Description

Rush Enterprises (NASDAQ: RUSH)

Rush is a cyclical in the middle of a downturn with no end in sight, so there’s no _hurry_ on this one -- which is probably just as well, given the limited liquidity. Rush’s primary business is Peterbilt truck dealerships/repair centers. Truck sales have fallen off a cliff since 1999, when Rush earned $2.33, as opposed to $.46 over the last twelve months. The investment thesis is that truck sales will recover some time over the next 2-5 years, and that investors will then value Rush at 7-10 times earnings. (Note that I’m not saying they _should_ -- just that they will; there’s a bit of greater-fool theory in this idea).

Management

Marvin, Rusty, and Robin Rush run the show. Marvin’s the dad. Rusty and Robin are the sons. There are also vice presidents and senior vice presidents, and a CFO.

Marvin owns 39% of the company. He pulled down a $240,000 bonus last year, to spice up his $680,000 salary, which included $109,903 for “salary and benefits of employees of the Company performing personal services exclusively for Mr. Rush”. Okay, so maybe there are some governance issues here.

Operations

Rush now operates in three segments: Truck, Construction Equipment (John Deere dealerships in Michigan and Texas), and Retail (farm/ranch supply superstars). The Internet And Catalog division, fortunately, has been discontinued.

The retail segment managed to lose $4,000,000 last year on $40,000,000 in sales -- not bad for a single division in a company with a $50,000,000 market cap.The only short-term catalyst for the stock price that I can see is to fix or sell the retail segment;. Rush seem to want to fix it., even though they could have almost doubled their earnings by just giving it away. This segment has been profitable in the past.

At 11% of revenues and 5% of earnings, the construction equipment segment is a small part of the company. The idea behind this segment is that the strategies employed in the trucking division will work here as well, and that there is some opportunity for cross-selling between the truck and equipment segments. It also provides an outlet for acquisitions when truck dealerships are too expensive. In the past, Rush has called this segment a growth area. Nothing much has happened lately.

The truck segment is the core of the company. Rush operates 23 full-service truck centers and 12 limited-service centers in the Western and Southwestern U.S. Rush’s mantra is “one-stop”: sell new or used trucks, provide leasing, financing and insurance, do on-site or mobile repairs, etc.. They also brand their locations by making them all look the same and sticking the biggest damn Peterbilt sign you’ve ever seen as high in the air as state regulations allow. This isn’t an earth-shattering new business model, like ,say, Priceline.com, but it makes sense, and Rush has (for the most part) executed it well.

The Malaise

Here’s a table of class 8 truck registrations since 1995:

1995 207,932
1996 184,989
1997 184,211
1998 212,602
1999 253,000
2000 231,190
2001 155,000
2002 110,000 (projected)

The past few years look like Cisco router sales; it’s that bad. It gets worse. The trucking industry has been in the dumps for years. This has combined with the overhang of new trucks from the turn of the century to depress used truck values, forcing Rush to take write-downs on used truck inventory, and putting some of its customers in the position of not being able to afford to trade in. Furthermore, new EPA emissions regulations are going into effect in October. These are expected to add $3,000-$5,000 per new truck, and reduce fuel economy by 2-5% -- although Cummins, the first to gain EPA certification, claims that drivers prefer the performance of the new engine. Whatever the ultimate impact, the new standards increase uncertainty in the short term.


General

When looking at a cyclical in a downswing, we need to ask three questions:

1: Will the cycle turn?
2: Will the company be around when it does?
3: Will the company make more than at the last peak?

1: Will the cycle turn?
Yes. Trucks wear out.

2: Will Rush be around when the turn comes?

Yes. The parts and repair part of Rush’s business is counter-cyclical, and has higher margin than truck sales. This isn’t a bust-bust-bust-boom business, like, say, gold-mining; the cycle is more chug-chug-chug-boom. Rush hasn’t had a losing year in 30 years of business. Their only unprofitable quarter as a public company was Q4 2000, when they mismanaged inventory at the start of the downturn -- in their defense, the severity and speed of the slump surprised most in the industry. Rush made money last year, even with the atrocious performance of the retail division and the $1 million writedown on the disposition of the internet and catalog division.

Rush isn’t a mom-and-pop, despite the pop-and-sons management team. They had almost $800 million in revenue last year. They’ve got over a 2% market share in new truck sales, a highly fragmented industry. Supplier relationships are good. They’re responsible for 22% of new Peterbilt truck sales in the U.S. Paccar, the Peterbilt manufacturer, owns 14% of their stock. John Deere asked _them_ to take over Michigan. Peterbilt and John Deere are strong and competitive brands which won’t be going away for a while.

