Description

Situation overview
For starters, and perhaps most importantly, Mullen Group Ltd. (TSX: MTL) is a different company from Mullen Automotive, Inc. (Nasdaq: MULN), the electric car company that was recently written up on this board as a short.  This is a writeup on MTL, a trucking, logistics, and industrial company based in Canada.  A trucking company?  In this economy?  I’ll take the other Mullen you might say.  I believe that MTL, however, with its financially savvy management team, highly diversified business structure, strong cash flow generation, and extremely strong history of managing through industry downturns, presents an attractive opportunity to earn at least a mid-teens return over several years, with free option on business improvements and accretive acquisitions, as well as the ability to sleep at night even if the world burns.  Mullen currently offers a 5.1% dividend yield representing a payout ratio of only 45%, leaving significant cash for growth acquisitions, repurchases, and balance sheet strengthening.  The company also has $15.62 per share of asset value (book value of net working capital and non-real estate PP&E, plus my valuation of real estate and investments) offset by $6.71 in debt, for a net asset value of $8.91, or ~63% of the current stock price.


Company and industry overview
Mullen operates a broad network of businesses across Canada in three segments: Less-Than-Truckload, Logistics and Warehousing, and Specialized and Industrial.  The recently acquired fourth segment, U.S. & International Logistics, is the former QuadExpress 3PL business operating in the U.S.  $ figures in this writeup represent CAD unless otherwise labelled.

The Less-Than-Truckload (“LTL”) segment operates a last mile delivery network for smaller shipments, packages, and parcels including ambient freight, temperature controlled, and consumer goods and runs through regional hubs located in Ontario and Western Canada.  This business is largely hauling pallet-mounted ecommerce purchases weighing more than 150 lbs to purchasers and is driven by consumer spending.  The segment overall comprises ten individually branded business units with head offices in BC, ON, AB, MB, and SK, and includes 114 terminals (71 owned, 43 leased), 2,014 “power units” (i.e. trucks that pull things), 3,861 trailers, and headcount of 3,878 (3,316 employees and 562 owner/operator subcontractors).  The segment delivers over three million shipments on behalf of 500 customers to 5,000 communities each year.  This business is highly competitive and fragmented.  The company believes that its “vast” network of facilities, which allows LTL operations to deliver to these 5,000 points of service, is a competitive advantage along with the advantages of its scale and strong operational systems.  The top ten customers in this segment accounted for ~21% of 2021 segment revenue.  2021 OIBDA (Operating Income Before Depreciation and Amortization - basically the company’s term for EBITDA) was $94mm (16% margin, 41% of segments total) and organic growth has bounced around from positive to negative MSD but seems to generally be a GDPish business.  Mullen calls this the more fixed-cost-oriented of their segments due to a higher ratio of company owned operations to independent contractors.  In 2021, company owned represented 92% of revenue with a 29% gross margin while contractors made up 8% of revenue with a 39% gross margin (i.e. 90% of segment gross profit was company, while 10% was contractor).

The Logistics and Warehousing segment (“LW”) operates a network of terminals and transload facilities and provides full truckload, specialized trucking, warehousing, intermodal, and transload along with warehousing and fulfillment centers that handle ecommerce transactions.  LW’s truckload business is more leveraged to retailer purchasing activity than consumer.  The segment operates 1,055 power units, 2,604 trailers, 69 terminals, and employs 1,306 employees and 551 subcontractors across twelve individually branded business units with head offices in BC, AB, ON, MB, and SK.  The top ten customers of this segment accounted for ~25% of 2021 segment revenue.  The logistics and warehousing industries are experiencing rapid growth, largely due to the growth in ecommerce over the last few years.  The business is highly competitive and MTL sees its network of strategically located facilities, multimode transportation capabilities, and value-added warehousing services as competitive advantages.  This segment generated 2021 OIBDA of $83mm (18% margin, 36% of segments total) while company owned represented 47% of revenue at a 34% gross margin and contractors were 53% of segment revenue at a 25% gross margin, resulting in 55% of segment gross profit being company owned.  This results in a more variable expense structure relative to LTL.  Organic growth characteristics have been similar to LTL in the last two years.  Prior to that, LTL and LW were reported as a single segment.

