Description

Radiant Logistics share price is largely unchanged over the last seven years despite the company doubling its mid-cycle earnings, generating its current EV in free cash flow, and transitioning its balance sheet from $60 million in debt and preferred stock to $33 million of net cash ($0.67 per share).

The company is operating near trough earnings, given an extended freight recession, but even on that basis the stock is relatively cheap. At current operating rates Radiant should generate around $20 million of free cash flow against a current EV of just over $200 million. I estimate mid-cycle free cash flow north of $30 million, suggesting the stock will move higher when freight markets improve, and in the meantime compound earnings through share repurchases and acquisitions. On that front, Radiant has a long-term opportunity to consolidate its network of franchise partners. Longer term the company is a plausible target for a larger logistics company.

The business

Radiant provides third-party logistics through wholly owned operations and partners. 80% of the business is freight forwarding, with the balance split between truck brokerage and value-added services, which includes consulting and customs brokerage. These are all asset light business lines with almost no capital expense. Value added services are higher margin, and currently represent about five percent of revenue and ten percent of gross profit. While the company has acquired various competencies over time its early strength was domestic air transport of products requiring special handling and this remains a core competency. Vaccines and other medicines, food to hotels, cruise lines and for humanitarian missions, and just in time parts for aircraft and oil/gas assemblies are examples. Logistics companies typically bill as a percent of the total freight bill, and the domestic air competency has insulated Radiant from the widest price fluctuations on other transportation modes, notably ocean freight. That said, in the current environment all modes of transport are pressured on price.

Third party logistics is a relationship business. Anecdotally logistics partners will take calls at all hours to arrange urgent deliveries. That said, providers must be price competitive and are largely price takers based on freight rates. That creates substantial revenue and earnings cyclicality. Radiant has become more profitable and cash generative through each cycle, such that its currently depressed operating earnings are roughly on par with operating earnings prior to 2020, in addition to having a stronger balance sheet and fewer outstanding shares.

There is a significant longer term roll-up opportunity. Currently more than half of Radiant’s fulfillment is through partners. Many of these partners entered the business decades ago and are now approaching retirement. Radiant is a natural buyer given it already has full visibility into their business operations and customers in addition to being well financed and focused on this niche of the logistics market. The company typically buys out partners for a mid-single digit multiple of EBITDA, which represents a mid-teens ROI given limited capital requirements post-acquisition.

When Radiant buys in a partner the “partner commissions” expense goes down, while SG&A goes up by a lessor amount, with the difference representing the acquired EBITDA. In addition, over time, Radiant can consolidate some locations, reducing operating costs further.

The company occasionally signs new partners. My assumption is Radiant brings these partners on around breakeven and thereby gains a motivated commissioned representative.

While acquisitions were scarce for a time the pace has picked up, supporting the demographic thesis of aging partners. Over the last year Radiant has made three acquisitions, as well as several internal expansions and partner signings. If the company can maintain that pace it should drive solid inorganic growth, even absent a recovery in the freight industry. Given that half of the company’s current fulfillment is partner based, I’d think this channel of M&A targets could boost growth for many years. In addition, the company can supplement this growth with occasional non-partner M&A which adds new geographies or competencies.

I estimate between cash on hand and assuming a willingness to leverage up to two times EBITDA, Radiant has about $80 million of liquidity, which would support roughly $15 million in further acquired EBITDA. That suggests the company could inorganically increase free cash flow to $30 million, which would put price to free cash flow in the mid-single digits at a cyclical trough. Expeditors (EXPD) trades slightly above 20 times earnings despite somewhat slower growth over the last decade and seemingly fewer levers for inorganic growth. Most other freight and logistics providers, even those with much higher capital intensity, are trading at higher multiples.

I think Radiant can continue the rollup playbook at attractive ROIs. $30 million of annual free cash should support $5 to $6 million of acquired EBITDA, which would represent mid-teens inorganic growth on the current EBITDA base. And while I don’t think Radiant is interested in selling today, at some point it could be a plausible target for a mid-cap freight company like ArcBest, a shipper like Maersk, a larger logistics company like Expeditors, or private equity. 

Notes on management, etc

Bohn Crain, age 59, started Radiant in 2005 and I think has done a good job growing the business. He owns roughly 10 million shares, representing 21% of shares outstanding.  There have been a few missteps over the years, for example the company likely overpaid for the truck brokerage Wheels in 2015, and there was a fairly lengthy and expensive implementation of SAP EM from 2017 through 2019, but in recent years the execution has been steady particularly relative to the broader industry. There have been a couple cyber incidents, the most serious of which impacted 2023 financial reporting, but the whole industry has been subject to attacks and the company thwarted a recent one, so hopefully they are getting better on this front.

Risks

As far as what could go wrong here, this is fundamentally a commoditized service where industry margins have been compressed by the expansion of large asset heavy players like Maersk, which has expanded from a shipping company to a more diversified freight forwarder. Smaller forwarders like Radiant have adjusted by serving higher margin niches that require special skills and attention, but it’s possible more effective tracking and coordination technology could pressure margins in these areas as well. From time to time there’s been hand wringing around the emergence of new logistics tech platforms, the most recent being Flexport, however that venture has so far not gotten the traction people feared. The continued expansion of fulfillment by Amazon also poses some risk to industry pricing, although appears to be more focused on B2C delivery.  

The industry has also been targeted by cyber criminals. A successful attack two years ago delayed Radiant’s annual financial filing. A similar attack was perhaps more disruptive to Expeditors. Radiant reported thwarting an attack on its Canadian operations last year. This remains an ongoing risk.

Finally, the company reports over the next two weeks (fiscal 3Q24 March quarter) and most freight stocks have fallen post earnings. No particular reason to think RLGT will buck this trend, so I would advise anyone looking at the name to wait for earnings.

Catalyst

Improvement in freight markets

Execution on rollup

Share repurchases