Jul 12th, 2012 by aboveaverageodds
The investment analysis below is our sixteenth in our ongoing series of guest posts, and is brought to you by friend of the blog Torin Eastburn, portfolio manager of Monte Sol Capital and second order thinker extraordinaire (see below). Torin founded Monte Sol in January 2012. Prior to founding Monte Sol, he was employed as an equity analyst at CJS Securities, a sell-side brokerage firm that provides small-cap research to institutional investors. He is a CFA charterholder and a 2006 graduate of St. John’s College in Santa Fe, New Mexico.
As a long-time shareholder in Radiant, I’ve shared Torin’s belief that there are currently some very compelling investment opportunities in the 3PL industry for quite some time now, and hence wanted to share his wonderful piece with my readers on Radiant and the 3PL space in general. For patient investors willing to look out 3-5 years and perhaps bear some volatility along the way, I think an investment at or around today’s price is likely to do very, very well – and while Radiant is admittedly an economically sensitive business in an increasingly uncertain world, I would remind potential investors that this is a non asset based forwarding network that should grow at order-of-magnitude faster than GDP, has fixed SG&A, network effects, operating leverage, minimal capex, high/improving ROIC in a stable to growing world, no-brainer buyback potential at low to mid single digit normalized EBIT, and near certain multiple expansion once it gets to critical scale and comparisons to the bigger boys becomes more appropriate.
Of course if we get a global recession over the next year or so Radiant may come under pressure, but I remain convinced that such an outcome is nothing to fear and perhaps may ultimately represent what I consider an almost “best case” outcome, as I imagine the thinner margins of the small players would almost certainly get hammered under such scenario, offering up a buffet of incredibly compelling acquisition opportunities at rock bottom prices, and in the process setting the stage for Radiant to emerge at the other end of the cycle materially stronger then it was on its way in. In Bohn I trust.
Anyhow, before I turn it over to Torin, I wanted to quickly plug his brand new (and quite fantastic) blog – make sure to check it out.
Third-party logistics, or “3PL”, involves arranging the transport and/or storage of someone else’s goods. Third-party logistics companies serve as middle men between companies that want to have goods moved (the customers) and companies that do the moving (the shippers). If you, the reader, want to ship a parcel somewhere, all you have to do is take it to UPS, FedEx, or DHL. But what if you want to ship a truckload of goods from Seattle to Bozeman? Who do you call? There are more than one million trucking companies in the United States. And what if your shipment’s destination is not Bozeman, but Bangladesh?
Or let’s say you run a small or mid-sized business. Your company is great at designing products, or selling products, yet you seem to spend a lot of your time, money, and energy just figuring out how to move your inventory from the port to the warehouse to the retail location. Isn’t there someone who can take care of all of that so that you can focus solely on your products and your customers?
Enter the 3PLs. These are companies that don’t typically own transportation assets like trucks and containers. Instead, they have relationships with thousands of shippers—trucking companies, railroads, and air and ocean cargo companies. The most common type of 3PL is a freight broker. A freight broker evaluates its customer’s shipping needs and then polls its own network of shippers with whom it has relationships, in order to figure out how to get the cargo to its destination cheaply and on-time. In some cases this might involve just one shipper, and in some cases it might involve multiple shippers and multiple transport modes (ocean then rail then truck, for instance).
Different brokers are good at different things. Some brokers focus on trucking while others focus on air freight. Some focus on domestic freight while others focus on cross-border freight. Some focus on slow-moving freight while others focus on time-definite freight. Some focus on the food industry while others focus on autos. And so on. In some cases freight brokers contract with shipping companies on a freelance basis, and in some cases the two parties have an ongoing, or even exclusive, arrangement. The same is true for the customer-broker relationship. Sometimes the two parties only transact a few times a year, and sometimes they do business together every day. It all depends.
Freight brokers serve a number of purposes. The most fundamental purpose is the aggregation and matching of supply and demand. The brokers obviate the need for each customer to call each shipper, something which would be terribly inefficient. Brokers also increase customers’ purchasing power by pooling orders, and decrease costly “deadhead” miles by finding secondary shipping customer who have cargo to ship ‘back’ on the return journey. As compensation for their services, brokers take a cut of the shipping fee, typically 20% or so.
