Description

Company Description (per latest 10Q)

Company’s Business. The business of the Company, conducted through our wholly owned subsidiary, Florida Rock & Tank Lines, Inc., is to transport petroleum and other liquids and dry bulk commodities. We do not own any of the products we haul, rather, we act as a third party carrier to deliver our customer’s products from point A to point B predominately using Company employees driving Company owned tractors and tank trailers. Approximately 86% of our business consists of hauling liquid petroleum products (mostly gas and diesel fuel) from large scale fuel storage facilities to our customers’ retail outlets (e.g. convenience stores, truck stops and fuel depots) where we off-load the product into our customer’s fuel storage tanks for ultimate sale to the retail consumer. The remaining 14% of our business consists of hauling our customer’s dry bulk commodities such as cement, lime and various industrial powder products and liquid chemicals. As of December 31, 2018, we employed 541 revenue-producing drivers who operated our fleet of 380 company tractors (excluding 10 being placed in service and 3 being prepared for sale), 20 owner operators and 532 trailers from our 20 terminals and 6 satellite locations in Florida, Georgia, Alabama, South Carolina, North Carolina and Tennessee.  

Thesis

The Baker family has a proven track record of value creation and realization. They sold Florida Rock to Vulcan Materials for nearly 4.5B back in 2007 which on its own suggests a modicum of smarts, if not good timing. Perhaps tipping the scales towards the former was their sale last year of their second foray into the aggregates business, Bluegrass Materials, which Martin Marietta acquired for 1.6B. In addition, they manage FRP Holdings which is a 500mm publicly traded real estate company that in early 2015 spun off Patriot Transportation. They appear to be savvy investors who, as their share holdings demonstrate, happily eat their own cooking. Patriot Transportation is quite cheap, with a rock solid balance sheet, in an industry that, while challenged, appears to have troughed. As such we find the stock to represent compelling value.

Valuation

Shares outstanding: 3.3mm

Market Cap: 61mm

Net cash: 20mm

EV: 41

*Excess land for sale: 10mm

Effective EV: 31

TTM EBITDA: 10.5mm

TTM FCF: 4.7mm

EV/EBITDA: 2.9x

FCF %:  14% (normalized about 3-4mm in fcf at these ebitda levels or 9-12%)

 *In 2016 the company announced that they were marketing a desirable piece of property in Tampa: https://www.bizjournals.com/tampabay/blog/morning-edition/2016/02/exclusive-prime-development-site-near-macdill-air.html

They got close to the finish line with one party who agreed to pay 10mm. While the deal didn't go through, it is the company's belief that it has only become more valuable and when they decide to actively remarket the parcel it should draw multiple suitors. We believe the 10mm is a conservative estimate for the land and thus intellectually deduct the value in our calculation of the firm's enterprise value. 

State Of Their Markets

The steady drumbeat of driver shortages continues to plague the company and has been referenced in numerous conference calls across various industries. In such a tight labor market, drivers are attriting at about an 80% annualized rate; drawn to shorter routes, better pay, and better benefits. There are enormous inefficiences as a result and the company has been spending most of its internal resources in trying to retain drivers via additional time off and investing in a newer fleet of tractor trailers that improves the driving experience.

That the company and its peers haven't gotten pricing traction in this environment remains a bit of a mystery. The returns of the past two years don't justify further investments in additional capital equipment and almost by default the situation should self-correct. We have heard that private companies that gorged on cheap debt are beginning to feel the pain associated with this stagnant pricing dynamic. As such, there appears to be early signs of consolidation, with the bid/ask spread standing in the way for now. The rumored spread is 5x bid and 7x ask.

Our investing approach is mostly catalyst-lite and relies upon the hackneyed saying that valuation usually provides the spark that is required. We attempt to find companies that provide a needed service during times when that service is being underpriced and undervalued by public market investors.

Financials

 (this year included a $1.04 per share ($3,444,000) benefit from revaluing the Company’s net deferred tax liability as a result of the Tax Cuts and Jobs Act

There's inherent operating leverage in the model and should the pricing headwind moderate we believe that a return to the 14-15mm ebitda level of the 2013-2016 period is certainly achievable. Improved profitability should result in investors affording the company a more generous multiple which we think might ultimately reach 6-7x. 

 Summary

Trading at peak-like multiples on trough earnings, we believe that Patriot is quite cheap on an absolute basis. Its balance sheet and cash generative abilities should allow the company to weather the storm and, potentially, benefit from the woes of their less-well capitalized peers. The family has a favorable reputation and doesn't strike us as a team content to merely play out the string. We would imagine that should the company continue to be afforded its current multiple, the Bakers might be prone to seek out ways to correct the value gap. 

Catalyst

• The low pricing environment causes private market participants to consolidate
• A larger strategic or financial buyer can no longer ignore the cheap valuation