ArcBest: A Best-In-Class Trucking Company
ArcBest Corp. (NASDAQ:ARCB) celebrates its 100th year of business this year and continues to be an integral part of the U.S. trucking industry, which is one of the most valuable segments to the country's transportation infrastructure. 90% of the food U.S. residents eat is transported via trucks. In 2021, more than 80% of the nation's freight was shipped via trucks, representing more than $875 billion in gross revenue.
Due to the industry that it operates in, to say that ArcBest is one of the most important companies in the U.S. would be an understatement in my opinion. More importantly for investors, it has also done very well financially despite prevailing macroeconomic headwinds.
2023 will be challenging
The start of 2023 was not great for ArcBest. First-quarter earnings of $1.58 per share came in about half of what the company achieved in the same period of last year. This was coupled with a 17% drop in quarterly revenues to $1.1 billion, amplified by rising operational costs. This pushed operating costs up 5% to 98% of revenues compared to 93% last year, including depreciation. Management attributed this to softer pricing and slowing demand, which is likely to persist throughout the year.
However, while the company is likely to face continued margin pressure due to a decrease in tonnage in the asset-based business, inflation and changes in market pricing, that hasn't stopped Wall Street's estimates for revenue to top more than $5 billion by 2025 and earnings per share estimates to come in around $8 in 2023 to $10 in 2024 to $12.50 in 2025.
Concerns over inflation and rising interest rates have heightened recession fears. Widespread layoffs and potential liquidity issues have undermined near-term fundamentals across the industry. ArcBest has historically managed costs and maintained profitability on very slim margins. In fact, the nearly 10% gross margins ArcBest currently enjoys is an increase on the company's five-year average. That said, returns on equity and assets sit above 22% and 12% respectively, and the cash flow from operations is slightly above $500 million, helping to make up for the way it accounts for cost of revenue.
Trucking is a good, but tough business
ArcBest and its subsidiaries operate over 240 facilities in North America with 15,000 employees. It has more than 4,000 company-owned tractors, over 22,000 trailers and 83 straight trucks in its fleet. The company generates revenue primarily through its various subsidiaries, which provide a range of services in the transportation and logistics industry.
ABF Freight is ArcBest's largest subsidiary and provides truckload and less-than-truckload freight services. The ABF Logistics subsidiary provides brokerage and transportation management services. U-Pack is a household goods moving brand of ABF that generates revenue from the approximately 30 million people that move every year in the United States.
ArcBest acquired Panther Premium Logistics in 2012. Panther is a non-asset carrier based in Seville, Ohio and was the second-largest U.S. expedited carrier behind FedEx (NYSE:FDX) Custom Critical at the time of acquisition. In 2021, ArcBest acquired MoLo Solutions, a truckload brokerage company based in Chicago, for $235 million. MoLo's revenue was expected to hit $600 million in 2021 and was growing at nearly 100% year over year. In addition to these, ArcBest also provides other asset-light operations, which include a variety of logistics and supply chain management services.
Every one of these segments generates fees by providing a useful service that is not likely to be eroded any time soon. Moreover, these fees should increase over time to fight future inflation.
Multiple competitive advantages
ArcBest has been in operation since 1923, providing it with a long history of delivering value in the transportation and logistics industry. This helps maintain trust and relationships with customers and partners?. It takes time to build big companies. ArcBest's size and scale is a great advantage, allowing the company to achieve economies of scale, reducing per-unit costs and potentially giving it a pricing advantage over smaller competitors??.
ArcBest also offers a wide array of services beyond standard freight, including brokerage, household goods moving and transportation management. This diversification allows the company to meet various customer needs and could help the company maintain steady business even if one area is underperforming?.
Valuation
ArcBest is in a solid financial position with more than $365 million in cash and just $186 million in long-term debt. The company sold its FleetNet America subsidiary earlier this year to a unit of Cox Enterprises for $100 million, saying the business is "no longer core to its growth strategy" and it will be using a portion of that cash to buy back around $125 million in stock. At the current price, that would shrink the total from 24 million down to around 22.5 million.
The market is already undervaluing the quality of earnings, placing a price-earnings ratio of just 7 on the stock, when historically ArcBest has traded around 15 times earnings. If earnings estimates are right, I believe the share price could be worth somewhere between $112 and $180.
This article first appeared on GuruFocus.
