2024-01-04 09:31:48 ET
Summary
- Universal Logistics Holdings did not meet expectations for quarterly EPS growth, but analysts expect a rebound in financial figures in 2024.
- The company has a strong presence in the automotive sector and has relationships with large brands, which could attract new investors.
- Expanding the network of agents and outsourcing higher-value logistics services in the automotive sector could lead to significant net sales growth.
Universal Logistics Holdings, Inc. ( ULH ) did not deliver better than expected quarterly EPS growth, but investment analysts are expecting a rebound in the financial figures in 2024. I believe that with the growth of the outsourcing of higher-value logistics services in the automotive sector, more network agents could bring both net sales growth and economies of scale. I do see obvious risks from changes in labor conditions, lower payments from clients, and fuel price inflation. However, ULH does seem to trade quite cheaply.
Universal Logistics Holdings
Incorporated in Michigan, United States, in 2001, Universal Logistics Holdings has subsidiaries dedicated to providing a variety of customized transportation and logistics solutions throughout the United States as well as in Mexico, Canada, and Colombia. Its subsidiaries offer a wide range of services across its supply chain, including truckload, brokerage, intermodal, dedicated services, and value-added services.
Source: Presentation
The commercialization and delivery of its services are carried out through a direct sales and marketing network focused on offering its portfolio of services to large clients in specific industrial sectors, through company-managed facilities, full cargo offices, and customs brokerage, or through a network of agents who solicit freight business directly from shippers. As of December 31, 2022, the company operated 51 company-managed terminal locations, and served 63 value-added programs.
The company reports its financial results in four reportable segments: contract logistics, intermodal, trucking, and company-managed brokerage. Aggregate operations in the contract logistics segment provide value-added and dedicated transportation services to support inbound logistics to automotive OEMs and large retailers on a contractual basis, generally pursuant to terms of one year or more.
The intermodal segment is associated with local and regional drayage movements predominantly coordinated by company-managed terminals through a combination of owner-operators, company teams, and third-party capacity providers.
The operations grouped in the truck segment are associated with individual freight shipments coordinated primarily by the agents with whom Universal Logistics works through a combination of owner-operators, company teams, and intermediary carriers. The company managed brokerage segment is responsible for the pickup and delivery of individual freight shipments using intermediary carriers, coordinated by company managed operations.
In the last quarterly report, the company noted lower than expected EPS GAAP. The company also noted a revenue surprise. Quarterly revenue was close to $421 million. The company is currently trading at close to $25-$30 per share, but touched more than $40 per share in 2023. With this in mind, I believe that having a look at the recent business performance makes a lot of sense.
Source: SA Source: SA
Beneficial Market Expectations, And Beneficial Long-Term Performance
I usually do not look at the past to judge the future. However, in this case, it is fair to include recent operating performance because the numbers reported in the last seven years were quite impressive. EPS grew at 39.1% CAGR, and new sales grew at 11% CAGR. These financial figures were obtained thanks to six intermodal acquisitions and improved margins in the brokerage business. I did not assume that net sales growth and EPS could grow at a double digit in the next decade, however it is fair saying that the company did in the past. I tried to remain conservative.
Source: Presentation
Analysts out there are expecting that Universal Logistics Holdings, Inc. may deliver operating margin growth in 2024 and 2024 net margin growth with positive FCF. I believe that the trading multiples are quite cheap. EV/Sales stands at close to 0.6x, and the EV/EBITDA is close to 4x. Considering these figures, I believe that there is significant room for improvement in terms of stock valuation.
Source: Market Screener Source: Market Screener
Customer Relationships With Large Brands May Bring The Attention Of New Investors
Universal Logistics Holdings, Inc. has relevant customer relationships with massive corporations. The contracted truckload, brokerage, and intermodal services with the company. The following is a list of clients offered in a recent presentation.
Source: Presentation Source: Presentation
With these names, I believe that the total amount of accounts payable reported in the balance sheet may look a bit better. I assumed that it is likely that large clients pay business providers like Universal Logistics Holdings.
Expansion Of The Network Of Agents Could Bring Economies Of Scale And FCF Margin Growth
Universal Logistics is also looking to expand its network of agents and owner-operators. This has been a driver of its historic growth in transactional transportation services, and the company plans to continue these efforts. Its agents typically focus on a small number of carriers in a specific market, and are attuned to the specific transportation needs of that core group of carriers, allowing for specialized attention. I assumed that further expansion of the number of agents will most likely bring net sales growth and economies of scale. As a result, we may see some FCF margin improvements.
Growth Of The Outsourcing Of Higher-value Logistics Services In The Automotive Sector Could Bring Substantial Net Sales Growth
Universal Logistics Holdings, Inc. aims to achieve greater penetration of key clients in the North American automotive industry. This industry is one of the largest clients of outsourced logistics services worldwide. This sector accounted for approximately 36% of operating revenue from customers, generating more than $100,000 annually. The objective is to capitalize on the anticipated continued growth in the outsourcing of higher-value logistics services in the automotive sector, such as subassembly and sequencing, which are linked directly to production lines, and require specialized capabilities, technological expertise, and strict quality controls. Under my financial model, I assumed that future growth in this specific sector will most likely bring net sales growth.
The Dutch Auction Executed At $28-$25 Per Share May Indicate That $28 Per Share Is A Cheap Valuation
Some time ago, Universal Logistics Holdings, Inc. executed a Dutch Auction at $28-$25 per share. The shares are currently not trading far from $28 per share. I believe that directors inside Universal Logistics Holdings may know the true valuation of the company better than other market participants. With this in mind, I believe that $28 per share is a cheap price mark.
