It would also be painful. But for the purpose of valuing the company right now, we should assume that it will remain unchanged since we have no data to suggest otherwise. If we assume that other profitability metrics would decline at the same rate year over year as EBITDA is forecasted too, we would get net income of $40.7 million and adjusted operating cash flow of $138.3 million.
As you can see in the chart above, shares of the company do look more expensive on a forward basis than if we were to use data from 2022. But in the grand scheme of things, the stock is still fundamentally attractive. Relative to similar firms, however, the stock looks closer to being fairly valued. This is based on the table below where I compared the enterprise to five similar companies. Using both the price to earnings approach and the EV to EBITDA approach, I found that three of the five businesses were cheaper than Daseke. Meanwhile, using the price to operating cash flow approach, I found that only one of the five companies was cheaper than our prospect.
Company | Price / Earnings | Price / Operating Cash Flow | EV / EBITDA |
Daseke | 8.4 | 2.5 | 4.5 |
P.A.M. Transportation Services (PTSI) | 10.1 | 3.8 | 4.9 |
ArcBest Corp (ARCB) | 10.1 | 6.0 | 5.4 |
Ryder System (R) | 5.9 | 2.1 | 3.2 |
Covenant Logistics (CVLG) | 7.0 | 5.7 | 3.4 |
Universal Logistics Holdings (ULH) | 5.5 | 3.5 | 3.7 |
Takeaway
When I last wrote about Daseke back in April of this year, I found myself optimistic even though financial performance had been somewhat mixed leading up to that point. Compared to similar companies, shares were looking a bit pricey, but they weren't outrageously pricey. And on an absolute basis, they were fundamentally appealing. Management has since then revised down guidance for 2023, but not enough to change my bullish stance. Unless something changes for the worst, I believe that a soft 'buy' rating is still appropriate at this time.
For further details see:
Daseke: Shares Are Still Appealing Going Into What Will Likely Be A Painful Quarterly Release