In addition to brokers, there are many other types of 3PLs. Freight forwarders, for instance, assemble cargo from multiple shipping customers into one load in order to take advantage of bulk shipping rates. Customs brokers take care of the customs process for cross-border freight. “Reverse” logistics 3PLs handle product recalls, refurbishment, or recycling for their customers. At its most complex, third-party logistics can involve the outsourcing of virtually the entire supply chain, up to and including warehousing, distribution, and even light assembly.
Armstrong & Associates, an independent research firm dedicated to the 3PL industry, estimates that the U.S. 3PL market is about $140 billion in size on a gross revenue basis. “Gross” revenue refers the total cost of shipment, including what is paid to the shipper, as opposed to “net” revenue, which refers only to the broker’s ~20% share. So while gross revenue is ~$140 billion for the 3PL industry, the actual share of revenue kept by the 3PLs is probably closer to $30 billion.
A&A breaks down the 3PL industry into four subsectors: domestic transportation management (about $40 billion in size on a gross revenue basis), international transportation management (also $40 billion), value-added warehousing ($35 billion), and dedicated contract carriage (~$10 billion), which is essentially another form of domestic transportation.
Despite being quite large, the 3PL industry has grown at an 11% CAGR for the last fifteen years, even with the interruption of the global financial crisis. Industry growth has been driven mainly by two things: the increasing globalization of trade, and greater adoption of supply chain outsourcing by large corporations. In 2001 only 46% of Fortune 500 companies used 3PLs, but by 2008 that usage rate had increased to 77%, and my guess is the rate is probably closer to 85% today. The chart below, which is in billions of U.S. dollars, provides a good visual representation of the industry’s growth.
The 3PL industry is extremely fragmented. Domestic U.S. trucking is a $650 billion business, yet C.H. Robinson (CHRW), the largest truck broker in the U.S., generates just $9 billion of gross transportation revenue. That means it only brokers 2.5% or so of U.S. truck freight. Landstar (LSTR) is probably the second-largest truck broker in the U.S., and its $2.7 billion of truck brokerage revenue accounts for less than 1% of total U.S. truck freight.
Why is the industry so fragmented? There are many reasons, but the big ones seem to be the fragmentation of the trucking industry itself (there are more than 1.2 million trucking companies in the U.S., and 90% of them operate less than seven trucks) and the cost of growth to brokers. The first reason is fairly self-explanatory: since the trucking industry is fragmented, the truck brokerage industry (the largest 3PL niche), which has grown up alongside it, is too.
The second reason, the cost of growth, bears a little more explanation. Most small brokers cannot grow quickly because they cannot fund the associated increase in working capital. Freight brokers extend credit to their customers as an inducement to do business. A consequence of this practice is that when a broker books a load of cargo, it must pay the shipping company before it receives actual payment from the customer. As a result most freight brokers have accounts receivable balances (which is the money owed to the broker by its customers) that are 50% to 100% larger than their accounts payable balances (the money the broker owes to shipping companies).
Why is this such a big deal? Well, the receivables/payables difference is usually equal to about 5% of gross sales. Take a small broker with $50M of gross revenue and $1M of EBITDA (2% margin). If this broker’s sales grow by 30%, to $65M, the increase in working capital is going to be about $750k (the $15M increase in sales multiplied by the 5% accounts receivable/payable difference). Because this fictitious broker’s $1M of EBITDA equals about $500k of after-tax income, growing 30% in a year actually requires more incremental working capital than the business itself produces in profits.
This is a difficult problem for small brokers to overcome, and makes it hard for small brokers to grow large. The only obvious solutions are to A) increase sales or profit margins and thereby profits, or B) establish a relationship with a large and willing lender. Unfortunately for the small brokers, both of those are hard to do without having size and scale in the first place.
Because growing as a freight broker is so hard when you’re small, the industry has tens of thousands of tiny brokers that each focus on one or a few shipping lanes and/or shipping modes, but relatively few large brokers with global, diversified service offerings.
