Description

Daseke (DSKE) is a $340M market cap national provider of standard and specialized flatbed trucking services based in Texas. At $5.20 the stock trades at 6.2x trailing EV/EBITDA and about 5.0x forward EV/EBITDA based on management 2019 guidance. Applying the current trailing multiple of 6.2 to 2019e results would yield a $9.00 stock and about 75% upside in a year.

Daseke was founded by Don Daseke and is a roll up of flatbed trucking acquisitions which came public via a spac, Hennessy Capital Acquisition Corp, II. After trading as high $14 in 2017 and early 2018, shares declined to as low as $3.13 during the December market correction. Weighing on the stock is the Street’s desire to see management demonstrate they can do more than just pull the trigger on deals and instead prove they can successfully manage the acquisitions they have already made, generate cash flow and pay down debt. The depressed stock price has caused management to state they have religion on these priorities. I believe if they can resist doing new deals for most of this year and execute on managing what they have, then the stock should rebound further from its depressed levels.

The business is broken down into two segments, Flatbed Solutions and Specialized Solutions. Flatbed provides standard flatbed and retractable-sided open deck transport services and logistics. The Specialized segment includes flatbed and open deck services for super heavy haul, customized over-dimensional, commercial glass, and oil & gas rigs. Flatbed and Specialized are 38% and 62% of revenue, respectively. Each segment is a combination of asset heavy and asset light brokerage.

In 2018 the company generated $173M in EBITDA by my GAAP driven math. Management provides an acquisition adjusted EBITDA (as if recent acquisitions had been made prior to beginning of 2018) of $190M. I am basing my trailing EV/EBITDA multiple of 6.2 on the actual trailing GAAP results.  

Management’s 2019 guidance, which assumes no additional acquisitions, is for EBITDA of $200m to $210M. Because of the many acquisitions in the past year it is difficult to model with precision a bridge from 2018 to 2019 EBITDA.  However, at the low end they are guiding for 5% growth from their 2018 acquisition adjusted number to their 2019 estimate/guidance. Management highlights that organic revenue growth was 13% in Q4 and 14% for full-year 2019. Maintaining their pause on acquisitions would allow the Street to begin to prove out organic growth in the GAAP numbers as opposed to only relying on that provided in quarterly commentary.

End market exposure is to the industrial side of the economy including, aerospace, heavy machinery, building materials, steel and metal, oil and gas, renewable energy and commercial glass. Top ten customers include Boeing, Caterpillar, GE, Georgia-Pacific, Helmerich & Payne, Nucor, USG and Vestas and AGC (glass). No customer is greater than 5% of the business and the largest industry exposures are metals (17%), renewables and energy (16%, which I believe is 10% energy and 6% renewables) and building materials (15%).

Of the top customers listed above, the length of these top ten customer relationships ranges from 8 to 39 years (with all but one customer over 14 years). The duration of these relationships suggests that there is at least some small measure of value to customer relationships in trucking, a factor that was questioned in the comments on a previous VIC write up by azia1621 from May 9, 2018. Why bother acquiring a trucking business at all, much less at a premium to book value (equipment value)? Why not simply purchase a bunch of equipment, hire a salesperson and his rolodex away from an existing trucker, and have that person call up BA, GE, NUE, USG, Vestas, HP, etc, and offer to pick up their shipment for a tiny bit less than what they currently pay? The fact that the acquired companies which constitute Daseke have multi-decade customer relationships lends support to the notion that relationships, reputation, and having an existing and reliable infrastructure brings value. Of course, this is true only to a point. I would submit that the small measure of value is that the job is there for the incumbent to keep, especially for more specialized load types, but that rates will still fluctuate directly with the market. Fail to flex price in line with the market and soon the job will go elsewhere.

Management’s commentary on rates on the Q4 call included some softening of Flatbed segment rates from abnormally high levels in 2018. Margins in the Flatbed business are also lower due to a mix shift to a higher percentage of asset light business in the segment, but also labor pressures. The Specialized Segment rates remain firm (though up on absolute basis due to mix shift driven by acquisitions) and margins were up 100 bps.

As of Q4, debt including capital leases totals $702M leaving trailing debt to EBITDA on a GAAP basis by my calculation of 4.1. Net debt to EBITDA stands at 3.8. Assuming 201M in 2019 EBITDA, capex of 70M (management guides 2019 capex of 65M to 70M), I get free cash flow of $73M. If I apply all of that free cash to pay down their term loan I see 2019-end trailing debt to EBITDA at 3.1. 2019-ending net debt to EBITDA would be 2.5. They ended 2018 with 45M in cash which I am leaving on the balance sheet as part of my 2019 full year calculation. I am including 65M in preferred and $22M Aveda acquisition earnout in EV.

The share count with negative earnings is 65.3M. Fully diluted shares accounting for warrants, preferred conversion and all options amounts to 91.4M. The warrants are priced at $11.50 and most of the options strike over $10.00. At the current stock price it is more conservative not to include the dilution given the large amount of cash it would put on the balance sheet. It is not until the stock price moves above $11.50 that this begins to change and not until price approaches mid-teens that it is material.

Risks: Management wants to do the right thing, but will have a tough time saying no to acquisitions. Part of the attraction of this roll up is that the flatbed space is highly fragmented. Daseke’s 2% share makes them the largest in the space. I bet it’s killing Don Daseke to be on hold. The risk is he can’t keep his finger off the trigger long enough to let the street get comfortable that he can execute on what is already on the plate. Additional risk is excessive trucking supply causes rates to materially soften and/or a drop in demand due to recession.

Catalyst: Management made great effort during Q4 earnings results to emphasize in the presentation, press release and commentary that 2019 is a year to focus on EBITDA growth, free cash flow and deleveraging. If they can stick to this plan, I believe the stock can lift further from its currently depressed levels. Applying only today’s trailing EV/EBITDA multiple of 6.2 to forward EBITDA yields approximately 75% upside.

Catalyst

Catalyst: Management made great effort during Q4 earnings results to emphasize in the presentation, press release and commentary that 2019 is a year to focus on EBITDA growth, free cash flow and deleveraging. If they can stick to this plan, I believe the stock can lift further from its currently depressed levels. Applying only today’s trailing EV/EBITDA multiple of 6.2 to forward EBITDA yields approximately 75% upside.