Wabash National's (NYSE: WNC) most recent earnings report is a shining example of two strong and opposing market forces crashing head-on with each other: tariffs and a booming trucking industry. One of these forces led to historically high revenues and a robust backlog of work, while the other took a huge bite out of margins and made Wabash miss earnings expectations.
Let's see how these conflicting forces showed up in the numbers for this past quarter and how these market forces could influence Wabash's future results even more.
Image source: Getty Images.
By the numbers
|Metric||Q2 2018||Q1 2018||Q2 2017|
|Revenue||$612.7 million||$491.3 million||$435.9 million|
|Operating income||$46.0 million||$25.6 million||$38.6 million|
|Free cash flow||$54.3 million||($5.5 million)||$2.2 million|
DATA SOURCE: WABASH NATIONAL EARNINGS RELEASE. EPS = EARNINGS PER SHARE.
There were several things working in Wabash's favor this past quarter to drive revenue up 40% compared to this time last year. Much of that has to do with its acquisition of Supreme Industries in the third quarter of last year, but even without Supreme's last mile, products revenue was up 13% for its other business segments. Strong demand for trucking and trailers has been due to several factors, such as a growing economy, an aging fleet of trailers, and increased logistics demand from e-commerce and other home-delivery services.
Unfortunately, those secular trends also are running up against fast-rising material costs. While Wabash noted in its prior earnings release that material costs were affecting margins, this was before tariffs on aluminum and steel started to take hold. Management has tried to pass along price increases in recent quarters to offset these rising costs, but material costs are simply outpacing price increases.
Data source: Wabash National earnings release. Chart by author.
One encouraging note was the uptick in free cash flow this past quarter. Wabash's cash generation is incredibly lumpy as it has to make large capital builds like it did in the first quarter of the year. Management was able to use that cash to settle the remaining $63 million in convertible debt that came due in the quarter and prevented shareholder dilution. The retirement of this debt and payments on its other obligations left Wabash with a net debt-to-capital ratio of 28%.
What management had to say
In his first quarter as Chief Executive Officer after taking the reigns back in June, Brent Yeagy highlighted how strong demand and cost inflation were pulling the business in opposite directions.
We achieved a new record for quarterly consolidated revenue at approximately $613 million, which is 13 percent higher than the previous record from the fourth quarter of 2015. This new record is directly attributable to the addition of the Supreme business and our Final Mile Products segment. Needless to say, we continue to believe our Final Mile Products business will help drive future growth for Wabash National. Overall, all three of our reporting segments continue to experience strong demand in most end markets and we expect a stronger second half of 2018.
Backlog totaling $1.2 billion as of June 30, 2018, remains seasonally and historically strong, increasing approximately 51 percent when compared to the prior-year quarter. Trailer and truck body demand and orders have remained strong for the past several months continuing the trend from the first quarter and supporting our belief in the growing secular demand in e-commerce and home delivery. We continue to take steps to reduce the margin impact of U.S. tariff policy, raw material inflation, supply base disruptions and a very tight labor market on our business in 2018.
A couple of levers to pull
Perhaps the greatest challenge for Wabash today is being able to pass on price increases for its products to offset cost inflation without disrupting sales growth. That's going to be a delicate balancing act because there are both secular and cyclical trends impacting Wabash today. Trucking companies still need to replace older equipment, but the rate at which that equipment is replaced will rise and fall with the cost of trailers and truck bodies.
Even though the cost of raw materials is out of management's hands, there are some other cost levers it can pull to improve margins from here. Its last mile product segment has the highest gross margins of its business segments, but low operating margins. As the company continues to integrate this acquired segment into the rest of the business, there likely will be some costs it can wring out and improve margins.
Wall Street doesn't seem too convinced that Wabash's operations can improve much from here, though, as its stock currently trades at an enterprise value-to-EBITDA ratio of just 7.7 times.
There's a lot of demand for Wabash's products right now. If it can pass on cost increases at a faster rate and right the ship with its margins, then all this market pessimism will seem a bit overblown.
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