Description

Thesis:

Landstar is a highly cyclical business operating on peak economics, as Covid driven supply chain disruptions coupled with supernormal demand for goods (thanks to stimulus dollars and a shift away from services towards goods) pushed spot trucking rates up to historically high levels, thus creating a windfall for Landstar.  As the economy weakens and demand normalizes, we believe Landstar will be the next Covid winner to experience a rapid deterioration in its earnings.  We see Landstar returning to pre-covid “normalized” EPS of $6 per share (likely well below that if we do slip into a recession) over the next 12-months and trading at a market multiple of 16x (perhaps generous given the many structural headwinds the industry faces), yielding downside to into the 90s, or ~40% below the current price. 

Business Description

LSTR is an asset-light transportation management and logistics provider predominantly focused on North American truckload transportation solutions.  It’s essentially a platform that connects shippers with agents (basically kids out of college) who are paid a commission to go find carriers – truckers.  Landstar earns a percentage of the rate and thus is long spot trucking rates.  The model is seemingly antiquated, but we’d acknowledge that its proven more resilient to disruption than we would have anticipated when we first started researching the name due to what we believe are some modest network effects.  Landstar also differentiates its model via its use of Business Capacity Owners (BCO’s), which are independent drivers (not employed by Landstar) but who have committed to hauling only Landstar loads.  Landstar pays BCO drivers 65-75% of the load price (vs. 80-85% for non-BCO drivers).  In return, for accepting a lower price BCO drivers are given first rights on loads (which reduces their downside during a downturn) and receive deals on items like tires.   Their use of BCO's excerbates LSTR's upside during an upscycle.  

Normalized Economics

Using normalized revenue per truckload and gross margins, we believe $6 per share (slightly above 2019) makes sense as the sustainable earnings power for the business.  One doesn’t need to have a complex model to come to the realization that $10 per share is unsustainable. 

Why Now:

·         Truck rates appear to have peaked within the past couple of months

o   As noted above, spot trucking rates are notoriously cyclical and volatile.  As the economy weakens, we see the potential for meaningful degradation in spot trucking rates and the likelihood that they will be equally hectic on the way down (https://www.freightwaves.com/news/cass-the-freight-cycle-has-downshifted-with-a-thud)

·         While a shortage of trucks (thanks to the chip shortage) likely played an impact in the supply tightness, we do not believe we were ever short trucks.  Our calls suggest that supply was artificially reduced by a lack of truck drivers (who were calling in sick from Covid and also willing to pass on loads thanks to stimulus dollars).  Rising trucker wages, getting past covid, and waning stimulus benefits are serving to rapidly normalize the driver shortage and thus expand the supply of carriers. 

·         BCO driver turnover is around 25%.  We believe these periods of supernormal economics exacerbate BCO turnover, thus, resulting in reduced network effects that have thus far helped protect the model. 

Structural Concerns:

·         The argument from the tech side is straight -forward: trucking, and by extension how truckers source loads, is an antiquated business model ripe for disruption and technological improvement that can eliminate many of the inefficiencies currently in the industry

·         Digital brokerages like Uber Freight and Amazon Relay are seeking to completely disrupt the business model, as they seek to completely eliminate the agent by directly connecting the shipper with the driver

·         Technology -focused 3PLs like Convoy and Transfix have increased in size.  The focus has expanded to remove further inefficiencies that contribute to the volatile ebbs and flows of trucking, such as minimizing empty miles and emissions, automating freight matching, and route optimization.

·         Tons of other capital has been pouring into the industry (and this period of well publicized “logistics bottlenecks” has only accelerated that trend)

o   Private equity funded 3PLs now account for seven of the 20 largest providers, nearly doubling from 2015

o   large 3PLs ($1 billion or greater in revenue) have tripled over the last five years from 5 to 15 carriers as competition amongst the largest players greatly intensifies.

• ·         When/if the world ever goes autonomous, there is zero terminal value for a trucking broker.

Risks:

·         Driver shortage persists for longer

·         As China emerges from lockdown and all the ships stuck in their ports come here, logistics bottlenecks remain tighter for longer

·         Potential diesel shortage this summer restricts supply of trucks keeping spot trucking rates elevated

Catalyst

• Time / Normalization of the cycle / economic weakening