Description

Disclaimer:

This writeup is for information purpose only, is not investment advice, and is not a recommendation, solicitation, or offer to buy or sell any security. Information contained in this document may constitute forward-looking statements or reflect the opinion of the author as of the date written. Due to various risks and uncertainties, actual events or results may differ materially from those reflected or contemplated herein. This material has been prepared from sources and data believed to be reliable and is subject to change without notice. No representations are made as to the accuracy or completeness of this material, and the author does not undertake any obligation to update or review any information or opinion contained herein.

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Summary & Thesis:

At current levels, we believe Rush Enterprises (NASDAQ:RUSHA/B) represents a highly attractive risk-reward.

RUSH is the largest commercial truck dealership group in North America. We like RUSH for the following reasons:

• Quality business
  • Largest and best operator in its space.
  • Local monopolies.
  • Since 1999: revenue CAGR of 10.4%; EBIT CAGR of 13.0% [note: all references to EBIT refer to operating income net of all interest expense associated with floor-plan-financing and lease and rental financing and net of reported D&A, which overstates maintenance CapEx; so, EBIT is an understated measure of unlevered pre-tax FCF.].
  • Since 2002 (furthest the data goes back): share price CAGR (not inclusive of dividends) of 15%, translating to 28x.
  • 20-30%+ pre-tax return ROC and 30-40% PT ROTC.
• First rate management, operations, and culture.
• Extremely strong balance sheet – net cash on an economic basis.
• Strong and shareholder friendly capital allocation.
• Market sentiment is cautious.
• We think the market is overly focused on near-term results which are weak due to a very weak trucking market. We expect 2025 and 2026 to be banner years ahead of new emission standards in 2027.
• Cheap.
  • Based on relevant peer valuations, we think RUSH’s Parts & Service business alone is worth the entire EV.
  • Trades at 8.5x depressed 2024 EBIT, 7.0x 2025/2026.
  • Will generate FCF >25% of its market capitalization from 2Q24-YE26.
  • Net of cash to be generated, trades at <4.5x EBIT a few years out.

In Further Detail:

Business and Management Overview:

RUSH is the largest commercial truck dealership group in North America, with more than 150 locations across the US & Canada. Its largest OEM partners are Peterbilt (PCAR) and International (Navistar – ultimately controlled by Volkswagen), and for those two brands RUSH is their largest dealership partner. RUSH sells approximately 6% of all heavy duty (Class 8) trucks in North America. It also sells many medium, light duty, and used trucks, along with a variety of other vehicles. Additionally, it provides repair and maintenance through its Parts & Service division.

CEO Rusty Rush owns 11% of the company (and through super voting shares, holds a 39% voting interest).

Rusty is old school in every sense. Conference calls begin with a 1–2-minute summary of the quarter, then straight into very frank (and fun) Q&A. Rusty intensely believes in his business but he’s not in the least promotional and waves off gimmicky Wall Street ideas. He’s an operator, in the deepest sense of the word, and absolutely lives his business.

Business Quality:

Superficially, selling and repairing commercial trucks looks to be a commodity business (although barriers to entry are quite high). RUSH has succeeded because management has out-hustled/operated/thought/ innovated/acquired its peers.

Based on our work, RUSH vastly outperforms privately operated peers across all key operating metrics. Most notably, its absorption ratio [note: Absorption ratio is calculated by dividing the gross profit from the parts, service and collision center departments of a dealership by the overhead expenses of all of a dealership’s departments, except for the selling expenses of new and used commercial vehicles and the carrying costs of the new and used commercial vehicle inventory], a key metric in the dealership space, is hundreds or thousands of basis points higher. Call it ‘shared economies of scale’ or just beating competitors, the point is the same: RUSH’s ability to service customers better than anyone else enables it to further service customers better than anyone else; RUSH’s competitive advantages enable it to extend its competitive advantages.

Auto dealerships have likewise proven to be very good businesses that can generate very strong shareholder returns. That is especially the case for best-in-class operators (e.g., AN, GPI, LAD). We like RUSH more because it possesses the same attractive features of those businesses + meaningfully greater P&S contribution, less competition, and higher returns on capital.

