I am recommending the purchase of Saia, Inc. (SAIA). Saia is an asset-based trucking company providing regional and inter-regional LTL (less-than-truckload) transportation service.  The Company has been public and independent since it was spun-off from Yellow Corporation (now YRC Worldwide) in September of 2002.  At less than $13/share, I believe the risk/reward proposition is compelling despite the fact that I really don’t like the sector or the asset-intensity of the business.

 

First, a very brief description of the business.  More detail is available at the Company’s website (www.saia.com) and through sell-side research.  The largest, and arguably most intensely competitive, segment of the trucking business is the truckload transportation (TL) segment.  TL carriers transport generally large shipments from point-to-point with no intermediate handling.  TL is as close to a perfectly competitive business as exists, particularly for major trucking lanes, with very few real barriers to entry.  The LTL segment, in contrast, entails the transport of smaller payloads (100-10,000 pounds) from shippers in different locations that are consolidated onto a single truck for transport to their various locations.  Thus, LTL carriers require networks of local pickup and delivery locations and intermediate distribution or so-called breakbulk facilities, as well as reasonably robust technology to facilitate the efficient movement of such freight.  As you might imagine, there is a big advantage in the LTL business to achieving scale in a given region (density) to maximize efficiencies and thus profitability and competitiveness.  This dynamic is leading to the ongoing consolidation of the LTL sector.  While the barriers to entry for LTL are higher than TL, LTL remains an awfully competitive space.

 

Saia is a regional and multi-regional LTL carrier serving 34 states, essentially all the regions in the U.S. except the Northeast.  The Company operates roughly 150 terminals, approximately 3400 tractors, and over 11,000 trailers with 8,200 non-union employees. Saia picks up some 24,000 shipments daily, with the average shipment weighing 1,325 pounds and traveling an average distance of 620 miles.  Summary historical financial information is set forth below as is my best guess for 2007 and 2008.

 

		2004		2005		2006		2007E		2008E
Revenue		$645.4		$754.0		$874.7		$960.0		$970.0
Adj. EBITDA		60.3		72.3		86.6		82		84
Operating Income		32.4		43.4		54.1		43		45
EPS		$0.86		$1.67		$1.74		$1.42		$1.45
FD Shares		13.9
Price		$12.25
MV		170.3
Net Debt		147.8
TEV		318.1
TEV/07 EBITDA		3.9x
P/E-07		8.6x
P/E-08		8.4x

 

 

For those of you who do not follow transportation, trucking is already in a recession as all the major freight indices have been negative for quite some time and as even the industry itself has admitted at a recent industry confab—indeed, the business has been weak since Q4 of 2006 when the normal holiday season transport peak simply failed to materialize.  The real question is how long and how deep it will be.  Of course, no one really knows, but my best guess is that there is no pickup until the second half of 2008, which is the assumption underlying my numbers above.

 

As these stormclouds have become obvious to investors, the transport segment generally, and LTL in particular, has sold off quite sharply.  In Q3, the Dow Transports were down 5.1% while the S&P 500 was up 1.6%; however, the LTL names were down  closer to 20% in Q3 and have since fallen another 10% or so.  Since Spring, the public LTL carriers (Saia, Arkansas Best, Con-way, Old Dominion, Vitran and YRC) are down by one-third.  Saia is down the most in the sector YTD, over 50% to under $13, its lowest level since Q4 2002 immediately following its spinoff from Yellow. I believe it is oversold.

 

Today, Saia is trading at a trough multiple off what I believe to be trough—or close to trough—earnings, i.e. at less than 9x 2007E and 2008E EPS, which I expect to be roughly in-line/flat year-over-year and at less than 4x EBITDA, which I also expect to be roughly flat in 2008 relative to 2007.  The LTL sector trades at an average of 11-12x EPS and 5x EBITDA.  Since the spin, Saia generally has traded at 11-12x P/E with a range of 8-17x forward EPS.  For the reasons set forth below, I do not believe these discounts are warranted.  Moreover, Saia’s stock should have (and historically has had) a floor around tangible book value, which nominally stands at about $11.25/share.  The Company has a strategy of owning its facilities in major metro markets such as Atlanta and Dallas, and approximately 45% of its capacity is owned.  Thus, tangible book consists of real estate in addition to tractors and trailers, all of which are owned.  Some of this real estate no doubt is worth more than its carrying value on Saia’s books, and although I have no idea how much additional value is there, it represents a further margin of safety.

 

Since the spinoff, Saia management has been focused on growth, both organically and through modest sized tuck-in acquisitions.  Notwithstanding this growth orientation, over the past 5-6 quarters, Saia has narrowed the gap with its piers in operating efficiency in its operations as measured by its operating ratio (“OR”), which is simply operating expenses divided by operating revenues and is a standard industry metric.  Now Saia management is focused primarily on improving operations, and it has several initiatives underway to cut costs, improve efficiencies and enhance profits even in a sluggish freight environment.  These initiatives include:  improving the optimization of its linehaul network using technology and outside professional resources; rollout of an automated dock management system as well as other technology solutions designed to automate workflow; improved labor management and scheduling; and further benefits from improving density, including extracting additional revenue synergies from recent acquisitions (i.e. capturing incremental revenue from legacy Saia territories for freight shipped into newly acquired geographic regions).

 

With the benefit of these initiatives beginning to flow in 2008 and given the inherent operating leverage in the business, I believe Saia could earn over $2/share in 2009 (assuming a more robust freight environment), which at normalized multiples provides 100% upside in 18-24 months with only 10-15% downside given tangible book value at $11.25.  I believe the biggest risk with SAIA is that the cycle is longer and deeper than I expect, which will push out value realization but should not impair the thesis over the intermediate term.