2023-08-08 20:57:04 ET
Summary
- Wabash National reported strong Q2 2023 results with increased sales and impressive growth in both segments.
- The company's significant margin improvements are driving higher earnings growth for 2023.
- Wabash's stock is poised for strong growth from a low valuation, earnings growth, and bullish technical set-up.
Wabash National ( WNC ) has a number of positive things going for it which are likely to act as catalysts heading into the end of 2023. The company reported strong earnings for Q2 2023 with a growing backlog. Wabash has a bargain valuation which leaves plenty of room to the upside for the stock. Recent increased earnings estimates can help drive the stock for strong stock gains for the 2nd half of 2023.
Wabash offers various solutions in the transportation/logistics field. This includes dry van and platform trailers, refrigerated trailers, van bodies, cargo bodies, steel & aluminum tank trailers, storage tanks, used trailers, and related parts and services. The company also offers laminated hardwood oak flooring products.
Wabash operates 2 segments: Transportation Solutions and Parts & Service. The Transportation Solutions segment provides the bulk of the company's revenue as it comprised about 92% of total revenue in the 1st 6 months of 2023. Parts & Service comprises the other 8% of total revenue.
Positive Q2 2023 Results
Wabash achieved increased sales for both of its segments. The company achieved a 5.8% gain in Transportation Solutions revenue to $631 million for Q2 2023 over Q2 2022. The company achieved an impressive increase of 23% to $62 million in the Parts & Service segment. The results for the 1st 6 months of 2023 were a 10% increase for the Transportation Solutions segment and a 12.5% increase for the Parts & Service segment.
Gross profit increased about 103% for the Transportation Solutions segment to $134 million and 44% for Parts & Service to $17 million in Q2. Gross margin was 22% of sales while operating margin was 15%. The gross margin was a significant improvement over the 12% in Q2 2022. The operating margin also significantly improved from 5.6% in Q2 2022.
Wabash's margin improvements led to strong profitability returns over the trailing 12 months. The company achieved an ROE of 50%, an ROIC of 21%, and an ROA of 15%. These strong returns can help drive above-average earnings growth for the company.
The company's total backlog increased 5% to $2.4 billion in Q2 2023 as compared to Q2 2022. However, Wabash did experience a decrease of 29% in total backlog from the end of 2022 to Q2 2023. The decrease in backlog was attributed to the fulfillment of orders outpacing new orders in the first half of 2023 which the company expected.
Overall, Wabash is seeing high demand for its products in 2023 along with higher expected production and revenue per trailer and truck body unit. The company is also achieving long-term relationship agreements with some strategic customers. Wabash expects the second half of 2023 to be softer than the 1st half. However, the company expects it to be the strongest second half in the company's history.
Positive Long-Term Industry Outlook
Industry forecasts for trailer production are positive over the next few years. Here are the projections from the ACT and FRT Associations:
Year | Expected Trailer Production |
2024 | 273,000 |
2025 | 304,000 |
2026 | 308,000 |
2027 | 313,000 |
2028 | 292,000 |
source: Wabash National Q2 2023 10-Q
The ACT is projecting 2023 trailer production to be 310,000 while FRT is projecting 322,000. So, there might be a drop off in production in 2024 which could be a result of expectations for a softer economy next year. However, growth looks healthy from 2025 through 2027 which could act as a tailwind for Wabash. It is important to note that economic situations and supply chain disruptions could change these forecasts.
Valuation
Wabash is trading with a forward PE of just 5.5x and a price/cash flow of only 6x. This is significantly lower than the sector median forward PE of 17.9x and price/cash flow of 14x. This leaves plenty of room to the upside for the stock.
There are multiple reasons why Wabash is trading below the sector. One reason could be the company's large amount of debt . Wabash's total debt of $422.3 million significantly outweighs its total cash of $99 million. This leaves Wabash with net debt of $324 million. Wabash leverages its business by taking on high amounts of debt. Some investors might be turned off by this high debt which could be keeping the stock price depressed. My take is that if Wabash continues to produce positive cash flow, then the company can effectively handle its debt.
Another likely reason for Wabash's undervaluation could be the possibility of a recession occurring later this year or next year. There have been numerous predictions from economists that a recession could take place in 2023. This could prevent investors from putting money into the stock as they may expect a slowdown in the transportation industry which could negatively impact Wabash's business.
You can see from the chart below that Wabash is trading attractively according to many metrics:
Wabash National Valuation Metrics (Deep Valued Stock) (Seeking Alpha)
2023 Growth Outlook
Earnings per share expectations for 2023 have been increased from $4.21 to $4.49 with three upward revisions over the past 90 days. This should help provide a positive catalyst for the stock, especially if the company meets/exceeds these expectations over the next two quarters. The fact that expectations were increased shows that the covering analysts are confident that Wabash can at least meet the higher expectations.
The EPS expectations represent an impressive 99% increase over EPS from 2022. That reflects expectations of 6% revenue growth for 2023 along with the strong margin improvements that Wabash has achieved.
Technical Perspective
Wabash National Daily Stock Chart w/ MACD & RSI (tradingview.com)
Wabash's stock price recently bounced higher from a support level in the lower $20s. The MACD indicator (middle of the chart) recently made a bullish crossover as the blue line crossed above the red signal line. The purple RSI line (bottom of the chart) also looks bullish as it increased from a near oversold level. This looks like a bullish set-up for the stock to have another run higher as we head into the end of the year.
'Strong Buy' Seeking Alpha Ratings
Wabash National Seeking Alpha Factor Grades (Seeking Alpha)
Wabash has a 'strong buy' quant rating according to Seeking Alpha's rating system. Stocks with strong buy ratings have been back tested to outperform the S&P 500 ( SPY ). Although there are no guarantees that Wabash will outperform the broader market, these ratings at least put the odds in favor of that happening.
The Risks to the Investment Thesis
Higher interest rates could lead the economy into a recession. This could lead to a slowdown in orders for Wabash's trailers and related products. Wabash's customers could delay orders when interest rates are high and wait for lower rates before placing large financed orders. This could have a significant negative impact on Wabash's revenue and likely put downward pressure on the stock.
Wabash's high amount of debt puts the company at risk of defaulting if cash flow went negative for too long. Wabash currently has an Altman Z-score of 4.7 . This is a positive number. Altman Z-scores of below 1.8 indicate that a company is at risk of bankruptcy. So, Wabash is far from being in that type of danger. However, it is important for investors to realize that a prolonged negative change in the business could lead to declining revenue & earnings and a lower stock price.
Wabash National's Long-Term Outlook
Wabash's stock looks poised to perform well through the end of the year. Wabash should also perform well over the next 4 years on industry-growth tailwinds and the company's effective execution. However, there could be some hiccups along the way as business in 2024 might be lighter than 2023. Investors should see what the company says in the next couple of earnings calls to see how the Wabash guides for the future.
Wabash's low valuation and strong expected earnings growth for 2023 leave plenty of room to the upside for the stock. Analysts have a one-year price target of $31 for the stock, which is about 33% higher than the current price. This looks reasonable as it would take the PE from 5 to about 7 based on the expected EPS of $4.49 for 2023.
For further details see:
Wabash National: Stock May Increase On Industry Growth And Margin Improvements