2023-04-20 16:56:46 ET
Summary
- The key to Wabash's success is its ability to offer solutions through continued innovation.
- It has a solid and highly leveraged balance sheet backed by high liquidity.
- The company has recorded improved gross profit margins and good returns in relation to its shareholders' equity.
Investment Thesis
Wabash National Corporation ( WNC ) operates in the United States, designing, manufacturing, and distributing connected solutions for the logistics, distribution, and transportation industries. It works through two segments: Parts and Services and Transportation Services. The company provides its products under various brands, including; Wabash, DuraPlate HD, AeroSkirt CX, DuraPlate AeroSkirt, and EcoNex.
During the past year, the company has realized an appreciation in its stock by approximately 68.59%. Although the industry has been very dynamic and faced with different obstacles, Wabash has managed to perform well. The key to its success is how they differentiate through innovation, especially in the Advanced Composite Technologies such as the EcoNex and DuraPlate Composite Technology, as well as Laminated Fiber Reinforce Plywood panels (FRP panels).
WNC is backed by a relatively highly leveraged, fairly liquid balance sheet. It also recorded improved profitability ratios compared to the previous year. Given its firm footing, I am bullish on the stock and rate it a buy.
Innovations
Wabash has a well-known reputation and culture of being a giant innovator. I will especially focus on its Advanced Composite Technologies, which include the EcoNex and DuraPlate Composite Technology and FRP panels.
EcoNex Technology
EcoNex is the latest ground-breaking innovation by Wabash. It is an innovative and eco-friendly approach that has addressed issues related to equipment that refrigerated transportation services have been experiencing, such as strength, weight, thermal efficiency, and asset durability. It has boosted thermal efficiency by 30%, improved structural strength , eliminated the need for wood and metal, reduced weight by about 20%, and reduced operational costs.
It is manufactured by a highly efficient foam core enclosed in a shell reinforced with polymer fiber and a layer of protective gel coat, which protects against weight gain and unwanted water seepage. EcoNex was developed with a deliberate attempt to decrease the amount of greenhouse emissions and lessen the reliance on non-renewable sources of energy. This technology is only used in Wabash Refrigerated Vans.
Despite the fact that the company has not yet reported sales relating to this technology explicitly, I am confident that due to its superiority and efficiency , it will raise the company's sales significantly, stamping its viability.
DuraPlate Composite Technology
Back in 1996, DuraPlate was a game changer to semitrailers in the trailer sidewall technology that set new performance standards. To date, it’s still unwavering in fulfilling its promise of top-notch durability and damage-resistant performance. It comprises a high-density polyethylene core that is bonded thermally between two steel skins of high strength. This technology can be applied to industries such as the military, building, and storage.
Wabash provides prefabricated walls made with the DuraPlate technology to the building industry. The structure enables more accessible transportation and assembling on site. These walls can be used in mobile shelters, personalized for military field operations, temporary offices, or homes. Construction companies can use durable and damage resistant prefabricated walls to provide mobile homes. The composite wall panels are also used in portable storage containers.
DuraPlate’s distinctive composition provides a structural solution of high performance and durability that outshines rival sandwich panel designs.
Laminated Fiber Reinforce Plywood panels (FRP panels)
WNC's FRP panels provide versatile, robust, durable, and customized solutions. In construction applications, they are usually used in walls for trailers, truck bodies, recreational vehicles, boats, and prefabricated walls. The FRP panels are suitable for strenuous functions and reduce overall operational costs.
These innovations have ramped up sales in the parts and services segment. According to the MRQ, this segment registered a revenue of $49.6m, a 30.2% increase from the previous year's quarter. The parts and services segment has also grown by approximately 20% YoY. With the latest EcoNex technology as an addition to Wabash's innovative solutions, I believe the company will continue recording increased revenues. This is because they have addressed customer issues in refrigeration transportation.
Relatively High Leveraged Balance Sheet
This section will touch on liquidity and debt and their respective ratios. Wabash has a cash balance of $58.25m and levered free cash flows at $70.4m. It also has a current ratio of 1.71. With this cash available, the company can only cover 82% of its operating expenses, amounting to $155.4m TTM. This means that the company has to look for alternative methods to cover the remaining expenses, such as identifying areas it can cut its costs or securing financing. WNC's financial health assures investors of the above current ratio in the short run. It indicates its ability to cater to its short-term liabilities with its existing assets, that is, by about 1.7x.
Wabash's total debt is $418.82m, 39.5% of its market cap ($1.06b). The total equity is $398.1m, so its debt-to-equity ratio is 1.05; therefore, I consider the company relatively highly leveraged. It is, however, essential to assess its ability to cover its debt and interest payments. With its operating cash flows at $124.08m, the company's total debt is covered by approximately 31.3%. Moreover, its interest coverage ratio is 8.3, demonstrating that its interest expenses at $20.5m [TTM] are well covered by the TTM EBIT ($167.3m). The ratio indicates that WNC is generating sufficient earnings considering the interest accrued from debt to service it.
I considered its Returns on Total capital and asset turnover ratios to determine if the company has utilized its debt well. Its return on capital employed and asset turnover ratio TTM were 13.22% and 2.17xrespectively, thus outperforming the industry. This shows that Wabash generates more profit for every unit of capital invested and assets utilized than its competitors. The company is using its debt to create more revenues and profits.
Profitability Ratios
WNC has recorded improved gross profit and net income margins from the previous year. Its gross profit and net income margins [TTM] increased to 12.90% and 4.49% in 2022 from 10.9% and 0.07%, respectively, at the end of 2021. This can be explained by their continued strong demand for their portfolio solutions, leading to partnerships with strategic clients such as J.B. Hunt, increasing their backlogs. This can be explained by their continued strong demand for their portfolio solutions which increased their backlogs.
In evaluating the company's effectiveness in generating profits from its equity financing, WNC recorded a return on common equity TTM of 31.05%, which outpaced the sector significantly by 17.22%. This signals that the investors are getting good returns on their investments and adequately utilizing their equity.
The company will continue improving its profit margins since the demand for its portfolio is very strong and has not been affected. Furthermore, with its latest innovation in EcoNex technology, the future looks promising regarding profits and returns to investors.
Conclusion
WNC provides solutions to logistics, transportation, and distribution industries. Amidst the chaos, it has maintained its good performance, primarily influenced by its ability to offer solutions through its innovations, especially its advanced composite technologies. These technologies have reflected their performance on the increased revenues in the Parts and Services segment.
It also has a reasonably leveraged balance sheet with adequate liquidity and improved profitability ratios. Given its firm footing, I am bullish on the stock and rate it a buy.
For further details see:
Wabash National Corporation: Survival Through Innovation