Marten Transport: On A Road To Recovery Navigating A Freight Recession (NASDAQ:MRTN)

Introduction

It’s been a difficult time to be a logistics and transport company. During the last few years, the sector has undergone a tumultuous period navigating supply chains, inflation, and now a freight recession as an imbalance of supply and demand for trucking leaves the market dry. However, for those that look under the hood of the companies in the sector, as well as which ones are poised to benefit from a rebound, I believe that Marten Transport, Ltd. (NASDAQ:MRTN) should be a strong candidate to come out ahead. A strong balance sheet, attractive valuation, and signs of a rebound make this logistics provider a ‘buy’.

Company Overview

Marten Transport is a transportation and logistics company that specializes in long-haul trucking and refrigerated transport services stretching across North America’s three largest economies: Canada, the U.S., and Mexico. With a fleet of trucks that have built-in advanced refrigeration systems, Marten Transport ensures that goods transported through them can retain their integrity and quality given that its systems can maintain precise temperature control during transit.

This is especially important in industries where maintaining specific temperature conditions is critical for ensuring product safety and compliance with regulatory standards. Industries such as pharmaceuticals, food production, and perishable goods rely heavily on companies like Marten Transport, among others, to ensure that goods are transported reliably and securely. As such, it’s often an integral part of the supply chain of its customers, so it offers dedicated and expedited services.

Marten Transport can be examined through four segments: Truckload, Dedicated, Intermodal, and Brokerage. In the Truckload segment, the company is involved in transporting full truckloads of freights for customers, but generally focuses on temperature-sensitive cargo, such as food and beverages, which requires specialized equipment like refrigerated trucks. These are less cyclical to other segments because they are higher-value services and so demand tends to be more consistent throughout the year. The Truckload segment does the majority of the company’s sales at around 45% of total revenues.

The Dedicated segment includes dedicated fleets for companies needing regular shipments, dry vans, or specialized equipment for unique cargo requirements. Often, contracts are long-term in nature which provides the company with predictable revenue streams. It’s also a fast-growing segment, having doubled in size over the last five years. The Dedicated segment represents 35% of revenues.

For the Intermodal segment, the company transports goods for customers using both trailers on railcars for portions of trips, and tractors and contracted carriers for other parts. Leveraging intermodal capabilities to offer more cost-effective solutions (especially for those longer hauls where rail is cheaper), Marten can broaden its service offerings beyond just regular truckload. The Intermodal segment is the smallest segment and a more volatile part of the company’s revenues, making up 6% of total revenues.

Finally, in the Brokerage segment, Marten Transport essentially acts as an intermediary between customers and carriers for shipments within the United States and into and out of Mexico, still focusing on refrigerated containers and temperature-controlled trailers on railroad flatcars for portions of trips. The brokerage side of business involves billing, collection, and managing the customer and earning revenues on a rate per mile basis. It represents 14% of the company’s sales.

To manage the company’s different segments, Marten Transport operates a fleet of 3349 tractors, 97% of which are company-owned and 3% which are supplied by independent contractors. Of the company-owned tractors, the fleet is relatively new at around 1.9 years average age. Typically, they get replaced 4.1 years after the initial purchase.

Outlook for Q2’24

Marten Transport is scheduled to report its Q2’24 earnings on July 17th and there are a couple of things I think investors should be watching for. Firstly, the intermodal segment has been performing particularly poorly lately. For example, according to volume data out of the Intermodal Association of North America (IANA) and the Association of American Railroads (AAR), domestic intermodal volume increased by approximately 3% to 4% year over year in the second quarter. However, according to them, shippers have negotiated lower contractual rates for the year, which could be a headwind on revenues.

I’ll also be monitoring the truckload segment for Q2’24. In Q1’24, the Truckload segment saw a revenue decline of $9.1 million, or 7.5%, to $111.6 million compared to last year. In addition, with the operating ratio increasing to 99.6% compared to 91.7%, we can again observe the softness in the quarter. Typically, when operating ratios are over 100%, carriers may be more willing to take lower-priced freight. A lower operating ratio is an indicator of a well-run carrier, but also stronger market conditions in which freight rates are elevated. Given the trend from 93.2% operating ratio in Q4 and 91.7% in Q1, Marten Transport is on a negative trend so monitoring whether Q2 can be an inflection point will be key.

In the upcoming quarter, I’d expect management to give a measured outlook of their views on intermodal, given the weakness in the sector. With shares of Marten Transport down roughly 6% in Q2, I think a lot of this weakness is already priced in.

For Q2, I’ll also be watching plans around capex. Based on information out of the company’s investor presentation, capex for the fiscal year is expected to be around $155 million, compared to $173 million in FY’23. I expect most of the company’s capex to remain low next quarter, particularly as availability delays subside. With capex, I’d expect most of these savings to trickle down to the bottom line through free cash flow and earnings per share.

Background

When looking at the historical share price performance of Marten Transport, the company’s shares have closely tracked the performance of the S&P500, until recently. Over the last ten years, the company’s shares have delivered a 99% return while the S&P500 has returned 185%. This is in large part due to a widening divergence this year, where the market has gone on to return 18% year to date while Marten Transport is down 17%.

Having doubled in the last ten years, an annualized return of 7.1%, the company’s share price returns are backed up by similar growth on the top and bottom lines. For example, over the last decade, Marten Transport has delivered CAGRs in revenue and EBITDA of 5.6% and 6.1%, respectively. More recently, in the past five years, the company’s CAGRs for revenue and EBITDA are 7.5% and 4.8%, showing that the company’s growth rates haven’t really slowed (Source: S&P Capital IQ).

