![ABF Freight Systems trucks](https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1182783547/image_1182783547.jpg?io=getty-c-w750)
![ABF Freight Systems trucks](https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1182783547/image_1182783547.jpg?io=getty-c-w750)
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Again in April of 2023, I discovered myself taking a slightly bullish stance on logistics enterprise ArcBest Company (NASDAQ:ARCB). The corporate, which is thought for providing freight transportation providers and different logistics options to its prospects all through North America, had been outperforming the broader market since I had previously written about it in Could of 2021. Whereas the S&P 500 was down by 1.5%, shares of the corporate had seen upside of 10.9%. Even with that return disparity, I felt as if shares had been attractively priced. This led me to maintain the agency rated a ‘buy’ to replicate my view that the inventory would possible proceed outperforming the broader marketplace for the foreseeable future.
At the moment, with nearly a yr having handed, I need to say that shares have outperformed even my very own expectations. Because the publication of that article, the S&P 500 has seen upside of twenty-two%. By comparability, ArcBest has jumped by 54.7%. Apparently, this has occurred at a time when a few of the basic efficiency of the enterprise has truly weakened. For 2023 in its entirety, income, earnings, and money flows, have all dropped yr over yr. However, there are nonetheless some positives that traders want to concentrate to. For starters, the corporate has a web money place versus a web debt place. Along with this, whereas 2023 was weaker than 2022, some shiny spots started displaying on the underside line within the closing quarter of the yr. And on high of this, the inventory, whereas not wherever close to as low cost because it was beforehand, doesn’t look outrageously priced. All issues thought of, this makes me really feel as if there could be a bit of extra upside. However due to how little that extra upside could be relative to the broader market, I believe that downgrading the agency to a ‘hold’ is prudent right now.
Fascinating outcomes as of late
On February sixth, the administration group at ArcBest introduced monetary outcomes overlaying the ultimate quarter of the 2023 fiscal yr. However earlier than we get into the outcomes for that quarter particularly, let’s speak about 2023 in its entirety. As a result of if we glance by way of the lens of the yr as an entire, the image appears to be like slightly unappealing at first look. Throughout 2023, income totaled $4.43 billion. That represents a decline of 12% in comparison with the $5.03 billion generated in 2022. To actually perceive this decline, we must always contact on each of the corporate’s working segments.
![Financials](https://static.seekingalpha.com/uploads/2024/2/24/9866571-17087521868517702.png)
![Financials](https://static.seekingalpha.com/uploads/2024/2/24/9866571-17087521868517702.png)
Creator – SEC EDGAR Knowledge
At the beginning, now we have the Asset-Based mostly portion of the enterprise. This a part of the enterprise offers LTL (less-than-truckload) providers to the corporate’s prospects. It does this by way of ABF Freight’s motor provider operations. In brief, what this unit does is present transportation providers for normal commodities that administration considers to incorporate mainly all freight except for hazardous waste, harmful explosives, and some different area of interest classes. Particular items transported would additionally embrace meals, textiles, chemical substances, plastics, wooden, equipment, and extra.
![Financials](https://static.seekingalpha.com/uploads/2024/2/24/9866571-1708752216947023.png)
![Financials](https://static.seekingalpha.com/uploads/2024/2/24/9866571-1708752216947023.png)
ArcBest
Throughout the yr, income related to this phase dropped to $2.87 billion in comparison with the $3.01 billion reported one yr earlier. This decline could be chalked as much as a few elements. For starters, construct income per cargo dropped by 7.4%, with construct income per hundred weight dropping 2.2% yr over yr. This decline got here at the same time as shipments rose by roughly 3%. When you think about that general tonnage dropped by 2.6% per day, which means the corporate was transporting much less within the method of general items however making extra journeys.
![Financials](https://static.seekingalpha.com/uploads/2024/2/24/9866571-17087522279396536.png)
![Financials](https://static.seekingalpha.com/uploads/2024/2/24/9866571-17087522279396536.png)
ArcBest
Despite the fact that income related to this phase dipped barely, the actual ache got here from the Asset-Gentle phase. This a part of the corporate mainly offers prospects with a single supply of built-in logistics options. In brief, prospects utilizing these providers may need transportation wants that may require a number of routes or a number of technique of transporting their items. ArcBest addresses this by dealing with these complexities for his or her prospects, typically even resorting to 3rd events to facilitate mentioned performance. Sadly, issues didn’t actually go properly with this phase for the yr. Income for this unit dropped from $2.14 billion right down to $1.68 billion. Despite the fact that the variety of shipments per day below this phase rose by 5.3%, income per cargo fell a slightly important 25.9%. In response to administration, the ache that this phase skilled was the results of a change in enterprise combine that was pushed by weaker market situations.