The Specialized and Industrial Services segment (“S&I”) is what the original oilfield services business rolled into and now comprises a number of semi-related activities across fourteen individually branded business units with head offices in AB, SK, and BC.  While this segment does include a number of activities outside of oilfield services such as dredging and dewatering, water management, environmental services, civil construction, and transportation, the segment is leveraged to energy exploration and production activity and capital budgets.  The S&I segment operates 1,192 power units, 2,750 equipment trailers with 1,113 personnel amongst 77 terminals.  2021’s top ten customers accounted for ~35% of segment revenue.  Over the last nearly ten years, this segment has seen the downward trend that one would expect from a Canadian oilfield service company.  2021 segment OIBDA was $49mm (16% margin, 21% of segments total OIBDA).  Revenue was 80% company owned at a gross margin of 29%, representing 88% of segment gross profit, while the other 12% of segment gross profit was the 20% of contractor revenue at a 17% gross margin.

The U.S. & International Logistics segment (“USIL”) is based in Illinois with a single business unit (“HAUListic LLC”) and employs 291 personnel servicing North America broadly.  This is an asset-light business that combines an end-to-end software solution with freight brokerage services in order to seamlessly get the product from here to there including across multiple modes of transportation when necessary.  As mentioned above, this is the former QuadExpress.  USIL serves ~2,700 customers, of which the top ten represented ~38% of 2021 segment revenue, and works with over 6,000 certified sub-contractor carriers.  Third party logistics is a USD$160 billion business in the U.S. and growing.  This appears to be one of those industries where everyone claims that the old business (freight forwarding, ~3.5% growth rate) is garbage and will disappear, and the newer, software-enabled versions of freight forwarding are growing 20% and taking share.  Also, everyone’s business is the one that is most software-enabled.  My best estimate is that USIL is somewhere in between and should do alright.  Quarterly sequential revenue growth since the 6/30/21 acquisition has been flattish but Mullen states that the company is exceeding expectations.  I honestly don’t have a great feel at this point of whether this is a great addition or if it’s just garbage that Quad was offloading.  Management seems pretty excited about it.  Acquisition price was about 6.2x forward EBITDA.  Because this business just takes a spread on the cost of the contracted freight services, it does seem like an advantageous model for this environment where pricing, labor, fuel, and other expenses are all jumping around.  Either way it’s small, generating $8mm of EBITDA in the four quarters since it was acquired.

In terms of EV, diluted shares of 102.3mm (including a post-quarter stock repurchase and the conversion of a convert struck at $14) and a stock price of $14.07 gives a market cap of $1.44 billion.  Debt consists of $147mm of bank facilities (no covenants other than staying compliant with private placement debt covenants), $425mm of private placement debt with $217mm due in 2024 and 208mm due in 2026 (covenants discussed below), $113mm of lease liabilities, and the aforementioned convert has a face value of $125mm and is due in 2026.  No balance sheet cash so we get net debt of $686mm without the convert and 811mm of debt with the convert.  Subtract $83mm of equity investments for an enterprise value of $2.04 billion.  TTM OIBDA of $279.2mm gives a trailing EV/EBITDA multiple of 7.3x and a debt/EBITDA ratio 2.9x.  Using the company’s figure of $60mm of maintenance capex, TTM cash flow is $153mm for trailing equity yield of 11%.


How we got here
Looking back at Mullen’s history is a little confusing.  On the one hand, I’ve called them a financially savvy management team, and this is borne out when looking at the incredible job they’ve done cutting costs and protecting earnings during industry downturns (discussed at length below).  Similarly, they’ve generated a respectable 13% cash flow yield on book equity over the last 20 years.  Perhaps more impressive, in the last five years, including both the pandemic and some very difficult years for the Canadian energy industry, this figure has been just above 10%.  In the last 26 quarters (as far back as I looked), they’ve had exactly two cash flow negative quarters, and in each case the cash burn was more than outweighed by positive cash flow in both the prior and the following quarters.  Similarly, in the last 22 years, cash flow has been positive every single year.  In all of these cases cash flow includes both maintenance and growth capex.  I suppose I should also add the fact that they’ve done over 77 acquisitions and haven’t yet blown up the company.

