Description

Patriot Transportation (PATI) is an undervalued regional tank truck carrier with a long history of growth.  A recent IPO via a spinoff with little notice coupled with heavy insider ownership and alignment of interests makes the company very timely.  Additionally, trailing earnings have been depressed due to driver pay hikes coupled with a decline in the diesel surcharge, but unlike many businesses, margins can be restored very quickly, often as quickly as one quarter.  Despite selling for only 11x run-rate earnings and 3.5x EV/EBITDA, the company is poised to grow earnings via market share gains and consolidation opportunities (debt free balance sheet).

Florida Rock Industries entered the trucking business in 1962 focusing on hauling and construction aggregates.  In 1972, Florida Rock entered the petroleum and hauling business – later renamed Florida Rock & Tank Lines.  In January 2015, this segment was spun out into a stand-alone company called Patriot Transportation.

Patriot Transportation is one of the largest regional tank truck carriers in North America, transporting over 2.5 billion gallons of fuel each year.  It acts as a 3rd party carrier delivering fuel from point A to point B using company employees and company owned trucks.  The company is currently #12 by revenue with a 7.4% market share, although market share is regional, therefore Patriot is one of the few large carriers in the Southeastern United States.

The basics of the business are quite simple.  During my due diligence process, I met with the CEO of a 50-truck competitor (whose facility was literally next door to Patriot’s in Georgia).  The tank truck hauling business is a basic blocking and tackling type of business in which execution and track record are key determinants of success.  The P&L and ROE dynamics are very straight forward.  

Patriot delivers up to 9,000 gallons of fuel in each load and delivers over 45,000 loads per month.  The company has 699 drivers, 477 owned tractors and 566 trailers.  They haul petroleum products (82% of sales) and dry bulk and liquid chemicals (18%), delivering around 350,000 truckloads of fuel and 80,000 truckloads of chemicals per year.  The company currently operates in six states (Florida, Georgia, Alabama, South Carolina, North Carolina, Tennessee). 

Patriot operates 21 terminals in the Southeast, with 9 satellite locations.  Each truck generally operates within a radius of 150 miles around each of its terminal locations.  The average one way trip is 100 miles per load so a driver gets up in the morning, drives to the terminal, fills up a truck, drives it 100 miles or so to the destination, unloads the truck at the c-store or hypermarket, and then drives the truck back to the terminal.  This is a significantly shorter haul than the industry average and somewhat reduces the company’s exposure to hiring and retaining drivers.  Part of the appeal of this line of truck driving is that one is able to see their families every night.  However, part of this advantage has lessened over the past few years as long haul trucking companies have started opening up satellite locations so their drivers have a shorter haul also.  This is putting pressure on tank truck haulers wage rates.

There are approximately 218 companies that are members of the trade association that transport more than 80% of all fuel hauled in the U.S.  Most of these companies are smaller truck operators (i.e., operate fewer than 25 trucks).  Many of these smaller operators are exiting and/or selling out as the industry is characterized by stringent customer requirements related to safety, insurance, regulation (driver training, product handling). 

Customers include major convenience stores and hypermarket accounts (Murphy USA, Costco, Kroger, among others.  A primary key to success is the ability to provide superior customer service at competitive rates.  Safety and timeliness are arguably the two biggest drivers of success, as the customer often sees more daily volatility in the price of gas than in the daily rate that it is paying the tank truck operator to deliver the fuel. 

While this might seem to be a commodity business, switching costs are reasonably high, particularly for larger customers.  For example, Murphy USA represents 22% of Patriot’s sales and is serviced in the Southeast largely by Patriot and Kenan Transport.  If Murphy wanted to shift its business elsewhere, it would need to break up its fuel delivery amongst many different smaller firms, a level of complexity that Murphy USA probably does not even like to think about. 

The business model drivers are: i) number of revenue miles driven, ii) rates per mile, iii) quantity of products hauled (each truck holds 7,000 gallons), iv) amount of fuel shortages.

Roughly 35% of Patriot is owned by the Baker family.  The Bakers were the founders of Florida Rock and CEO Thompson Baker owns 9%.  All members of senior management take low salaries and annual incentives are directly tied to after-tax ROIC. 

While this might seem to be a commodity business, switching costs are reasonably high, particularly for larger customers.  For example, Murphy USA represents 22% of Patriot’s sales and is serviced in the Southeast largely by Patriot and Kenan Transport.  If Murphy wanted to shift its business elsewhere, it would need to break up its fuel delivery amongst many different smaller firms, a level of complexity that Murphy USA probably does not even like to think about. 

The largest risk factor is an industry wide driver shortage. 

Catalyst

Continued sales and earnings growth.

Greater awareness of the company.

Acquisitions.