With income falling, earnings for the enterprise additionally took successful. Web revenue went from $298.2 million in 2022 to $195.4 million in 2023. Different profitability metrics adopted an identical trajectory. Working money stream went from $470.8 million right down to $322.2 million. If we regulate for adjustments in working capital, we get a decline from $458 million right down to $292.6 million. And lastly, EBITDA for the corporate fell from $564.6 million to $369.6 million.
Regardless of the issues that the enterprise skilled for the yr as an entire, the ultimate quarter of the yr has seemed as much as some extent. Income did proceed dropping, falling from $1.16 billion to $1.09 billion. The primary excellent news includes the Asset-Based mostly phase. Income was nonetheless down yr over yr within the closing quarter of 2023, but it surely was down by solely 0.2%. Shipments had been just about flat and tonnage transported dropped by 6.4%. This led to tons per day dropping by 7.2%. However greater income per hundredweight ton jumped by 6.8%. Even on the subject of the Asset-Gentle phase, the corporate noticed some glimmer of hope. Whereas income per cargo was nonetheless down 23.9% yr over yr, shipments per day jumped by 12.4%. So clearly, there was some enhance in demand as of late.
![Financials](https://static.seekingalpha.com/uploads/2024/2/24/9866571-17087519835266192.png)
![Financials](https://static.seekingalpha.com/uploads/2024/2/24/9866571-17087519835266192.png)
Creator – SEC EDGAR Knowledge
Much more excellent news could be seen when trying on the backside line for the enterprise. Web earnings went from $37.3 million to $48.8 million. Regardless of the drop in gross sales, ArcBest benefited from a lower in its working bills from 95.7% of income to 94.1%. When unfold throughout the quantity of income the corporate generated throughout the closing quarter of the yr, this interprets to an additional $17.4 million in pretax earnings. The corporate additionally benefited from a leap in its curiosity and dividend revenue from $2.3 million to $4.1 million. Apparently, on the subject of the working bills class, the advance was despite the truth that salaries, wages, and advantages all rose slightly materially. Nevertheless, the corporate noticed gasoline, provides, and bills dropped from 13.7% of gross sales to 11.9%. In the meantime, rents and bought transportation dropped from 13.1% to 9.4%. As you may see within the chart above, different profitability metrics adopted go well with throughout the quarter relative to the identical time one yr earlier.
In terms of 2024, administration has cautioned traders that they’re persevering with to see weak point. This contains either side of the corporate. Regardless of this, the agency nonetheless intends to allocate important quantities of capital towards capital expenditures, with a variety of between $325 million and $375 million. At one level final yr, I wrote an article in regards to the now defunct Yellow Corp, and I detailed the way it might open up some alternatives for some gamers within the trucking trade to buy belongings on a budget. Administration does appear to be benefiting from that. In January of this yr, as an illustration, the agency bought three services that had been owned by the corporate for a mixed $30 million. In addition they spent $8 million to amass the lease for one more facility that the enterprise had been working. I like seeing long-term strikes like this, particularly at a time of weak point within the trade.
![Trading Multiples](https://static.seekingalpha.com/uploads/2024/2/24/9866571-17087520341362479.png)
![Trading Multiples](https://static.seekingalpha.com/uploads/2024/2/24/9866571-17087520341362479.png)
Creator – SEC EDGAR Knowledge
When it comes to valuing the corporate, I want to level you to the chart above. Particularly on an EV to EBITDA foundation, aided by a web money place of $101.1 million, ArcBest appears to be like attractively priced on an absolute foundation. I then in contrast the agency to 5 related firms as proven within the desk beneath. On a value to earnings foundation, solely one of many corporations was cheaper than it. 4 of the 5 had been cheaper on a value to working money stream foundation, whereas three of the 5 had been cheaper when it got here to the EV to EBITDA strategy.
Firm | Value / Earnings | Value / Working Money Movement | EV / EBITDA |
ArcBest | 17.1 | 11.4 | 8.8 |
Marten Transport (MRTN) | 22.1 | 9.5 | 9.2 |
Werner Enterprises (WERN) | 22.7 | 5.7 | 7.8 |
Heartland Specific (HTLD) | 69.3 | 5.5 | 6.6 |
XPO, Inc. (XPO) | 74.8 | 20.8 | 19.7 |
Common Logistics Holdings (ULH) | 9.6 | 3.2 | 6.1 |
Takeaway
Operationally talking, ArcBest could be struggling to some extent, however the agency has been displaying some enchancment on the underside line. The inventory appears to be like pretty enticing on an absolute foundation, although relative to related corporations, it could be round honest worth or barely greater. I do like seeing the long-term strikes that administration is making similar to asset purchases and the allocation of capital for natural means. Once you mix all of these things collectively, the image is slightly combined. And one factor I’ve discovered about investing is that, if one thing shouldn’t be a clearly enticing prospect, then taking a extra cautious strategy might be greatest.