On the other hand, however, for something that we’d want to consider an excellent long-term compounder, book value per share not only hasn’t gone exponential, it has trended mostly _down_ over the last 20 years.  How is this possible?  One factor here is certainly the consistent ~5% dividend yield they’ve paid out, representing somewhere between a third and half of cash flow at any given time.  Still though, how are we losing book value?  For most of its history, the company has been heavily leveraged to what used to be a very profitable and attractive Canadian oilfield services segment.  No wonder that OIBDA in 2008 was $273mm(!!).  For the last ten years or so, Mullen has been trying to gracefully manage an environment with declining fundamentals.  North America saw a significant overbuild in oilfield services equipment, which was followed by a shortage of pipeline capacity in Canada which crushed production and consequently demand for services, followed of course by the pandemic.  In the last few years the company has realized that its future is in building out the trucking side of the business and that oilfield services should be run for cash but shouldn’t have meaningful capital allocated to it.  In 2010, 2/3 of Mullen’s business was oilfield services.  Even as recently as 2019 it represented a third, and currently it represents only a subset of the SI segment.
This significant shift has been made possible by the company’s long-standing strategy to grow by acquisition.  In a highly competitive commodity-ish industry like trucking, rolling up weaker competitors is highly preferable to putting new trucks on the road.  And we just may be entering an environment with a lot of such opportunities.


Where we are now
There are really two “where are we now”s.  The first is that we’re left with a diversified, trucking/logistics focused group of companies, with a decentralized operating structure that supposedly has the ability to improve its results (Murray has said that a number of business units are below plan and they are working on it), but more importantly has a rock solid base with which to weather difficult industry environments.  The market is a bit skeptical.  The valuation appears to give some credit for the positive business characteristics, but is in no way “premium”, especially given the underlying asset value.  It would not surprise me if Mullen’s history in oilfield services has made it appear to long-term observers as a perennial disappointer.

The second pertains to the current environment we’re in.  Government stimulus combined with pandemic reductions in consumption of services has created a tremendous demand for freight services.  At the same time, supply chains are stretched to their limits.  On the plus side, Mullen has been able to pass wage and fuel price increases to its customers.  The company itself however is also dealing with supply chain issues such as driver shortages, truck shortages, and parts/maintenance difficulties.  MTL has said that it’s on allocation for pretty much all equipment orders until 2023.  The good news is that this is an environment where being large and diversified and having both the reliability of some owned trucks as well as the flexibility of contractor relationships is very helpful.  Single truck owner-operators and smaller fleets with less ability to swap parts/trucks/people are in a much tougher situation and Mullen may thus see more attractive acquisition opportunities.  As long as Mullen itself doesn’t disappear in the downturn (discussed at length below), there’s every chance that the downturn will make Mullen stronger relative to the industry.  They have said that they’re pausing on acquisitions for the moment however and will keep returning capital to shareholders and strengthening the balance sheet.

I won’t pretend to know what sort of recession or freight recession is coming.  I’ll relay Murray’s belief that as long as employment stays strong, freight will be in fine shape, as consumer spending will continue.  They say they don’t yet see softness in consumer behavior, though they are starting to see some softness in the truckload business due to retailers way over-ordering on inventory and now stepping back.  His sanguine viewpoint is partially informed by the continued tightness in the freight industry.  There simply aren’t trucks available with which to overbuild the fleet.  All of their storage facilities are apparently full, and loads are getting held up at all parts of the freight supply chain due to simply having either no place to be stored or no truck/rail capacity to take them somewhere.  At the same time, demand for the oilfield services side of the business may be poised to explode.  Mullen’s Q2 results were very strong, due partially to price increases.  The company is baking in some potential deterioration in what appears to be conservative 2022 guidance for $300mm of OIBDA after delivering $60mm in Q1 and $94mm in Q2.