Yesterday, Today, Tomorrow
The U.S. 3PL industry was more or less born out of the Motor Carrier Act of 1980. This act deregulated trucking, morphing it from a concentrated and somewhat cozy industry into an extremely fragmented and price-competitive one. The result was an explosion in the number of trucking carriers: there were less than 20,000 in 1980, but there are 1.2 million today. This explosion necessitated a middle man to help the customer navigate the multitude of new trucking options. 3PLs were born, many in the form of truck brokers.
Then came China. Economic initiatives implemented there in 1990 quickly turned the country into the global epicenter of low-cost manufacturing. This made almost all finished goods and components cheaper, but it also added great complexity to global supply chains. Sourcing goods and components, shipping them, storing them, and keeping track of them became something companies no longer wanted (or could) do on their own, so they started hiring 3PLs. In 2001 only 46% of Fortune 500 companies used 3PLs, but today about 85% do.
Finally came computers and the internet. Software has enabled great advances in the efficiency of logistics and distribution. More importantly though, as the internet has turned retailing into an art of scale and distribution rather than of selling, use of 3PLs by retailers and tech/consumer goods companies has grown dramatically. Once upon a time, moving agricultural products from farms to factories and grocery stores was the U.S. 3PL industry’s biggest business. Today, moving consumer goods is far larger.
Trucking deregulation, Chinese manufacturing, and internet retailing took the 3PL industry from virtually nothing in 1980 to $140 billion today. But those trends are losing steam. While online retailing continues to grow faster than traditional retailing, the growth rate is slowing. And on absolute basis, U.S. online retail sales are growing by $20-25 billion each year, but not much more or less. So while Internet retailing will continue to drive 3PL usage at the margin, the growth won’t be industry-changing like it once was.
Globalization also seems to have played out as a driver of 3PL growth, as virtually all large companies have become sophisticated outsourcers by now. Nearly all Fortune 100 companies use 3PLs, and more than 80% of the largest 300 Fortune companies do. Since these 300 largest companies account for 90% of total Fortune 500 revenue, the remaining opportunity for offshoring-driven 3PL use is probably quite small.
If the 3PL’s industry two biggest growth drivers of the last fifteen years are losing power, it seems reasonable to question whether the industry is starting to mature. The table below, which shows “then & now” growth rates for some of the largest 3PLs, appears to confirm this suspicion, although with the caveat that recent growth rates include the global financial crisis.
So what opportunities remain?
Today, many investors and 3PLs are focused on U.S. truck brokerage as the next driver of industry growth. The domestic trucking industry generates about $350 billion of revenue annually, but 3PL gross revenue from domestic transportation management (“DTM”) is only $50 billion. That means just 15% of trucking revenue, at most, goes through a broker. Here is what Bradley Jacobs, the CEO of XPO Logistics (and formerly the founder and CEO of United Rentals and United Waste Systems), has to say about the truck brokerage opportunity:
For me, [truck brokerage penetration] was a very important point, because my bet is that the $50 billion penetration – which is 15% of the total trucking transportation spend in the United States – is going to increase significantly. It’s a very similar bet to the one I made at United Rentals, where I saw a lot of construction equipment that was under-utilized. It was being used only a week or two, or maybe a month total out of a year. Yet people were buying the equipment. I was certain that over time, people would rent that equipment instead of buying it. And the penetration of equipment rental has indeed grown from 15% in 1997 to around 45% today.
I think it’s a very similar situation with the way transportation is purchased in the United States. That 15% is going to increase. If you look at the growth rates of brokerage versus trucking as a whole, trucking has mainly been going up and down with GDP. The outsourcing to brokers, on the other hand, has been growing at two or three times GDP.
I think the reason the pie is growing is because it makes good economic sense to use a broker. The Fortune 500 have discovered that about brokerage. 85% of the Fortune 500 uses a broker. But below the Fortune 500, transportation is very inefficiently purchased, by and large. The average small-to-medium sized shipper doesn’t have a freight department, and frankly, for the amount of freight that they move, they really shouldn’t have people dedicated to checking out the market all day long. That should be outsourced to brokers like C.H. Robinson, Echo, or hopefully XPO Logistics.