As summarized earlier, RUSH’s LT track record is extremely impressive. The table below gives a full view of the business’ progression over the last 25 years:

Parts & Service:

We think the market doesn’t appreciate the size and value of RUSH’s Parts & Service business.

The company delineates revenue and gross profit between product/service lines. Parts & Service represents >60% of gross profit. Based on an allocation of OpEx (as calculated based on the company’s absorption ratio), underlying EBIT from P&S was $250M in 2022/23 and $225M LTM (due to negative fixed cost absorption).

We think the appropriate comps for RUSH’s P&S business are best-in-class aftermarket auto parts (e.g., AZO, ORLY) and MRO distribution (e.g., FAST, GWW). Those business trade at high-teens EV/EBIT. Based on P&S alone, RUSH trades at 15x EBIT. Based on RUSH’s medium-term targets (see below), shares trade at <10x P&S EBIT (7.5x, net of the cash to be generated through YE26)

We believe RUSH’s P&S business has a very bright future. Its most important competitive advantage is its nationwide coverage, which is far larger than any competitor’s. In addition to constant blocking-and-tackling across the business, we think RUSH has a large opportunity to contract with many large fleets seeking to outsource their repair and maintenance. We expect RUSH’s P&S business will grow organically HSD for the foreseeable future.

We think the appropriate comps for RUSH’s P&S business are best-in-class aftermarket auto parts (e.g., AZO, ORLY) and MRO distribution (e.g., FAST, GWW). Those business trade at high-teens EV/EBIT. Based on P&S alone, RUSH trades at 15x EBIT. Based on RUSH’s medium-term targets (see below), shares trade at <10x P&S EBIT (7.5x, net of the cash to be generated through YE26)

We believe RUSH’s P&S business has a very bright future. Its most important competitive advantage is its nationwide coverage, which is far larger than any competitor’s. In addition to constant blocking-and-tackling across the business, we think RUSH has a large opportunity to contract with many large fleets seeking to outsource their repair and maintenance. We expect RUSH’s P&S business will grow organically HSD for the foreseeable future.

Balance Sheet:

RUSH’s balance sheet features superficially high leverage due to two factors:

1. Floorplan financing (effectively, working capital).
2. Term-matched spread financing on their lease and rental fleet.

Neither of those represent corporate capital structure debt and we treat the associated interest cost for both as an operating expense.

Adjusted for those items, net corporate cash is >$160M.

Capital allocation:

RUSH has allocated capital exceptionally well, as the business’ long-term metrics demonstrate.

RUSH pays a modest dividend ($.72/share) and has repurchased a decent amount of stock, with the amount accelerating over the last few years (e.g., $60M avg. 2018-2021, $102M in 2022 and $219M in 2023).

A legitimate criticism is that management has maintained a wildly overcapitalized balance sheet. The stock has almost always been inexpensive, and not infrequently no-brainer cheap. We would like RUSH to prudently employ leverage to more aggressively repurchase stock and take advantage of its persistently low valuation. We hope that RUSH moves in the direction of AN, AZO, CACC and other share cannibals who possess durable businesses, robust cash flows, and the public market gift of a low valuation.

Valuation:

RUSH trades at 8x 2024 EBIT. We think 2025/26 are going to be much better years, and on those RUSH trades at 7x EBIT. From 2Q24 through YE26, we expect RUSH to generate FCF ≥ 25% of its market cap, and we expect a very substantial portion – maybe all, or even more than all if the company finally assumes some leverage – will be returned to shareholders.

RUSH has a history of laying out medium-term targets, meeting them and then growing well beyond. Presented below are RUSH’s current medium-term targets:

We think RUSH will hit those targets in the next few years. Accordingly, in 2.5 years – net of the cash generated in the interim – RUSH will be trading at <4.5x EBIT. We think RUSH is worth a good deal more than it currently trades at, and that an investment at today’s level will yield a very attractive IRR. If the company optimizes its capital structure and repurchases lots of shares on the cheap, the upside is very large.

Catalyst

See above