Valuation and expected outcomes
The current pause notwithstanding, it is likely that Mullen will continue to make, at a minimum, tuck-in acquisitions provided the assets and the financials and the pricing make sense.  However I’m valuing the company as it stands today, without underwriting any particularly good or poor outcomes from future acquisitions.  We appear to be in a very strong trucking operating environment with the potential for a real economic slowdown (something between “strong growth” and “disaster the likes of which we’ve never before” depending on who you talk to) before us, as evidenced by softness in spot market rates in recent months as well as June showing a m-o-m decline in trucking volumes (while a number of months this year have reflected y-o-y declines of a few percentage points).  As such, my base case valuation is intended to be a high-probability conservative case (i.e. weak-ish performance in a generally benign environment) while my low case is the “things get 2009/2020 weak again” case.

Downside case
My downside scenarios contemplate a weak environment for both the trucking-related businesses and the oilfield services and industrial businesses.  2009 represented the worst year of organic growth that the trucking and logistics business has experienced in the last 20 years, with a revenue decline of just over 23%.  The specialized and industrial segment (back then just called oilfield services) also saw a significant revenue decline of ~31% in 2009, but more importantly saw sequential declines of ~3%, 42%, and 30% in 2014, 2015, and 2016, respectively, for a three-year cumulative drawdown in revenue of ~60%.  These are, without a doubt, cyclical businesses with economic sensitivity.  Impressively, however, Mullen was able to reduce expenses in both of their then-operating divisions significantly enough that OIBDA margin in trucking only declined 60 bps and in oilfield services only declined 76 bps.  By also cutting capex significantly (but still spending 4.4% of PPE book value, vs estimated maintenance capex needs of ~5.5%), the company was able to increase cash flow (including making interest payments) from ~$145 million to ~$200m, representing a 17.6% cash flow yield on book equity.  Admittedly cash flow in 2009 was aided by an unsurprising working capital inflow, though I note that cash flow over the following three years still averaged $100 million or ~10% of book equity (note that these figures use total capex in calculating cash flow, meaning that any growth investing that Mullen was doing is accounted for).  Similarly, during the 60% revenue drop in the oilfield services segment from 2014 through 2016, Mullen was able to cut segment expenses by ~59%, resulting in an OIBDA margin that fell only to 20.7% from 24%.

With this backdrop of strong expense management during difficult periods, my first downside case is as follows: 20% drop in revenue across the trucking and logistics businesses, attended by a 5% OIBDA margin decline (i.e. assume they do significantly worse this time around in cutting costs than they did in 2009) and a 40% drop in SI revenue, with a 10% drop in OIBDA margin.  In this scenario Mullen is still able to generate revenue of $1.37 billion, consolidated OIBDA of $136 million (9.9% margin) and just over $40 million of cash flow, even including a $60 million maintenance capex spend.  Thus we know that they can not only survive this extremely punitive scenario, but can maintain equipment and have some excess cash flow for growth, debt paydown, or potentially a dividend.  Their annualized current dividend cost is ~$67mm so at least a partial dividend cut will be required (this would likely be an attractive opportunity for us to buy additional shares).  As I hope will be obvious in this discussion, however, this is not in any way a scenario that I’m trying to make look “good”.  We’re looking at “can / will this company survive the next cyclical downturn and what will they look like on the other side?”  To that end, it’s good news that Mullen remains in compliance with its fixed charge covenant by a large margin, however it will exceed its net leverage covenant (basically total debt excluding $125mm of subordinated converts divided by cash flow adding back capex and interest expense) requirement of 3.5x.  Specifically, the company will have about $210mm of excess debt.  That said, there are a lot of levers that the company can pull in order to remain in compliance with its leverage covenant.  To name a few, the $40mm of generated cash flow could go towards debt paydown.  Secondly, capex could be temporarily reduced below maintenance levels (for example, in 2009, the decreased capex from $80mm to ~$28mm).  Thirdly, it is likely that a revenue decline of this magnitude would be accompanied by a meaningful inflow of working capital.  If the company maintains the same ratio of working capital to revenue, the implied cash inflow in this scenario is $60mm.  Fourth, Mullen has significant real estate holdings (I estimate a conservative market value of $839mm) that it could sell to generate cash.  Finally, the company has the ability under its existing agreements to raise ~$150 million of (unsecured) credit facility debt plus another ~$100mm of secured debt.  While this doesn’t by itself fix the covenant issue, such additional debt could be combined with some real estate sales and potentially another convert to refinance the entire amount (~$425mm) of private placement debt that contains the leverage covenants.  For what it's worth, the company has stated that it has a very good relationship with its lenders (and while I haven’t reviewed the docs, based on the covenant descriptions in the financials, they appear to be written very loosely), having first borrowed from them in 2006 and repaid that deal, and then taken additional financing in 2014, and doesn’t foresee difficulty in finding a solution to a potential covenant issue.