The Company commenced a "Dutch auction" tender offer to repurchase up to 100,000 shares of the Company's outstanding common stock at a price of not greater than $28.00 nor less than $25.00 per share. Following the expiration of the tender offer on June 15, 2022, we accepted 164,189 shares, including 64,189 oversubscribed shares tendered, of our common stock for purchase at $28.00 per share, for a total purchase price of approximately $4.6 million, excluding fees and expenses related to the offer. Source: 10-Q
Balance Sheet
Universal Logistics Holdings, Inc. appears to receive payments from clients a bit late as the total amount of accounts receivable is significant. Universal Logistics Holdings, Inc. uses some debt to finance both the working capital and the property and equipment.
Source: YCharts
As of September 30, 2023, Universal Logistics Holdings, Inc. reported cash and cash equivalents worth $16 million, marketable securities of about $10 million, and accounts receivable of about $307 million. Besides, total current assets stand at close to $389 million, and the current ratio is equal to more than 1x. I do not see a liquidity issue here.
Property and equipment stands at about $533 million, with operating lease right-of-use assets of about $92 million, goodwill worth $170 million, and total assets of close to $1.259 billion. The asset/liability ratio is larger than 2x. Hence, I believe that the balance sheet appears healthy.
Source: 10-Q
Accounts payable stands at close to $83 million, with current portion of long-term debt of about $69 million, current portion of operating lease liabilities of about $29 million, and accrued expenses and other current liabilities of $43 million. In addition, long-term debt stands at $317 million, with operating lease liabilities of $69 million and total long-term liabilities close to $462 million.
Source: 10-Q
Cost Of Capital, Median EV/FCF, And EV/EBITDA Multiples
Given the total amount of debt, I studied carefully the loans, revolving credit facilities, and other debts reported by Universal Logistics Holdings, Inc. According to figures included in the last annual report, the interest rate paid ranges from 6.41% to 7.4%.
I also studied a bit the trading multiples exhibited in the sector. Peers out there are trading at 12x cash flow, and the EV/EBITDA is close to 11x. Universal Logistics Holdings, Inc. appears to be a bit undervalued. Given these figures, I assumed exit multiples close to 12x-16x FCF, which I believe are realistic.
Source: SA
My Expectations And Cash Flow Projections Indicate That Universal Logistics Holdings, Inc. Appears A Bit Undervalued
My expectations include 2030 net sales close to $3.145 billion, with net sales growth of about 7%, 2030 EBITDA close to $331 million, and net income of about $694 million. I believe that my figures are conservative.
Source: My Expectations
My cash flow statement projections include 2030 net income of about $695 million, with 2030 depreciation and amortization of about $96 million, but no noncash lease expense, amortization of debt issuance costs, or losses on marketable equity securities. I believe that these figures are not really part of the recurring business model.
In addition, with trade and other accounts receivable of about $1 million, prepaid income taxes worth $5 million, changes in accounts payable of -$316 million, and principal reduction in operating lease liabilities of -$45 million, 2030 net cash provided by operating activities would be close to $432 million. Finally, with 2030 capital expenditures of -$307 million, 2030 FCF would be close to $125 million.
Source: My Expectations
Now, assuming EV/FCF multiples from 12x to 16x and a WACC between 5% and 10%, the implied valuation range would be close to $737 million and 1.4 billion. Besides, the median valuation excluding debt would not be far from $1 billion.
Source: My DCF Model
If we divide everything by 26.28 million shares, the implied median fair price would not be far from $33 and $48 per share. In addition, the internal rate of return would range between -0.3% and 12%, and the median IRR would be close to 6%.
Source: My DCF Model
Competition
The transportation and logistics services industry is highly competitive and extremely fragmented. Competitors include truckload and less-than-asset truckload carriers, active and non-asset, intermodal transportation providers, logistics providers, and, to a lesser extent, railroads.
It also competes with other carriers for owner-operators and agents. Additionally, many clients may eventually choose to keep these services in-house. It also faces competition from regional and local third-party logistics providers, integrated transportation companies that operate their own aircraft, cargo sales agents, and brokers, freight forwarders and surface carriers, airlines, shipper associations organized to consolidate their members' shipments as well as to obtain lower freight rates, and Internet-based freight exchanges.
Risks
The company operates mainly in the US market, which may be affected by the ups and downs of the country's internal economy. In addition, it concentrates its operations in the automotive industry, so it is also exposed to movements in this area, and any depression in activity will negatively affect it.
Another determinant of transportation activity is the price of diesel fuel. The company may be affected by fluctuations in the prices of fuel-related commodities. As a result, I believe that the FCF margins could lower, which may lower the valuation of the stock.
Furthermore, as already mentioned, the firm has a series of key clients that represented more than 40% of the company's revenue in 2022, which makes Universal Logistics highly dependent on the fulfillment and maintenance of the commercial agreements. Risks arising from the businesses that the company carries out in Mexico must also be considered, including changes in border transportation regulations or the exchange rate of the Mexican peso with the US dollar.
Conclusion
After delivering close to 39% EPS growth in the last seven years, Universal Logistics Holdings did seem to convince market participants out there. I believe that the company appears quite undervalued. In my view, future potential growth of the outsourcing of higher-value logistics services in the automotive sector, connections with large and established clients, and expansion of the network of agents could bring substantial net sales growth. Even taking into account risks from the price of gasoline and diesel or changes in labor conditions, I think that Universal Logistics Holdings appears to be a gift at its current valuation.
For further details see:
Universal Logistics: Large Clients, Network Agents Growth, And Very Cheap