Mr. Jacobs makes a compelling case, and it seems quite likely that brokerage will indeed continue to grow faster than GDP. But DTM is already the single most-used service among existing North American 3PL customers, with 75% reporting using it. This means the opportunity is probably not massive like it was 10 years ago, which will be a limiting factor of growth. Arguing more favorably for truck brokerage though, DTM’s high penetration rate among existing 3PL customers suggests that DTM will often be the first service adopted by future 3PL customers. It is also worth pointing out that North America’s 75% DTM usage rate is the lowest of all the major regions—European, Asian, and Latin American DTM usage rates are 94%, 89%, and 80% respectively. So I am of two minds about the U.S. truck brokerage opportunity. The opportunity is clearly there, but its size is up for debate given the already-high penetration of DTM among large U.S. companies.
The Few and the Many
I don’t want to bet against Mr. Jacobs’ track record, but I do wonder if consolidation is not the bigger opportunity. The early phase of consolidation has already enabled aggressive mid-tier 3PLs to grow at astonishing rates. ECHO’s 5-year revenue CAGR is 79%. Coyote, a similar-sized but private 3PL company, has grown 73% annually for the last five years. XPO, RLGT, and AUTO all have grown at about 30%. The growth rates of the big 3PLs pale in comparison.
The 3PL giants like C.H. Robinson and Expeditors International never needed acquisitions to grow, because they climbed onto the 3PL wave at its earliest point. So acquisitions never became a part of their corporate cultures. But for the mid-sized 3PLs who came later to the party or haven’t reached the same scale, consolidation has been an integral part of the business plan. ECHO has made 13 acquisitions since 2007. NFI, a private 3PL company, has made 11 since 2000. RLGT has made six in its short history. XPO has $200 million sitting in the bank, and all of it is earmarked for acquisitions.
Consolidation has clearly already started, but I think we are still in the early stages, for four big reasons.
Reason 1: Fragmentation
Even after the early phase of consolidation, the industry remains extremely fragmented. I’ve already discussed this point in some depth so I won’t belabor it here. 3PL fragmentation exists in part because 3PL’s biggest economic partner, the trucking industry, is itself extraordinarily fragmented, and in part because of the current stage of the 3PL’s industry lifecycle. The typical cycle involves a great proliferation of companies during the industry’s rapid expansion phase, and then consolidation as maturity arrives.
Reason 2: Advantages to Scale
In the 3PL industry, life gets better as you get bigger. The chart below is the most succinct way I can think of to illustrate the advantage of being big.
Clearly, bigger means more profitable. Much of 3PL corporate spending—payroll, financial & tax reporting, IT—can be scaled at minimal cost. Take software, which is rapidly becoming one of the most important competitive advantages a good 3PL can have. If two 3PL companies each spend $10 million to develop the same software suite, but the first company has 1,000 employees while the second has 2,000, then the first company is paying twice as much per employee for the same software system. So the bigger you are, the more value you get for your corporate dollar.
Another natural result of this scale effect is that as freight brokers grow, their return on investment improves. The investment to support the first hundred million dollars of revenue is much greater than the investment needed to support the second hundred million dollars of revenue, and so on. The cost to hook up the one hundredth sales associate to your network is de minimis. So mature providers earn returns on equity in the 20-40% range while the smaller, younger 3PL companies like those at the bottom left of the chart above generate ROEs closer to the 10-15% range—still good, but not elite like the mature 3PLs.
The steepness of the 3PL margin curve also means that the larger a 3PL provider gets, the easier a time it has financing its growth. At the end of Part 1 I gave an example of a small freight broker that earns a 2% EBITDA margin and does not make enough money to take advantage of the rapid growth opportunities that exist in the industry. But for big 3PLs who earn 6% to 8% EBITDA margins, financing growth is no problem. After-tax profits are not only large enough to pay for increased working capital, they leave huge amounts of cash to be distributed to shareholders every year.