So assuming the above poor revenue and earnings occur immediately, let’s imagine that Mullen uses a combination of generated cash flow, working capital inflows, and asset sales to reduce covenant debt to $475mm inline with the 3.5x covenant (note that the covenant calculation excludes the converts).  What now?  We still have $217 million of maturities coming due in two years at the end of 2024.  Will they make it through?  Over the two years leading up to the 2024 maturities, Mullen generates ~$82mm of cash flow, reducing covenant net debt to $393mm.  At this point we have a 10% EBITDA margin company with 2.9x covenant leverage and consolidated net debt (including subordinated converts) / OIBDA of 3.8x.  It seems reasonable to conclude that they’ll be able to refinance (not to mention their interim cash generation is enough to pay off nearly half of the maturing debt).  It’s worth noting that this analysis includes a full $60 million of maintenance capex.  If Mullen needs to temporarily cut capex to $30mm as they did in 2009, that generates an extra $60mm of cash over the two-year period or a 2.5x covenant leverage level and 3.4x consolidated leverage ratio.  So we get through the 2024 maturities.  What about the ~$333mm of 2026 maturities?  Again, generating another ~$82mm of cash flow over two years means that as of the 2026 maturities, covenant leverage will be 2.3x (1.4x if capex stays at $30mm this second two-year period, but that will be cutting into the earnings power of the business), and consolidated leverage ratio will be 3.2x.  As a reminder, these scenarios contemplate a severe degradation in Mullen’s ability to reduce costs relative to its history, and no further selling of real estate or assets beyond its initial sale of $100-$150mm.

As a final quick note on the downside case, I think the above is too conservative, and the company will be able to cut costs well in excess of what I’ve laid out above.  Keeping these same revenue declines of 20% in trucking and logistics and 40% in specialized and industrial, if Mullen is able to protect margins to the degree they did in 2009 (i.e. 60bps of deleverage in trucking and logistics and 76bps of deleverage in S&I), they will be generating nearly $100mm of cash per year (vs. $153mm TTM).  In this scenario, they will be so close to making the leverage covenant that I trust the team to find the extra $4mm (2%) of OIBDA needed.  No asset sales, no working capital inflows, no additional debt-raise.  For a giant “for what it's worth,” the company has stated that its ability to cut costs and protect margin should be just as good today as it was in 2009.  Even if the correct answer is somewhere in-between, there is plenty of room and a lot of options to work with.

Base case
So, having established that this company will survive to see the next several cycles even if the recession of all recessions is indeed upon us, let’s look at what an investment in Mullen Group might stand to earn in a non-disastrous scenario.  Although the company has done an admirable job of growing this business from ~$73mm of revenue when it went public in 1993 to $1.9 billion of revenue today, this is not an organic growth story today.  In fact as mentioned, around the turn of the millennium Mullen shifted its focus toward growth through acquisition, correctly surmising (i) that there were many smaller and less-efficiently-operated companies that could be purchased at a discount and then brought under the Mullen umbrella and synergized and (ii) that doing so was far more capital-efficient than growing revenue by putting all of their cash flow into buying trucks and telling the salespeople to go get business when trucking is, well, trucking.  It’s not exactly a commodity business, but it’s also not exactly *not* a commodity business.

