Description

Why Now

We’re posting this idea, largely unchanged, a year later because in many ways it’s emblematic of what we’ve seen across our portfolio for the past few years. In a world where capital has sought indices, growth oriented companies, and size, their antipodes have been relegated to the bargain basement. The spring has coiled to an extreme and, while short-term painful, we are hopeful that some of the valuations we are seeing are harbingers of future out-performance. In many cases, we believe that not much has changed from our original theses except the passage of time and the protracted state of weakness of many of the end markets. We continue to believe that these issues are cyclical rather than secular (CNRD, USAP as two of our recent submissions) and that they require patience-perhaps more than many investors are willing to exercise. 

We are tired of writing about the trading ‘weirdness’ that we witness on almost a daily basis. Patriot is a case in point; the company declared a $3 special dividend on December 4th when the stock was $17.97. In the ensuing few weeks headed into the record-date the stock traded north of $21 on a surge in volume. On the ex-date the stock traded $4 lower (rather than the $3 that one might expect). The volume has slowed to a trickle and the stock now trades 25% below the dividend-adjusted price reached a month ago. This is a boring trucking company; it makes little sense to us. Yes, they announced lack-luster earnings in the interim but they shouldn’t have been a surprise to most informed investors. The company now has about a 24mm enterprise value assuming the sale of their Tampa property closes. By almost any measure, that seems far too cheap.

Company Description (per latest 10Q)

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 customers’ 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 customers’ fuel storage tanks for ultimate sale to the retail consumer. The remaining 14% of our business consists of hauling dry bulk commodities such as cement, lime and various industrial powder products and liquid chemicals. As of December 31, 2019, we employed 524 revenue-producing drivers who operated our fleet of 345 company tractors (excluding 14 being prepared for sale), 24 owner operators and 495 trailers from our 19 terminals and 6 satellite locations in Florida, Georgia, Alabama, North Carolina and Tennessee. We experience increased seasonal demand in Florida in the spring and in most of our other locations during the summer months.

Thesis

Our thesis here can really be writ large across much of our portfolio…capital outflows and the shuttering of many longstanding small cap value firms have led to wide swathes of the market being ignored. Valuations are quite cheap on an absolute basis and head-scratchingly so on a relative basis. The very same assets that private equity are acquiring at elevated multiples can be created in the public markets for extreme discounts. It has been frustrating, for sure, but ultimately we believe that valuation arbitrage doesn’t go unnoticed or un-exploited forever. We believe we are at the nascent stage for m&a activity in our space.

Valuation

Shares outstanding: 3.3mm

Market Cap: 41mm

Net cash: 9-10mm (after the recent $3 special dividend)

EV: 31-32

Tampa land under contract: 10mm ( 7mm after tax)

Effective EV: 24-25

TTM EBITDA: 3.0 mm

EV/EBITDA: 2.9x

The operating performance of the company, amidst the competitive frenzy for new drivers, is nearly historically poor. The company had a long history of generating 12-15mm in EBITDA which we believe is directionally correct (though too lofty on the high end). We believe that assets are trading hands at 4-5x…..multiples that reflect the tough environment and the reality that trucking isn’t a great business through the cycle. Even so, Patriot is trading at a discount to those private market values after factoring in the depressed profitability. 

State Of Their Markets

We previously wrote about driver shortages and, unfortunately, that dynamic has only gotten more acute. The labor market is historically tight and the company has tried to retain, and keep, drivers by increasing compensation, investing in newer and more comfortable tractor trailers, and giving more vacation time. 

That the company and its peers haven't gotten pricing traction in this environment remains a bit of a mystery. The company has told us that there are some competitors who are willing to accept rates that almost ensure a loss. One potential dynamic that might change that are recently escalating insurance rates….insofar as that further pressures these operators who fund their business through cash flow we might expect them to take a harder line on pricing. 

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. Management shares our sentiment and has been slowly increasing their own stakes through insider buys:

Trade Date

↑ No. Part Participants Net Sell (Shares) Net Buy (Shares) Close Price Volume

12) 02/03/2020 1 Baker John D   1,553       12.2800 3,675

13) 01/31/2020 2 Baker John D, Sandlin Robe 3,250 12.0900 23,628

14) 09/12/2019 1 Baker John D 100 17.8000 1,802

15) 08/13/2019 1 Sandlin Robert E 114 17.5000 116

16) 08/09/2019 1 Sandlin Robert E 100 17.5000 970

17) 08/06/2019 1 Sandlin Robert E 5 18.4000 517

18) 08/05/2019 1 Sandlin Robert E 200 17.5000 738

19) 08/02/2019 1 Sandlin Robert E 300 17.2500 938

Financials

 Five Year Summary-Years ended September 30

(Amounts in thousands except per share amounts)

Management and Insider Ownership

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. 

Name and Address of Beneficial Owner

Amount and Nature of
Beneficial Ownership

Percentage
of Class

Trust FBO John D. Baker II U/A Cynthia L. Baker Trust dated 4/30/1965

John D. Baker II

Edward L. Baker II

200 W. Forsyth Street, 7th Floor

Jacksonville, FL 32202

371,158(1)

472,222(1)

403,591(1)

11.07%

14.09%

12.04%

Trust FBO Edward L. Baker U/A Cynthia L. Baker Trust dated 4/30/1965

Edward L. Baker

Thompson S. Baker II

200 W. Forsyth Street, 7th Floor

Jacksonville, FL 32202

141,158(2)

175,108(2)

215,395(2)

4.21%

5.23%

6.37%

Trust FBO Sarah B. Porter U/A Cynthia L. Baker Trust dated 4/30/1965

1165 5th Avenue #10-D

New York, NY  10029

304,493(3)

9.15%

Royce & Associates, LP

745 Fifth Avenue

New York, NY 10151

194,864(4)

5.85%

T. Rowe Price Associates, Inc.

T. Rowe Price Small-Cap Value Fund, Inc.

100 E. Pratt Street

Baltimore, MD 21202

284,303(5)

230,653(5)

8.50%

6.90%

Estabrook Capital Management, LLC

Charles T. Foley

David P. Foley

900 Third Avenue

New York, NY 10022

195,441(6)

195,441(6)

195,441(6)

5.87%

5.87%

5.87%

Minerva Advisors, LLC

Minerva Group, LP

Minerva GP, LP

Minerva GP, Inc.

David P. Cohen

50 Monument Road, Suite 201

Bala Cynwyd, PA 19004

249,899(7)

189,987(7)

189,987(7)

189,987(7)

249,899(7)

7.50%

5.70%

5.70%

5.70%

7.50% 

 Summary

Patriot is quite cheap on an absolute basis. Its balance sheet and cash generative abilities (even in this downturn) 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. We have already seen them pay a special dividend and it would not surprise us to see a meaningful tender at these prices should the stock continue to languish.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Catalyst

• The low pricing environment causes private market participants to consolidate

• A larger strategic or financial buyer can no longer ignore the cheap valuation

• Rising insurance rates finally force prices higher