Being larger also makes your earnings less cyclical, because changes in revenue (the X axis) on the right side of the 3PL margin curve entail much smaller margin shifts (the Y axis) than do changes on the left side of the curve. Add in the fact that during recessions freed up shipping capacity lowers the price of transportation and thus raises 3PL margins, and you will typically see the big 3PLs lose much less in profit than in revenue during bad times. The results below, from 2009, demonstrate this.
Being small—especially really small—is hard.
Reason 3: Father Time
The Motor Carrier Act, the 3PL industry’s version of the big bang, went into effect in 1980. If the average 3PL entrepreneur was 30 years old then, he or she is 62 now and thinking about retirement and succession. Many of the 3PL businesses that were started back then are still quite small, and without the “head guy”, they face uncertain futures. To cash out while also ensuring that the business lives on in some form, many of these entrepreneurs will have no choice but to sell to larger 3PLs, either for cash or for equity in the acquiring organization.
Reason 4: Value Creation
This might be the most compelling reason of all for consolidation. Because many of the small 3PLs are not self-sustaining without the talent and motivation of their primary owners, they are in a tough position from a negotiating perspective. They simply cannot command high prices when they sell themselves. EBITDA multiples in M&A deals for 3PLs/brokers with EBITDA in the single-digit millions have historically been for 4-6x EBITDA, with part of the consideration paid up-front and the remainder paid in the form a multi-year earn-out. In contrast, established mid-sized and large 3PLs generally trade for 10-15x EBITDA, making the opportunity for value creation through M&A enormous.
Why Mid-Sized is the Right Size
If more consolidation is coming, what is the best way for an investor to profit from it?
I don’t think the big 3PLs are the way to go. They are good companies and they have scale-related advantages over smaller competitors, especially very small ones, but they all trade at high multiples and their growth may be slowing, as previously discussed. This fact alone makes them unattractive from an investment standpoint.
More importantly, these big guys are simply too big to be the prime beneficiaries of the consolidation I’ve talked about. The greatest quantity of M&A opportunities is at the small end of the industry—companies with EBITDA below $10 million. The big 3PLs have EBITDA in the many hundreds of millions. For them, $10 million doesn’t move the needle. The due diligence isn’t worth the time. Buying companies with more than $10 million of EBITDA is an option, but the opportunity for value creation isn’t there because any acquisition of that size is probably not going to happen at an EBITDA multiple much below 10x.
So the big guys are off the table, unless you’re working with an enormous capital base and you can only buy large cap companies. What about the small guys, say those with less than $100 million of gross revenue? They’re too small to be public, so you can’t invest in them unless you’re a PE or VC firm. But even if you could, realizing high returns would be a challenge. Survival is getting tougher for tiny 3PLs, and because these guys sell for such low multiples in M&A transactions, it would be hard to make a killing even if you could successfully identify the companies that will be bought out.
That leaves the mid-sized 3PLs—those with gross revenue of roughly $100 million to $1 billion—as the companies that are best-positioned to capitalize on 3PL consolidation.
On the one hand, the market has shown a willingness to award mid-sized 3PLs the same big multiples (see ECHO and XPO) that it awards the mature 3PLs. That means creating value through the acquisition of tiny 3PLs at 4-6x EBITDA is a very real opportunity for the mid-sized 3PLs, especially since they are still small enough for $10 million EBITDA deals to be meaningful to their growth.
On the other hand, I think the big guys could end up needing to make acquisitions to keep growing. All of them still sport the double-digit EBITDA multiples befitting high-quality growth companies, but continued high growth is far from certain. If their growth remains subdued, markets are going to start questioning whether the big 3PLs are still the growth machines they once were. If that happens, I would not be surprised to see some of the bigger 3PLs that have historically shunned acquisitions finally turn to them as a way to restore lost growth. And since the tiny private 3PLs are too small to move the needle, the only sensible targets will be the mid-sized guys who have already gotten fat consolidating the tiny guys.
This makes the mid-sized 3PLs doubly attractive from an investment standpoint. Not only will mid-sized 3PLs be the ones who get most of the benefit from M&A value creation, but some of them may also end up getting bought out for very sizeable EBITDA multiples by the bigger guys.