As such, while organic growth is certainly a possibility, my base case assumes only that the existing businesses roll along with GDP, generate cash, pay a healthy and increasing dividend (i.e. constant payout ratio), and return capital through share repurchases.  I should note that Mullen would likely strenuously disagree with my valuation, claiming that (i) they certainly expect to take advantage of organic growth opportunities, (ii) there are further synergies and efficiencies to be gained from the current portfolio, (iii) barring the current potential pause, not only do they plan to keep their strategy of making acquisitions on accretive terms (they target a normalized high-teens return on all acquisitions and capital investments), but (iv) the company continues to move towards higher return-on-capital consumer logistics-oriented opportunities, so overall economics should actually improve.  My response to that is sure, I think these things can all happen and that would be great (and I acknowledge that this valuation probably unfairly ignores the value that they can add), and I even think they’re likely, but they aren’t necessary to make this a good investment.

Given Mullen’s healthy monthly dividend payout of $0.06 per share ($0.72 annually), representing a 5.1% forward dividend yield, it makes sense to look first at a dividend-based valuation.  Mullen is currently forecasting OIBDA of $300 million in 2022.  This appears to be a cautious figure that bakes in some economic slowdown given that their Q22 results imply a figure north of $340 million (and a current run-rate of over $370mm).  I’m happy to use the more conservative $300 million figure though.  This figure implies annual cash flow of ~$164 million.  With outstanding shares of 102.3mm, annualized dividend expense is $74 million i.e. a payout ratio of 45%.  This is generally inline with the “normal” years of 2012, 2014, 2016, and 2017, where dividends averaged ~43% of cash flow and the stock traded at a dividend yield of 4.9% (I use these years because in 2013, 2015, and 2018 the payout ratio was much higher and/or there was clearly an environment that was going to lead to a dividend cut, so I don’t consider them representative for this scenario.  The average yield for 2012 through 2019 however was 4.7%).

If we carry this dividend model forward by growing our OIBDA at 2%, holding the payout ratio at 45%, assuming that the stock trades to the historical 4.9% dividend yield, and using all non-dividend cash flow to repurchase stock, an investor at today’s purchase price earns an IRR of 15% over a one-to-five-year holding period with a stock price of $18.60 in year three, or ~32% above the current level.  A decent return, but admittedly a bit of a snoozer (although perhaps not so much of a snoozer if you value the certainty that Mullen will not disappear in the next downturn).  This return, however, ignores the company’s equity investments, which generate (Mullen’s portion) an additional ~14mm of OIBDA.  If we value these at a conservative 6x OIBDA, they have a value of ~$83mm, or $0.81 / share.  “Selling” these investments and repurchasing shares with the proceeds boosts the IRRs from the dividend analysis to 16-19% (23% for a one-year hold but that’s mostly from the 20bps tightening in the div yield) with a year-three price return of ~40%.  Getting warmer!  Still though, what about all that real estate?

My quick and dirty valuation of Mullen’s real estate is as follows.  I break their holdings out by year of acquisition going back to 2000, I then assume that each “cohort” of real estate has appreciated inline with U.S. CPI.  I know this isn’t the most precise analysis but it’s directionally helpful.  I think the actual value is almost certainly higher than what I’ve come up with (not to mention the properties that the company owns in the greater Toronto and greater Vancouver areas).  The result is essentially that property acquired in the early 2000s has appreciated by 50-70% while property acquired in the early to mid-10s is up 20-40%.  The resulting overall value that I get is $839mm vs a gross book value of $631mm.  Obviously if Mullen sells its real estate, it has to pay to rent facilities, so it’s not reasonable to simply reduce our cost basis by $839mm.  I’ll get to that in a second, but I do want to emphasize the fact that along with the $0.81 cents/share of investments, when you buy Mullen stock you are also getting $8.20 / share in real estate value, totaling $9.01 per share outside of the business operations, or 64% of the current share price.

