Buyout of trucks in the United States: some light (NASDAQ: USAK)
June 24, 2022 turned out to be a remarkable day for the shareholders of American truck (NASDAQ: USAK). In response to news that the company had agreed to sell itself to another buyer, shares of the entity soared 112.6%. This price spike brings the company to a level that more or less matches what many of its competitors are trading. But on an absolute basis, stocks still look pretty cheap. Overall, investors should view this as a slightly disappointing result, even if they capture a significant upside in a short period of time.
A great little company got snapped up
In September of last year, I wrote my first USA Truck article. In this article, I mentioned management’s high expectations of the company and the low price at which the shares were trading. By low price, I don’t just mean the nominal price. I mean the multiple at which the company was trading relative to its cash flow. On top of that, I also commended the company’s historic financial performance, especially its revenue growth and its robust and generally growing cash flow. In the end, I ended up calling the company a “buy,” which underscores my belief that the company would likely generate a significantly higher return than the broader market would over an extended period. Since the publication of this article, USA Truck has significantly exceeded even my own expectations. Even though the S&P 500 is down 17%, the company’s shares were up 0.4% before the move was announced. Now they are up 109.6% compared to the 13.7% decline seen by the broader market.
The vast majority of this increase is the result of the aforementioned acquisition. According to a press release issued by management, the company has agreed to sell itself to logistics giant DB Schenker in an all-cash deal valuing the company at $31.72 per share. This translates to a company equity market value of approximately $285.7 million and an enterprise value of $435 million. While this represents a significant premium to the company’s previous share price, investors would be right to question whether the terms of the deal make sense to them. Also, the question of additional upside potential by the closing date is certainly reasonable. To answer the first question, we first need to dig deeper into the historical financial performance of the company.
When I last wrote about the company, we only had data covering the first half of the company’s 2021 fiscal year. Now we know how 2021 worked. We also have data covering the first quarter of the company’s fiscal year 2022. For all of 2021, revenue was $710.4 million. This represents an increase of 28.9% from the $551.1 million generated in 2020. A significant contributor to this increase in sales was the trucking segment, which saw revenues climb 14.8% from from $384.3 million in 2020 to $441.1 million last year. Even though the total number of kilometers driven by the company decreased by 7.9%, the basic income per loaded kilometer increased by 20.7% and the basic income per tractor available per week jumped by 18.4 %. Even more impressive was the performance of the USAT Logistics segment, which saw its revenues increase by 68.5%, from $192 million to $323.4 million in a single year. This is partly explained by a 17.5% increase in the number of loads. However, the main contributor was a 43.4% increase in revenue per load. Supply chain constraints have clearly proven beneficial to shareholders lately.
As revenues increased, profitability also increased. Net income of $24.8 million eclipsed the $4.7 million generated in 2020. Cash flow from operations fell from $31.2 million to $37.6 million. But if we adjust for changes in working capital, it would have gone from $49.1 million to $60.2 million. Meanwhile, the company’s EBITDA also improved, from $55.7 million in 2020 to $74.8 million in 2021. While these increases may seem out of proportion to the rise in income, this should come as no surprise to investors accustomed to buying into asset-intensive companies in low-margin sectors. Even a small improvement in price or volume can have a significant impact on a company’s bottom line.
The strong financial performance continued in fiscal 2022. In the first quarter, the company’s revenue was $201.1 million. This translates to a 26.9% increase from the $158.5 million generated in the same quarter a year earlier. Both segments saw year-over-year sales growth, but by far the best performing segment was USAT Logistics, with revenue up 52.6% from $55.7 million to $85 million. The number of loads for this segment decreased by 24.8%, while revenue per load increased by 14.2%. Naturally, profitability followed. Net income fell from $3.6 million in the first quarter of 2021 to $13.1 million in the same period this year. Operating cash flow more than doubled from $6 million to $13.8 million. However, if we adjust for changes in working capital, the increase would have been smaller, with the metric dropping from $12.2 million to $15 million. And finally, the company’s EBITDA went from $15.7 million to $27.4 million.
We don’t know what the rest of fiscal year 2022 will look like for USA Truck, but if we annualize the results seen so far this year, we should expect operating cash flow of $74 million on a adjusted and EBITDA of $130.5 million. Using this data, we can easily assess the company. On a forward-looking basis, the price to adjusted operating cash flow multiple is 3.9. This compares to the 4.7 reading we get if we rely on 2021 results. Meanwhile, the EV/EBITDA multiple is expected to reach 3.3, which is a significant improvement over the reading 5.8 which we get using 2021 numbers. Of course, some investors may think we are being overly optimistic in assuming that current market conditions will continue in perpetuity. This is a perfectly fair point. But even if financial performance returns to what we saw in 2020, those multiples are incredibly low at 5.8 and 7.8, respectively. Shares of the company are also cheap compared to other players. Compared to five other similar companies, I found that the companies traded at a price/operating cash flow multiple between 1.8 and 8.5. In this case, three of the five companies are currently cheaper than USA Truck. Using the EV to EBITDA approach, the range was 2.5 to 5.9. In this scenario, four out of five companies are cheaper than our prospect.
|Company||Price / Operating Cash||EV / EBITDA|
|TFI International (TFII)||8.5||5.9|
|Pact Logistics Group (CVLG)||3.7||2.5|
|PAM Transportation Services (PTSI)||5.2||4.0|
At first glance, this takeover seems incredibly attractive to investors. This is especially true when you consider USA Truck’s stock price relative to similar players. At the same time, however, equities are still cheap in absolute terms, even if financial performance returns to what it was in previous years. Given the company’s current stock price relative to the quoted redemption price, there’s an additional upside of around 2.3% to be had. For investors who like merger arbitrage opportunities, this could be worth taking, especially if it can be done with leverage and investors are anticipating further decline for the broader market. For this reason, I would still consider the company a soft ‘buy’, but in the absence of anything meaningful, all the easy money was made.