Now to Radiant and the specific opportunity…
• Non-asset-based 3PL provider with a focus on expedited freight
• 5 year revenue CAGR of 34%
• The 3PL industry has grown 10% annually for 15 years and is now starting to consolidate
• Vast consolidation opportunity means there is no end in sight to growth for RLGT and select peers
• Currently trades at 8x FCF and under 6x EBITDA based on NTM guidance
• Peers trade at 10-15x EBITDA
• Stellar CEO owns 30% of company, recently bought shares in open market
RLGT has been written up multiples times elsewhere, and on VIC as well. I am writing it up yet again because the stock’s recent pullback, has driven RLGT shares to a price at which I believe ANY microcap investor—growth, value, whatever—should take notice.
Some quick background:
The non-asset-based and asset-light 3PL industry consists primarily of intermediaries who organize the storage and transport of goods, both domestically and internationally. Most of them don’t own transportation assets, just relationships with shipping customers and shippers. Driven by supply chain modernization and the globalization of trade, the 3PL industry has grown 10% per year for 15 years. The industry is extremely fragmented, with the largest U.S. 3PL, C.H. Robinson, having only a 2% domestic share.
The economics of the 3PL business are great at scale. The 3PLs that have focused on the right niches of the industry have grown their revenues at double-digit rates for a long, long time, and all of the large well-run 3PLs earn ROEs of at least 20% and generate a tons of cash. The market has rewarded them each with EBITDA multiples in the 11-12x range.
But things are starting to change in the industry. In 2001 only 46% of Fortune 500 companies used 3PLs. Today, about 85% do. As a result, the adoption of 3PL services by large corporations is losing strength as a driver of growth. This is causing the top end of the industry to mature, as the big 3PLs rely most heavily on large corporations as customers.
The next step in the industry lifecycle is to consolidate. The 3PL industry is profoundly fragmented, consisting of thousands of companies, many of them little more than a few guys in an office arranging truckloads.
The industry’s fragmentation has two causes. The first is that the trucking industry, which is the backbone of the U.S. transportation system, is itself extraordinarily fragmented—there are more than 1.2 million trucking companies in the U.S., and 90% of them operate six or fewer trucks.
The second cause of the extreme fragmentation at the smaller end of the 3PL industry is working capital. In freight brokerage, the largest 3PL subsector, the dollar value of accounts receivable is typically 1.5-2.0x the value of accounts payable, so 3PLs must front money to grow. A lot of the small ones don’t have enough capital, which throttles growth and makes scale hard to achieve.
So there are a lot of very small 3PLs out there, and the small end of the industry is going to consolidate, which will be great for the consolidators. But there is one minor problem for the big guys like KNIN, CHRW, LSTR, and EXPD—they are too big. They all generate EBITDA in the hundreds of millions. Buying up 3PLs with EBITDA in the single-digit or low-double-digit millions won’t move the needle. The return on time invested is not sufficient to justify the investment.
So the mid-sized 3PLs (and smart PE and VC firms) are doing it. They are happy to oblige, because the tiny 3PL/freight brokerage businesses available for purchase are not indefinitely sustainable on a standalone basis, so their purchase prices are a pittance—typically 2-2.5x EBITDA in cash up front, and an additional 2-2.5x EBITDA in the form of a multi-year earn-out. Sometimes there is actually no price paid at all—a lot of the consolidation that goes on in the industry consists of attracting new sales agents from competitors and out of college with the allure of a larger shipping network to offer customers, as well as better IT and back office systems. Since the good 3PLs trade at 10x+ EBITDA, there is an obvious and enormous opportunity for value creation through consolidation.
Since consolidation has started, the mid-sized 3PLs doing the consolidating have grown at staggering rates. ECHO’s five-year revenue CAGR is 79%. Coyote Logistics, a private VC-funded 3PL, has posted a 73% CAGR. XPO’s number is 32%. RLGT’s is 34%. AUTO’s is 28%. The table below shows how the industry’s maturation and consolidation have shifted growth from the large 3PLs to the smaller ones.