Getting from my estimated real estate value to equivalent rent payments is another exercise in imprecision.  I went about it as follows: industrial real estate cap rates broadly appear to be around 5.5% currently.  I use 6.5%, which is more conservative and more reflective of where they were pre-pandemic.  Applying this cap rate to my estimated $839mm value results in a theoretical NOI from Mullen’s properties of $55mm.  I then looked at logistics REIT DRE, which earns about a 65% NOI margin.  Applying this margin to my hypothetical Mullen NOI figure results in an implied rental expense of $84mm.

I’m not suggesting that Mullen will do a sale leaseback on the entirety of their real estate portfolio (and the company has stated that they view some of these properties as strategic / core, though they could just be talking their book and trying to explain why return-on-capital doesn’t look higher based on headline numbers).  However in terms of valuing the equity and evaluating the potential returns, it’s worth understanding.  If they do indeed sell all of their real estate holdings and instead pay the full $84mm of rent expense, the two-, three-, four-, and five-year IRRs are 53%, 40%, 34%, and 31%, while the corresponding future stock prices are $29.64, $32.92, $36.52, and $40.49.  While those are extremely attractive numbers, I’m putting them here mostly so that we can get an idea of the bookend.  In a perhaps more reasonable case where they sell half of the real estate portfolio, a three-year hold results in a 24% IRR with an ending stock price of $23.37 while a five-year hold yields a 21% IRR and a $28.25 ending stock price.

Since I’ve written so much running this valuation through what are essentially enterprise value adjustments I suppose I should add in a quick EV-based valuation.  Where are we creating the company?  Again, due to the real estate holdings, the answer is “it depends”.  Ignoring RE for the time being and factoring in only the equity investments, we get 102.3mm diluted shares at $14.07 for a market cap of $1.44 billion plus $686mm of net debt (converts are excluded since they’re converted), less $83mm in investment value for an EV of 2.04 billion or 6.8x guided 2022 OIBDA, or 5.5x my estimate of $370mm of current run-rate OIBDA.  This is slightly rich compared to similarly-sized companies such as Heartland Express or Universal Logistics that trade just under 5x, and inline to slightly cheap relative to larger and more logistics focused players such as TFI International (7.8x), J.B. Hunt (9.6x), and XPO (6.9x).  If we use a constant 6.8x forward EBITDA multiple with my GDP growth/dividend/repurchase scenario, at the end of year three, the stock price is $18.58 and you’ve collected $2.37 in dividends, for an IRR of 15%.  Again, if we consider half of the real estate portfolio to be saleable, at the end of year three the stock price is $25.35 and you’ve collected $2.70 in dividends for an IRR of 27%.

Compounder case
For one final case, what happens if Mullen actually does some acquisitions to continue to grow its market share?  The company generally looks to buy quality assets at 4-6x EBITDA (though this valuation can include estimated synergies and business improvements).  Sticking with our same GDP growth case and assuming that half of the cash flow we were formerly using for share repurchases can instead be allocated to acquisitions at 6x OIBDA we find that Mullen’s stock price grows at about 10% per year and investors receive a ~5% dividend yield.  In other words, despite taking on acquisition and integration risks, not a ton of additional value is created relative to our dividend/repurchase case.  Importantly, this conclusion applies to these specific parameters.  Were Mullen to find cheaper high-quality acquisitions, or earn for itself a higher valuation (note that if EV/EBITDA increases to 8x, the 3-year IRR is ~20% and at 9x EBITDA it’s 26%), then it would make sense to take significant capital away from repurchases.  The company is clearly aware of this fact, given that they’ve used $117 million since 2020 to repurchase shares.  To paraphrase Murray Mullen on a recent earnings call when asked about attractiveness of acquisitions vs repurchases “if I could find other Mullen-quality businesses to buy at 7x EBITDA, I’d do that all day.”  While I won’t drag everyone through yet another set of cases, please keep in mind that this these numbers are much higher if we account for Mullen’s owned real estate.


Key risks
The obvious risk here is that the economy falls off a cliff immediately and it’s a long time before we see solid results again.  As I discuss ad nauseam in my downside case, Mullen’s broad diversification, increasing customer (and consumer) orientation, significant use of contractors, and strong expense discipline in down markets gives me significant (extreme?) comfort that the company will continue to weather industry downturns whether in its trucking segment, industrial segment, or both.  While a protracted downturn will certainly compress IRRs for today’s buyers, I would suggest that this could actually be accretive in surfacing discounted acquisitions for Mullen of weaker players as well an attractive opportunity for investors to purchase additional shares (especially in the event that they temporarily reduce the dividend).

