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Risk-Reward With Covenant Transportation

- By Jonathan Poland

After the Dow Jones Industrial Average fell 450 points at market open on Monday thanks to tariff hikes, Mr. Market's fear is providing an opening for intelligent buyers. Covenant Transportation Group Inc. (CVTI) should be one of those investments.

The small-cap trucking company continues to generate steady financial growth. Over the last decade, Covenant grew sales from $589 million in 2009 to more than $931 million in the last 12 months, turning around a loss of $1.77 per share into a net profit of $2.30 per share. The company has used its profit growth to expand its book value by more than 180% to $18.93 per share.


While the $700 billion industry slipped last year with the U.S.-China trade war and agricultural weakness, Covenant's individual growth continues. In its April earnings report, the company beat estimates with GAAP earnings of 24 cents per share on $219 million in revenue, an increase of 26.3% year over year. Average freight revenue per mile was up 6.6% to $1.886, while total debt was still below 6 times its net income.

Covenant faces headwinds across many areas of its business, from rising oil prices to changes in technology and an aging workforce. Trucking, however, remains one of the most viable methods of transporting goods across the country.

Manufacturers won't be building their own line of trucks and even Amazon (AMZN) is having problems with its supply chain delivery. Whether the market shifts to self-driving, clean energy trucks or some other technology, the services Covenant offers will be necessary for cost and efficiency purposes. And, as a smaller company, it will be able to shift with the trends.

As for valuation, the stock is trading at 8 times current earnings, below $18 per share, down almost 50% in the last year. It is also trading below the industry average and its own five-year average price multiples. Getting back to those averages could push the stock price up to the $30 range.

Moreover, Covenant Transportation could see its revenue and earnings double in the next five to 10 years. With that in mind, the stock is a bargain at this price.

Disclosure: I am not long or short CVTI.

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This article first appeared on GuruFocus.