3: Will Rush make more than at the last peak?
Probably. I don’t know when, or if, we’ll see over 250,000 class 8 trucks registered again. On the other hand, barring economic collapse, truck-miles-driven will be going up. Rush has centers near all the major Mexican border crossings, so they’re well positioned to benefit from any increase in NAFTA-driven traffic. They’re deepening their product offerings by expanding into complementary areas, like medium-duty trucks and cranes. They have $20 million in cash, so they can make opportunistic acquisitions in a buyer’s market -- for instance, they recently acquired the assets of Perfection Equipment out of bankruptcy for 2/3’s of tangible book.
So -- maybe. If you figure that truck sales recover, they add a couple of new product lines, a few new centers, turn around the retail division, avoid deworsification, they should be able to do it. In any event, if they can come close, the idea should work out OK.

Other Stuff

A couple of knocks against Rush are that it’s a consolidator, and that it’s run like a family business. Well, they’re not _just_ a consolidator; I’d guess that they’ve opened 1/3 to 1/2 of their locations. Besides, consolidation isn’t bad in itself -- nothing wrong with picking up assets at small business valuations. The trouble starts when the consolidators start to acquire each other, or the company needs to do deals to keep its stock price up. The good news here is that Rush is run like a family business (and at least there are no super-voting shares). Rush doesn’t make deals for the sake of making deals. The internet and catalog thing was definitely a mistake, and the ranch stores sure are starting to look like that way, so Mr. Rush won’t be receiving any Mungies (Charlie Munger Asset Allocation awards) -- but you can be sure that Rush didn’t pay top dollar. In the past, Rush has looked to acquire underachievers at book plus 4-5 times earnings; they say that they’re now looking at book plus a door-prize. I’d give Rush a fighting chance in any business involving large machines, or guys who hang around large machines. If they announced that they were getting into oil-field services, I might give them the benefit of the doubt; if they announced that they were getting into Old West-themed entertainment complexes, I’d head for the exits. To sum up: Rush as a deal-maker is cheap, opportunistic, experienced, and fallible.

I believe that there are benefits to size in Rush’s business. You get branding, geographical diversification, the ability to deal with fleets, more leverage with suppliers, cheaper capital, larger inventory so you can supply the truck or part the customer wants, and so forth. Anyway, at these prices, Rush doesn’t have to be an unstoppable juggernaut, it’s good enough if they can compete against determined local entrepreneurs.

Rush’s debt-to-equity is 2.5. This is a little misleading, because about half of the debt is floor-plan financing to support inventory. Long term debt is $80 million -- higher than I’d like, but manageable.

Rush is up over 100% over the last year. I have four things to say about this: They were just coming off the loss in 4Q 2000, and no one knew how bad things were going to get; Last spring was silly season for a lot of stocks; Heck of a year for small-cap value, huh?; and finally, Relax and enjoy the momentum for a change.

Paccar, Rush’s main supplier, is hitting all-time highs. If you’re looking for a market-neutral play, you could try buying Rush and shorting PCAR.

Valuation

This write-up is deliberately light on financials, but it’s time to get down to some numbers. Rush trades at 2/3 of $11.63 book value, and about 1.25 times tangible book. I like the core business. When Rush sticks to its knitting, it’s a pretty good company, so I think it’s worth book, maybe more if you can catch it just before an upswing. Rush’s average earnings for the past four years’ boom-to-bust cycle is $1.22 per share; I could see valuing Rush at 9-10 times average earnings. If you back out the retail loss and and internet writedown, they would have made $.88 last year. Enterprise value of six times trough EBIDTA is also pretty cheap. Short term, then, Rush might get to the $10-$12 range.

Longer term, I think Rush will double or triple. Truck sales are going to come back sometime over the next 2 to 5 years (two, because it’s not happening _this_ year; five, because, well, I hope so, and a seven year down-turn seems long). If Rush can just stay out of trouble, they should be able to increase their earnings base, and make well over $2 a share.At that point, they’re going to look cheap at 7 to 10 times earnings. Growth, momentum and naive investors will be glad to pay that much.

Catalyst

Absolutely none. This is a poor-man’s Marty Whitman cyclical; just buy and wait for the cycle to turn.