I’ve also covered this in the downside case but since this is a list of risks, I’ll reiterate Mullen’s leverage covenant and 2024 and 2026 debt maturities.  In a very weak environment (and if Mullen’s ability to cut costs somehow becomes limited), the company will have to pull some levers in order to work through these issues.  However, as described above, the company has a number of different levers available, and I don’t consider this a scary risk of default situation.

Key-Murray risk - Murray Mullen sets the direction and tone for the company.  A look at some of his annual letters make it clear that he lives and breathes this business.  Murray joined the company in 1975, has been on the board since 1986, and has been the Chair and CEO since 2001.  He owns ~$70mm of stock or nearly 5% of the company i.e. his interests are aligned and he is motivated.  In fact, he doesn’t take a salary and his compensation over the last three years has ranged from $570k to $650k under the profit share component of the company compensation plan (no other compensation reported).  While my conversations with management thus far have led me to believe that Murray has been able to assemble a competent group beneath him, who are interested in the business and conversant in the details, the loss of Murray would still cause meaningful uncertainty with respect to the future direction of the business.

Murray could make a bunch of bad acquisitions - while admittedly I don’t see Murray as an absolute shark on the acquisition front (perhaps this is me not yet having spent enough time with the company and understanding the true nature of what he’s doing, however goodwill of $371mm as of 6/22 merits at least some consideration), I also don’t see existential errors over the 20+ years that he’s been driving this strategy.  That said, with any company, and especially with a company whose stated strategy is to grow through acquisition, there is the potential for value destruction via a company misunderstanding any given market environment, “forcing” deals that aren’t slam dunks, or falling in love with opportunities that are either not high enough quality or too expensive.  My hope and sense is that Murray’s gigantic stock ownership provides some extra discipline reinforcement as he reviews acquisition opportunities.

Elevated fuel prices - In most cases Mullen has a passthrough on fuel prices, however it lags their fuel costs a bit so elevated fuel prices can cause a temporary decline in earnings.

Self-driving trucks, electric trucks, flying trucks - as in most industries, there are some existential risks with trucking, and there are several new technologies in development.  While some of these will certainly disintermediate traditional trucking models, the Company is well aware of this and, by expanding its contractor-operated business, is likely to look to be a customer, rather than a competitor, of these new ways of working.  Mullen is investing $10mm into “sustainability” initiatives in 2022, some of which is going into compressed natural gas trucks and hybrid trucks.

AMAZON - yes Amazon has built and is building a giant fulfillment network, and yes they are stellar operators, and yes pretty much everyone who states that Amazon isn’t a threat ends up getting their business ruined.  That said, there are large parts of Mullen’s business (for a stark example, the specialized and industrial segment) that appear at present to be a pretty significant drift for Amazon, who has mostly focused on ecommerce shipment fulfillment (both at the truckload and LTL level).  If Amazon ends up externalizing their fulfillment network for non-ecommerce purposes, I would hope that Mullen could again benefit by becoming a customer.

Labor tightness - in what is currently a tight trucking market, Mullen has had the luxury of passing wage increases onto customers.  This obviously may not be possible in a weaker market.  I’d point to past weak markets that Mullen has managed through as an indicator that this is at least not an unfamiliar obstacle to them.

Labor relations - it would seem impossible to write up a trucking company without covering labor relations.  That said, it hasn’t seemed to make its way into much of the narrative around the company historically.  Mullen’s use of contractors helps reduce some of the risk of labor relations issues, but at the moment it’s the shortage of labor that is the chief concern.

Catalyst

Quarterly results - continued refining and improving of underlying operations, leading to increased cash flow, increased dividends, and further repurchases

Continued growth through acquisition

Market gaining further confidence in the dividend (i.e. tighter yield) following its restoration after being cut due to the pandemic