2023-06-22 04:06:46 ET
Summary
- P.A.M. Transportation Services has experienced significant share price declines due to recent weakness on its top and bottom lines.
- Despite these issues, the company's shares appear cheap compared to similar firms and may present a good buying opportunity.
- The logistics market is expected to continue growing in the long run, which should benefit P.A.M. Transportation Services and similar companies.
One of the things that makes investing difficult is the fact that it's not always based on cold, hard logic. In the short run, the prices of securities can be significantly affected by sentiment. Sometimes, that sentiment can be based on real fundamental data. Other times, this is not the case. When it is the case, it becomes even more challenging to figure out the degree to which a shift in sentiment is appropriate and the degree to which it's not. One company that has been hit by a great deal of pessimism in recent months that I believe warranted a bit of that pain, but that has experienced too much of it relative to its overall fundamental health, is P.A.M. Transportation Services ( PTSI ).
With a market capitalization of $593.8 million, P.A.M. Transportation Services is a pretty small logistics company that provides truckload drive and carrier services, largely for commodities, throughout North America. Recent weakness on both its top and bottom lines has sent shares of the business down at a time when the broader market is doing quite well. But when you look at just how cheap shares are, even with this weakness factored in, I would argue that the downside has been very much overplayed. If anything, shares of the company deserve some nice upside from here.
Assessing recent pain
The past couple of months have not been particularly pleasant for P.A.M. Transportation Services and its shareholders. On March 1st of this year, I published an article that looked at the fundamental health of the company. At that time, the company was experiencing share price downside that was nearly double what the S&P 500 had seen from February of 2022 through the time of its publication. This downside occurred even as the company achieved continued growth, and it was largely driven by weakness that the business had experienced on its bottom line. Despite this weakness, shares of the company looked very cheap. This caused me to rate the enterprise a ‘buy’ to reflect my view at the time that shares should outperform the broader market for the foreseeable future. But since then, weakness has only intensified. Shares are down another 8.1% at a time when the S&P 500 has appreciated 11.6%.
When you look at the most recent data available, which should be data covering the first quarter of the company's 2023 fiscal year, it becomes pretty clear why shares have taken a beating. On the top line, revenue came in at $221.7 million for that quarter. That was up modestly from the $219.4 million reported one year earlier. But if you remove the fuel surcharges from the equation, sales actually dipped from $196.1 million to $193.5 million. This downside occurred even as truckload services revenue, excluding fuel surcharges, ticked up modestly from $125 million to $125.2 million. This was driven largely by a rise in the number of trucks that the company operated on a year over year basis. Unfortunately, the average rate per mile that the company was able to charge decreased enough to largely offset what would have been a larger increase. The pain for the company, then, was driven by a weakness under its logistics and brokerage services activities. Excluding fuel surcharges, this portion of the company saw revenue decline 4% from $71.1 million to $68.3 million. This, according to management, was driven largely by a drop in average rates that the company was able to charge its customers.
The decline in revenue was not the only problem for the company. Net income took a sizable beating, plunging from $23.9 million in the first quarter of 2022 to only $5.2 million the same time this year. Even though the logistics and brokerage services portion of the company is what experienced the revenue pain, the truckload services portion of the company is what saw the most pain from a profitability perspective. The company saw its pretax profit margin from this segment, again excluding fuel surcharges, plunge from 18.8% to negative 0.2% in just the course of one year. There were multiple contributors to this. I will touch on the three most significant though.
One area where the company experienced a great deal of pain involved its salaries, wages, and benefits. These spiked from 28.8% of sales under the truckload services segment to 36.2% of sales. This, management said, was driven by revenue deleveraging. As sales decreased on a per mile basis, much of the company's fixed costs, such as general and administrative expenses, maintenance wages, and operations wages, all remained elevated. Next, you have operating supplies and expenses. These shot up from 6.5% of sales to 10%. This move higher, according to management, was driven by the same aforementioned factor, as well as by a rise in the number of miles that each truck drove on average. And finally, insurance and claims expenses more than doubled from 5.5% of sales to 12.3%. This was because of an increase in accident reserves that the company recognized for the first quarter this year, which included a $10 million liability that the company booked for claims expected to settle in excess of insurance limits that are specific to an accident that occurred in February of 2022.
Other profitability metrics followed a similar trajectory for the company. Operating cash flow, for instance, dropped from $41.1 million to $34.2 million. If we adjust for changes in working capital, we would see an even larger decline from $41.8 million to $21.4 million. Even EBITDA Turkey beating. Based on the data provided, it was cut down by nearly half from $46.1 million to $24.4 million.
As painful as this is to see, shares of the company still look cheap. If we annualize the results experienced during the first quarter of the year, an approach that is probably overly conservative given the one-time nature of some of its bottom line pain, we would get net income of $19.7 million for all of 2023. Adjusted operating cash flow would be $95.1 million, while EBITDA would come in at $96.7 million.
Taking these figures, I was able to create the table above. In it, you can see how shares are priced using estimates for 2023, as well as actual results for 2022. In the table below, meanwhile, you can see how shares are priced relative to five similar firms. If we compare the company using data from 2022, we find that shares are quite cheap. On a price to earnings basis, only one of the five companies ended up being cheaper than P.A.M. Transportation Services. When it comes to the price to operating cash flow approach and the EV to EBITDA approach, two of the five companies ended up being cheaper.
Company | Price / Earnings | Price / Operating Cash Flow | EV / EBITDA |
P.A.M. Transportation Services | 6.5 | 3.2 | 4.1 |
Yellow Corp. ( YELL ) | 5.0 | 0.5 | 3.0 |
Daseke ( DSKE ) | 16.1 | 3.1 | 5.0 |
ArcBest ( ARCB ) | 7.5 | 4.4 | 4.2 |
Werner Enterprises ( WERN ) | 12.8 | 6.2 | 5.6 |
Knight-Swift Transportation Holdings ( KNX ) | 13.3 | 6.7 | 6.2 |
Of course, this picture does change if we use the 2023 forecast. In this case, shares of the company become the most expensive of the group using two of the three methods. Using the third, we find that one of the companies is tied with it, while three others ended up being cheaper. It may be tempting to gravitate toward the more conservative assessment here, but keep in mind that, given that these companies are similar in nature, they are dealing with some of the same industry conditions that P.A.M. Transportation Services is. It is true that they may not be facing the same insurance and claims liability. But all of the other issues are likely to remain intact. Even if shares of the company do end up becoming more expensive than the shares of similar firms, the trading multiples from a cash flow perspective are still quite affordable.
This is not to say that there won't be some weakness ahead. In an article published late last year, Lee Klaskow at Bloomberg mentioned that earnings and margins would likely come under pressure this year thanks to rising labor costs, insurance, equipment costs, overall truckload rates were also forecasted to decline after two years of strong demand. When you consider what's going on with the impact associated with inflationary pressures and rising interest rates, this is not surprising.
Takeaway
Based on the data at my disposal, I expect the fundamental condition of not only P.A.M. Transportation Services but also other companies like it, to remain under pressure for the next few quarters. This does not mean, however, that this company or others like it don't deserve attention. In fact, I would argue that P.A.M. Transportation Services does look cheap on both an absolute basis and relative to similar firms. In the long run, I fully suspect that the logistics market will only continue to grow. A growing population results in a growing economy. And with that economy becoming ever more reliant on the transportation of goods, the demand for a company like P.A.M. Transportation Services will remain. In the near term, we may still see some weakness from a share price perspective. But given how cheap shares are, I would argue that this could present a good buying opportunity.
For further details see:
P.A.M. Transportation Services: Still Appealing Despite Short-Term Pain