5 Yr Rev CAGR as of 2005 5 Yr Rev CAGR as of today
SWX:KNIN 12% 1%
CHRW 15% 10%
EXPD 15% 5%
LSTR 12% 2%
And because corporate costs can be scaled, EBITDA has been growing even faster. The incremental EBITDA margin on new sales is 6-8% depending on the mix of business, but the mid-sized 3PLs only earn 3-4% EBITDA margins, because they haven’t achieved full scale yet.
The 3PL business is cyclical, but with a few counter-cyclical features. During recessions excess transport capacity increases, which brings down the cost of shipping, thereby making shipping more economical than it was during the good times. In addition, companies looking to cut costs become more incentivized to outsource, which can bring additional work to 3PLs.
For the mid-sized 3PLs, economic cycles are even less of an issue because there are plenty of 3PLs out there for purchase, boom or bust. The deregulation of the U.S. trucking industry in 1980 basically gave birth to the 3PL industry, and the entrepreneurs who started 3PLs at age 30 in 1980 are now approaching 65 and looking for financial exits. In the dark days of 2009 the large 3PLs all saw healthy revenue declines, but most of the mid-sized consolidators actually grew, albeit with the help of acquisitions..
2009 Revenue Growth
Why invest in RLGT specifically?
You can’t invest in Coyote because it’s private. ECHO is public but it trades at a big EBITDA multiple and its founders have a history of using very aggressive accounting. XPO too trades at an extreme price, because its CEO and largest owner, Brad Jacobs, has a long history of success rolling up fragmented industries. And AUTO is miniscule, with a $7.5M float. RLGT is all that’s left.
Luckily RLGT is not exactly a bad date to be stuck with. The company was founded in 2005 with $5M of equity capital by Bohn Crain. Today RLGT’s market cap is $60M, and its intrinsic value is easily in excess of $100M (and growing quickly). Mr. Crain was formerly a financial executive with CSX, Schneider Logistics, and a few other companies. He still owns 30% of RLGT, and has purchased shares in the open market on multiple occasions, including a purchase a few weeks ago. Substantially all of his net worth is invested in RLGT, and his salary is modest. He is an excellent manager, something you can learn by listening to RLGT’s conference calls. There are plenty of companies out there that are five times RLGT’s size but would be lucky to have Mr. Crain at the helm.
Why buy RLGT now? In a word, DBA.
DBA, or Distribution By Air, is a an expedited freight broker based in New Jersey. RLGT bought DBA in March of last year for $12M, making DBA Radiant’s largest acquisition yet. Unfortunately, to get the deal done RLGT broke one of its own cardinal rules and agreed to a deal without an earn-out. Not long after the acquisition closed, one of DBA’s owners left and went into competition with RLGT. RLGT sued, believing this constituted a breach of the noncompetition clause (it seems likely that it did, and that RLGT will receive monetary compensation in return).
The bad results at DBA as a result of the previous owner’s actions broke a string of otherwise-consistent margin improvement and profit growth for RLGT. Radiant’s management has been adamant that DBA will be fixed, however, and has released June 2013 guidance to substantiate that claim. The guidance calls for $13.5M of EBITDA, which puts the stock at under 6x EBITDA at the current price, and under 8x cash earnings. Thanks to operational improvements at DBA, RLGT should actually post improving results over the next 12 months even as the economy falters.
A few weeks ago, when the stock was below $1.80, Mr. Crain and a board member each bought $50k worth of stock. $50K is not a huge dollar amount on its own, but I view it as meaningful given that A) Mr. Crain is already up to his neck in RLGT exposure, and B) Mr. Crain made $450k in cash compensation in 2011, meaning that after taxes and living expenses his $50k purchase probably represented a decent portion of his discretionary income for the year.
Based on a simple 12x peer EBITDA multiple, RLGT should be a $4 stock. Looking out five years, EBITDA could easily be three or four or five times what it is now, and RLGT could easily be a $10-15 stock.
How many chances do you get to pay 8x FCF for a great business growing 30% a year, in strong financial shape, with a huge growth runway ahead of it, and run by an excellent CEO who has everything on the line?
For those who are interested (Ryan here), I figured I’d also point you towards friend of the blog Adam Wyden of ADW Capital’s older write-ups on the name for some further color. Adam’s write-ups can be found here and here.
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