2023-07-10 03:45:32 ET
Summary
- Universal Logistics Holdings, Inc. has had a challenging start to 2023 with revenues and EPS down but has issued a new quarterly dividend of $0.105 per share.
- Despite disappointing results in three of its four primary segments, ULH's Contract Logistics segment saw a YoY increase, contributing to a p/s ratio of under 0.5.
- Despite a challenging market, ULH has improved its balance sheet, growing its cash position from $47 million to $76 million, and reducing its net debt/EBITDA ratio to 1.34.
Investment Rundown
Universal Logistics Holdings, Inc. ( ULH ), a company that operates in the transportation and logistics market in the United States, Canada, Mexico, and also Colombia has had a tough start to 2023 with revenues down across many metrics like revenues and most notably EPS, down 39% YoY. This performance, however, didn't stop the management from issuing a new quarterly dividend of $0.105 per share.
Many transportation companies have had a tough start to 2023 as both sticky fuel prices are cutting into earnings but a lower activity is also playing a crucial role in the effects. In terms of valuation for ULH it's far below the second average p/e of 17. ULH is also trading 19% under its 5-year average p/e which I think highlights the limited risk to holding shares in the company right now. That is exactly what I would recommend with ULH a hold rating as the last quarter's earnings didn't reassure me no more pain is ahead.
Company Segments
The business overview of ULH reveals a diverse set of revenue streams. ULH offers several different services for customers and clients. Since its founding back in 1932 the company has grown its fleet strongly and now has a tractor fleet of 4.330+.
Revenue Mix (Earnings Presentation)
Within ULH four primary segments make up the business. These are as follows: Contract Logistics, Intermodal, Trucking, and Company Managed Brokerage. The largest was Contract Logistics, which was the only segment in the previous quarter to see a YoY increase, but the overall results were dragged down by disappointing results across the remind three segments. Revenues for Contract Logistics reached $211 million. With that, the p/s ratio for ULH is very low at under 0.5. This further limits the downside risks from there in my opinion, seeing as ULH places a big focus on maintaining strong relationships with customers to create longstanding revenue streams.
Diving deeper into the Contract Logistics segment we see that the focus lies on providing storage and offering dedicated transportation to customers, but they also help with yard management. What was positive about the last report was the increase in the operating margin the segment experienced, an increase from 11.6% in Q1FY 2022 to 13.1% in Q1 FY2023.
Earnings Highlights
As for the latest earnings report from ULH, they had a disappointing set of results quite frankly. The CEO Tim Phillips noted the following about the quarter. “Our diversification strategy is increasingly evident during a transportation down-cycle as our contract logistics segment was the cornerstone of Universal's financial performance in the first quarter”. The company may have had to operate in a very challenging transportation market as demand was mixed. But the solid margins for the company's largest segment did help cushion some of the otherwise would have been yearly losses.
Earnings Highlights (Q1 Report 2023)
The value-added services that the company offers continue to be a very important part of the company's ability to generate revenues. I think that this relative stability in that part of the business was a major cause for the management seeing a continued dividend being safe to pursue. In the last report, they announced a quarterly dividend of $0.105 per share.
Dividend Summary (Seeking Alpha)
The dividend yield for ULH is that high and the payout ratio is not that high either, but the company has a decent growth history in regards to the yield, a 5.92% 5-year growth rate is a nice addition to a hold position in the company . In coming quarters I do expect to see another dividend announced despite the company having a challenging time ahead.
Risks
The transportation industry is exposed to risks associated with fluctuations in economic activity, which can lead to varying demands between fiscal years. While this may deter some investors in the short term, these challenges are often smaller and temporary. Investing in transportation in the North American market is typically seen as a bet on continued economic prosperity and eventual recovery from any downturns. Additionally, the volatility of fuel prices poses challenges for transportation companies, making quarterly results harder to predict. The upward trend in historical gas prices is placing a big focus on margin preservation for companies in the transportation industry, and ULH is no different.
Financials
As we have gone over in this article a few times, the performance from Q1 2023 wasn't that impressive. But that hasn't stopped ULH to make some decent progress on its balance sheet. Seeing the cash position grow from $47 million to $76 million on just a quarterly base is impressive. The company maintains decent FCF margins and the TTM levered FCF sits around $65 million which allows ULH to make improvements like this.
Balance Sheet ULH (Q1 Report 2023)
With positive cash flows also comes the opportunity to pay back debts and that is exactly what ULH has done, paying back around $10 million. Right now that means ULH has a net debt/EBITDA ratio of 1.34. This is a very healthy spot to be at and the likelihood that the company will face any issues regarding debt seems limited.
Final Words
In terms of the valuation for ULH, it remains very low in comparison to both its historical measurements and the sectors. The p/e for example is at just 7 on a forward basis . Worth mentioning is that the p/e is increasing as a result of ULH facing compressing margins caused by higher fuel prices and a much more challenging environment to operate in. Dropping activity isn't helping the outlook either.
Trading this far below the sector's average can sometimes be deserved if there are ample risks for earnings compression. This seems to be the case for ULH as earnings are expected to drop 33% YoY in 2023. Until we see the margin grow once again across most of the segments, I think the share price will be trading in the current range. Without any strong catalysts on the horizon, I am rating ULH stock a hold right now.
For further details see:
Universal Logistics Holdings: More Earnings Pain Likely, Rating Hold