2023-10-23 04:29:52 ET
Summary
- Wabash National Corporation has achieved strong growth and margins in recent quarters as the company has seen cost deflation.
- The company primarily manufactures trailers and truck bodies for on-road transportation, with the transportation solutions segment accounting for the majority of its operations.
- The company is priced for a performance below Wabash's communicated 2025 goals, which I see as reasonable - I have a hold rating for WNC stock.
Wabash National Corporation ( WNC ) manufactures products for on-road transportation. The company has achieved fantastic growth and margins in recent quarters. Although the stock seems dirt cheap with current earnings, I believe that investors should be cautious – the current earnings level seems to be partly due to a heightened market demand as well as temporary cost inflation. I believe that the current stock price fairly reflects a sustainable earnings level for the company. For the time being, I have a hold rating for the stock.
The Company & Stock
Wabash manufactures and sells trailers and truck bodies for on-road transportation. In addition, Wabash sells parts and services as well as processing equipment. The transportation solutions segment represents the overwhelming majority of Wabash’s operations as 87% from the company’s operating income came from the segment in 2022.
Wabash at a Glance (Wabash Transportation Day 2023 Presentation)
The stock price has performed quite well in the past year as Wabash’s earnings have risen. The stock has appreciated by around 35% on top of a small current dividend yield of 1.53% .
Financials
Wabash’s revenues have grown at a compounded annual rate of 5.7% from 2002 to 2022. The company’s revenue performance has seen its fair share of turbulence, as revenues in the great financial crisis in 2008 and the 2020 pandemic created a difficult environment for Wabash.
After the pandemic began to fade away, Wabash’s revenues have climbed back into a new record high. Further, the company is expecting sales of around $2.7 billion for the current year, signifying a growth of 7.9% for the year. Moreover, Wabash expects sales growth after 2023, as the company is targeting sales of $3.0 billion for 2025:
2023 Guidance and 2025 Goals (Wabash Q2 Earnings Presentation)
I believe that the target shouldn’t necessarily be taken at face value. The company has grown in recent years as the industry has recovered from a difficult spot, so the recent growth doesn’t seem sustainable. Also, the revenue guidance already came down in Q2 as in Q1 the company’s outlook for 2023 revenues was a range of $2.8 billion to $3.0 billion – the management is already facing a tougher-than-expected market. I would expect further turbulence in Wabash’s outlook for 2025 as the market develops.
Wabash’s margin history has been somewhat turbulent. From 2002 to 2022, the company’s average EBIT margin has been 3.0%, but has improved on average in the later years as in the past ten years Wabash’s average EBIT margin is 6.4% .
For 2023, the company is guiding for an EBIT margin of around 12%. The guided margin is very significantly above the achieved 2022 margin of 6.7% and the ten-year average of 6.4%. In Wabash’s Q2 earnings call , the company’s CFO Mike Pettit attributed the high margin as a result of material cost benefits as raw material prices have declined significantly. The company currently guides for an operating margin of around 9% in 2025, clearly below the level that’s communicated for 2023 as raw material deflation should in my opinion start to find its way into the company’s pricing. The margin of 9% is still clearly above Wabash’s long-term average, though – I believe that investors should be very cautious of the company’s margins and revenue trajectory in especially 2024.
Wabash leverages a good amount of debt on the company’s balance sheet . The company has a current amount of $396 million in long-term debt. Compared to Wabash’s market capitalization of $980 million at the time of writing, the amount of debt still seems reasonable. Also, the company holds $99 million in cash, providing security for the operations in case of weaker cash flows.
Valuation
As Wabash’s earnings have risen into a level that seems unsustainable, the company’s stock has seen a massive decrease in the forward price-to-earnings ratio. In the past year, the forward ratio has come down from a high of 10.5 into a current level of 5.6, near the company’s lowest in the period:
The low price-to-earnings ratio doesn’t tell the entire story, as Wabash’s sustainable earnings level is in my opinion quite unsure. To get a rough estimate of the stock’s fair value and to conceptualize the valuation, I constructed a discounted cash flow model as usual.
In the model, I estimate Wabash to achieve the 2023 guidance of $2.7 billion in revenues. After the year, my DCF model varies from Wabash’s communicated goals in the estimates – I estimate revenues to decrease by 3% in 2024 and the revenues to stay stable in 2025. After 2025, I estimate the revenues to get back on track into a rate that’s close to Wabash’s long-term average. For 2026, I estimate a growth of 6%, that slows down in sequential years into a perpetual growth rate of 2%.
For the EBIT margin, I estimate a figure of 11.7% for 2023, quite in line with the company’s expectation of around 12%. After the year, I estimate Wabash’s margin to decrease into a level that’s more in line with the company’s long-term history – in 2024, the EBIT margin is at an estimated 7.1% that further decreases into 7.0% in 2025. After 2025, I estimate the margin to grow back slightly as sales increase in the model – for 2032, I estimate an EBIT margin of 7.8%. The mentioned estimates along with a cost of capital of 12.19% craft the following DCF model with a fair value estimate of $24.12, around 16% above the current price:
It is important to note that my DCF model estimates don’t represent the company’s communicated targets – for 2025, I estimate revenues of $2.6 billion, significantly below Wabash’s target of $3.0 billion. Also, I estimate an EBIT margin that’s two percentage points lower than the company’s target for 2025 at 7.0%. If Wabash does perform on the level that the company aspires to perform, the stock could have significant upside.
The used weighed average cost of capital is derived from a capital asset pricing model:
CAPM (Author's Calculation)
Wabash had around $3 million in interest expenses in Q2. With the company’s current amount of interest-bearing debt, Wabash’s interest rate comes up to a low level of 2.92%. The company uses debt quite well to its advantage. I believe a long-term estimate of a debt-to-equity ratio of 20% is reasonable.
On the cost of equity side, I use the United States’ 10-year bond yield of 4.91% . The equity risk premium of 5.91% is Professor Aswath Damodaran’s latest estimate made in July. Yahoo Finance estimates Wabash’s beta at a figure of 1.57 . Finally, I add a small liquidity premium of 0.5%, crafting a cost of equity of 14.69% and a WACC of 12.19%.
Takeaway
Wabash doesn’t currently seem to be priced for the communicated 2025 goals. I believe that the gap in the valuation is justified, though: Wabash has already lowered its revenue guidance for 2023. The current earnings level seems unsustainable as the high margin has been achieved as a result of temporary cost deflation that hasn’t yet translated into sales prices. At the moment, the stock seems to be priced around the value that I see as reasonable – at the moment, I see a hold-rating as reasonable.
For further details see:
Wabash National: Earnings Fall Is Priced In