Profitability Amidst Freight Recession

One of the reasons to like Marten Transport is that this is a company that’s consistently generating better returns on both the top and bottom lines. This is due to reducing the cyclicality of the business, so the company’s growth can be more predictable and stable over the long run.

In terms of the cyclicality of the business, there is a bit of seasonality in the calendar year as it’s often the case that tractor productivity decreases during the winter months as the poor weather puts pressure on the business and shippers tail back their shipments. Concurrently, because of the more challenging weather, accident frequency rises with increased claims and more equipment repairs and lower fuel efficiency become the norm. As such, operating expenses increase, making Q1 and Q4 earnings in a given year worse than Q2 and Q3, on average.

In spite of this, the company has been seeing improvements year to year in non-dedicated, dedicated, and dry shipper loads in each sequential year. When stacking each calendar year on top of the other in the charts below, we can see the more recent years tend to be above those of the prior years, highlighting improving volumes.

Throughout the pandemic, in spite of challenging conditions and turbulent times (both good and bad) for the logistics industry, Marten Transport has been emphasizing increasing the volume of non-dedicated and dry customer brokerage loads to minimize the impact of shifting brokerage due to the freight market recession.

Over the last two years, the logistics industry has undergone somewhat of a freight market recession because of an imbalance of supply and demand. Essentially, this means that there’s an oversupply of trucks compared to the amount of freight needing transportation. Despite freight volumes being relatively high, there is a significant imbalance in capacity utilization within the industry. This imbalance is evident in metrics like the Outbound Tender Rejection Index (OTRI), which currently shows a low rate of rejected truckload orders (3.95%), indicating that trucks are not being fully utilized.

The issue is not so much about a decrease in demand for goods, as would be typical in an economic recession, but rather about an excess availability of trucks relative to the demand for their services. According to Freightwaves, this oversupply has led to reduced profitability for trucking companies as they struggle to maintain efficient operations amidst high competition and lower freight rates. As such, the freight industry is feeling the pitch with some trucking companies experiencing bankruptcies, closures, and downsizing as they contend with this capacity-driven recessionary environment.

We see some of the weaknesses showing up in the company’s latest quarterly results when analyzing them on a year-over-year basis. In Q1’24, revenue was down across all four segments compared to last year. Despite the poor results, there was still an increase in average tractors in the truckload segment (+5.1%) as average miles per trip and total miles increased 5.3% and 3.8%, respectively.

While results are poor compared to last year, there’s also evidence to show that the freight recession that followed the pandemic demand spike is showing signs of easing. Just recently, the CEO of Freightwaves commented that they believe that “tender rejections bottomed out in late March and have steadily increased throughout April, which is historically a soft month in freight”. In his view, this indicates that the 2024 low is in the rearview mirror.

To me, based on what we’re seeing out of Marten Transport’s latest results in brokerage, I’d agree with this. Looking at the company’s brokerage operating income, the company has seen a 19% decrease in revenue in FY’23 and a deceleration of -16% in Q1’24. It might still be too early to say, but as we enter into Q2 and the rest of the year, comps should get easier and I believe that the company could start to see positive operating revenue once freight volumes pick up again.

At quarter end, Marten Transport had $74 million of cash and cash equivalents on its balance sheet. With no major leases or debt, the company remains in a solid financial position. Moreover, with over $1.1 billion in PPE less $231 million in total liabilities, investors can feel confident that a significant portion of the company’s market capitalization ($1.4 billion) appears well covered by tangible assets.

Valuation and Wrap-Up

Based on the three analysts who cover Marten Transport’s stock, there are 2 ‘buy’ ratings and 1 ‘sell’ rating. In aggregating the price targets, the average price target is $19.67, which implies about 13.1% of the current price.

When looking at the valuation for Marten Transport, the company has historically traded within a range of 4.3x and 9.8x EV/EBITDA. With the current multiple at 6.9x, the company’s valuation is above its historical ten-year average of 6.6x. That said, since 2024 is likely a trough year for earnings, the forward multiple of 6.2x EV/EBITDA looks a lot more reasonable. (Source: S&P Capital IQ).

Comparing Marten Transport to its peers, the company’s forward EV/EBITDA multiple of 6.2x is below the peer group average of 10.1x. (Source: S&P Capital IQ). In my view, this valuation gap is unwarranted given superior gross margins and EBITDA margins, while also having significantly more tangible assets from a price-to-book value perspective. As such, I’d be inclined to favor Marten Transport seeing a near 4-turn valuation gap between the peer group average.

As for the risks to the investment thesis, the main ones would be a slowdown in the U.S. economy, a prolonged freight recession, and potential negative impacts from commodity prices. In addition, labor is a significant expense for logistics companies so a lack of truckers and an inability to meet demand with sufficient labor would be a risk to consider and monitor.

Altogether, Marten Transport stands as a resilient player in the transportation and logistics sector. So far, the company has been navigating through challenging market conditions with a commitment to improving profitability and overall operations. I believe it can come out ahead because it’s historically demonstrated robust growth over the years, underscored by consistent revenue and EBITDA expansion.

While the company has had recent pressures from a freight recession, I think Marten Transport remains well-positioned with a solid balance sheet, ample liquidity, and a disciplined approach to managing its diverse service offerings. Looking ahead, while uncertainties persist within the broader economy and industry, I believe that the company is well positioned should there be a rebound in the logistics market and given its balance sheet with no debt and significant tangible assets, would also be less susceptible in the event the downturn lasts longer than expected. Given these factors, I rate shares of Marten Transport as a ‘buy’ and will be adding on any further weakness.