2023-08-01 15:12:44 ET
Summary
- Schneider National Inc. is about to report earnings and I'm reviewing whether to buy more, hold, or take profits.
- The most recent financial results showed a decline in revenue and income from operations, but the capital structure remains strong.
- I forecast a net income of $97 million for the quarter, and believe the dividend remains well covered, but won't be added because of valuation concerns.
It’s been a little over a year since I bought Schneider National, Inc. ( SNDR ), and in that time, the shares have returned about 36.8% against a gain of about 19% for the S&P 500. The company’s about to report earnings again, so I thought I’d review the name to see if it makes sense to buy more, hold, or take my profits. I’ll make that determination by looking at the most recent financial history, making a (very tentative) forecast of what this quarter’s earnings will be in my estimation, and comparing all of that to the valuation.
There is a certain type of reader of my articles who wants a little bit more than they can get from a title and from bullet points, but may not want to commit to spending as much time as it would take to read through one of my screeds. It’s for such people that I write my “thesis statements” at the beginning of every one of my articles. You’re welcome. I’m forecasting EPS for the first half of the year of $1.10, and my forecast assumes that the business will continue to decline at the same rate we saw in 2023. In spite of this, I continue to like this company a great deal. The capital structure is one of the best I’ve seen, and I think the dividend is one of the most well covered I’ve seen. Although the shares are cheap by some measures, they’re not universally cheap. Additionally, the dividend yield is significantly below the risk free rate. So, I’ll not add to my shares today, but neither will I sell them. I may miss out on a “pop” if the market decides it likes the results of upcoming earnings, but I’d rather miss out on such gains than risk losing capital.
Financial Snapshot
The most recent financial results have been a bit soft in my estimation. Specifically, revenue and income from operations were down by 11.8% and 15.2% respectively when compared to 2022. Operating income was down substantially in spite of the fact that the company did a very good job of holding the line on operating expenses. For instance, purchased transportation expenses and “other general” expenses were down by 24% and 63% respectively from last year to this. Net income was higher by about $5.9 million, or 6.4%, but only because of the impact of a one off “other income” of $17 million. Stripping this out would have resulted in a fairly soft quarter. That written, it should also be remembered that 2022 was a banner year for the firm. Revenue and net income in 2022 were about 171.75% and 13% higher respectively.
Although debt and obligations have picked up slightly, from $211.7 million to $214.6 million, cash and short term investments dwarf this figure, currently at $443.1 million. This is one of the strongest capital structures I’ve seen recently.
Schneider National Financials (Schneider National investor relations)
Q2 Forecast
I’m forecasting net income of about $97 million for the quarter, or about $195.7 million for the first half of this year. Assuming the same number of shares outstanding, this works out to EPS of about $1.10. The underlying assumption here is that all trends remain in place in the second quarter that we’ve seen in the first quarter. So, revenue for the first six months of the year will drop by 11.8%, just as they did for the first quarter etc. Operating costs, too, have dropped according to my model at the same rate they did in Q1 of the year. This is obviously a very simplified model, but I think the most recent past is the best tool we have at our disposal when we try to perform this thankless task. I’m also calling for a second quarter dividend of another $.09.
Schneider National Forecast (Author forecast)
Even if the business continues to suffer, I think the capital structure remains very strong, and I think the ongoing dividend is very well covered. Given this, I’d be happy to buy more on the eve of earnings at the right price.
The Stock
I've written it before, and I'm absolutely certain that I'll write it again. I may risk boring you with this repetition, but you must know that that’s a risk I’m absolutely willing to take. Your potential boredom is a sacrifice I’m willing to make. The more you pay for $1 of future gains, the lower will be your subsequent returns. If you buy a stock when it’s relatively expensive, you’ll do less well than if you buy it when it’s relatively cheap. This is why I try my best to buy shares when they are cheaply priced.
Continuing with the theme of being willing to bore you, I want to drive this point home for the "we don't buy stocks, we buy businesses" crowd. An investor who bought these shares on February 7 of this year, is basically at breakeven on their investment over the past six months. An investor who bought virtually identical shares 14 days later is up about 10% as of this morning. Not enough changed at the firm over these two weeks to account for a 10% swing in returns. The 10% variance in returns in such a short period of time comes down to the price paid for the shares. The person who bought more cheaply did better.
Stepping down from my soapbox, I should point out that I measure the cheapness of a stock in a few ways, ranging from the simple to the more complex. On the simple side, I like to look at ratios of price to some measure of economic value, like earnings, free cash, book value, and the like. I like to see shares trading at a discount to both their own history and the overall market.
When I last looked at Schneider, I was impressed by the fact that the shares were trading at a PE of about 9.97 times, and they were sporting a dividend yield of about 1.3%. Fast forward to the present, and the shares remain quite cheap on a PE basis, per the following. Additionally, with my forecast of upcoming EPS of $1.10, the forecasted PE would sit around 12.7 times. This is also not egregiously expensive in my view. At the same time, the dividend yield remains about 290 basis points below the 10 year Treasury Note.
In addition to looking at simple ratios, I want to try to understand what the market is currently "thinking" about a given company's future. In order to do this, I turn to the work outlined in books like Penman's "Accounting for Value" and Mauboussin and Rappaport's "Expectations Investing." The idea expressed by these books is that stock price itself has some interesting information embedded within it, including the market's future expectations for a given company. The greater the expectations, the more risky the investment. According to the approach outlined by Penman's work, the market currently "thinks" that Schneider will grow at a rate of about 5.3% from current levels. I consider that to be a bit rich.
Given the above, I’ll be neither adding to nor selling the shares I have before earnings. If earnings are much different than I’m forecasting, I’ll change my view, but for now I’m holding. I may miss a “pop”, but I’d rather miss out on some upside than risk capital loss.
For further details see:
Schneider National, Inc.: Neither Buying Nor Selling