Description

Frozen Food Express (FFEX)

Summary

FFEX is an outstanding value play. Because of a miserable operating environment for the trucking industry, the company has had two years in a row of negative earnings. Their finances remain strong. Based on the company’s basic earning power of $.55 per share and $5.03 book value, this is one to tuck away for the turn around.

Frozen Food Express is the largest publicly owned, full-service trucking company of temperature sensitive goods in North America. The company is a value play based on a turn-around of operations after a three-year period of industry turmoil.

The company’s full-truckload operation transports full trailer loads of perishable products from the seller to the buyer. Pricing is based on mileage, weight, and type of commodity. The majority of their revenues, about two thirds, are full-truckload.

Unlike other operator in their niche, they also offer less-than-truckload, or LTL, service. LTL consists of multiple shipments, usually 18 to 30, that weigh as little as 50 pounds or as much as 20,000 pounds. They are shipped in a single container with multiple compartments, temperatures, and destinations across North America. Pricing varies from full-truckload, depending upon space required, pick-up, and delivery.

The company is run by a direct, outspoken Chairman, President, and CEO named Stoney M. (Mit) Stubbs, Jr. Mit also owns roughly 8% 0f the 16,318m shares outstanding. In their 2000 annual report he describes their business as, “It’s a simple proposition. To be a trucking company, you’ve got to have trucks, fuel to power them, and drivers to drive them. Oh, and one more thing. You’ve got to be able to pay for all three.”

He then went on to painfully detail their recent experience with those three areas. The cost of trucks has increased because of added driver amenities and a very soft market for the used trucks and trailers they sell as part of their non-trucking operations. As well, temperature controlled trailers cost twice that of a dry trailer. The cost of fuel, as we have all experienced, continues into 2001. Trucking companies protect themselves with a fuel adjustment charge, which they pass along to customers. On average, unfortunately, this only covers about 80% of the total fuel cost increase. The last bit of bad news relates to the continuing driver shortage and the multiple reasons for it. The bottom line is that if a driver isn’t available to drive the truck it sits idle, costing money.

These problems have eased somewhat because of industry trends:

* Competition is on the decline, as only the strongest will survive. For example, trucking company failures reached a record high of 3,670 in 2000. Some have suggested that 2001 will bring a new record.

* The fuel crisis has received substantial publicity. This has helped enable the industry recover their fuel adjustment.

* Although driver salaries have increased throughout the industry, high turnover and the enormous costs associated with training new drivers have decreased.



Vital Signs

6/7/01 Price: $1.96 Five Year High: $13.88 Low: $1.23
Book Value: $5.03 Price/Book: .4
Market Capitalization: $32,240m
Annual Revenues: $392,400m

Positives

Although FFEX has lost money the past two years, the company has normalized earnings power of roughly $.55 per share. The stock is at a P/E of 3.6X that figure.

Revenues have grown every year, at a 9.2% rate for 9 years, and 6.1% for the past 5 years, in what can only be described as a very tough environment.

The company’s financial strength is actually better than that of the S&P:
FFEX S&P Industry

Quick Ratio 1.2 1.1 1.4
Current Ratio 1.9 1.6 1.6
LT Debt/Equity .2 .6 .3

Even with two years of negative earnings, long term debt has been reduced from $26,500m last year to $15,000m at the end of the March first quarter. The company’s debt to equity ratio is now .2 to 1.

EBIT for 2000 was $1,729m or $.11 per share versus a net loss of $.07
EBITDA was $15,988m or .98 per share

Negatives

How long will this be sterile money for any investor? Most analysts wouldn’t touch the industry now. Although that may be a positive, the industry is economically quite sensitive and investors could be in for a long wait.

Catalyst

FFEX is an outstanding value play. Because of a miserable operating environment for the trucking industry, the company has had two years in a row of negative earnings. Their finances remain strong. Based on the company’s basic earning power of $.55 per share and $5.03 book value, this is one to tuck away for the turn around