Description
Trailer Bridge is a small-cap stock that has been written up a few times on VIC, most recently by Jon64, and previously by myself among others. The stock is up about 40% since I last wrote it up, but it’s still cheap (12.5x 2007 FCF and 9.1x 2008 by my estimates), growing, there is still a lot more value to be realized, and some very interesting catalysts as we get to the second half of the year.
On the base case I believe that the stock has 50%+ upside, and if a few things go right, the stock could triple from here.
Caveat: The stock is more liquid now than it has been, but it’s still only trading around $50k - $200k per day, with spikes around earnings calls. Insiders own a lot of stock, and they seem to know what its worth – especially the CEO, because he’s still buying shares in the open market, (he has been a steady buyer for years as the stock has risen). There is no equity coverage yet though there appears to be more participation from the sell side on calls these days so that may change (Jefferies “monitors” it and covers the high yield).
Prior writeups on the site cover most of the company’s history and background. In short, TRBR is a Jones Act shipper operating in the Puerto Rico trade route. The Jones Act is a law requiring that all vessels operating between US ports be US flagged, built and crewed. The prohibitive cost of newbuild self-propelled ships from US yards acts as a barrier to entry for new US competitors. Puerto Rico’s market is an oligopoly with 4 operators – HRZ and Seastar operate self propelled ships and TRBR and Crowley operate barges. Barges are the lowest cost method of transport. Rates are rising in the market, and have been since a few years ago when a fifth competitor folded and its ships were scrapped. TRBR is the low cost provider (barges are slower but much cheaper than ships) and has spare unutilized capacity (only 4 of 7 barges currently in service, but that is about to increase).
Let’s spin back to last year when TRBR hit a rough patch:
- The company’s drydocking of a couple of its barges ran way over budget - $12.5MM total. TRBR had been in distress early in the decade and they had deferred some capex. This time they caught up and then some, at a time when steel, labor costs etc were way up. TRBR expects costs at the next overhaul (5 years away) to be a LOT lower with better planning and without all the catchup costs – we estimate $5mm or less at current prices. In addition, TRBR was forced to expense all of the costs as incurred, unlike their competitors who are allowed to capitalize the costs and amortize them over a longer period. Earnings were clobbered, naturally.
- Sears and Kmart merged, and the Kmart business was transferred to Crowley, who had the Sears account. This was a big hit for TRBR.
- The Puerto Rico economy stalled, slowing demand
- There was a Puerto Rico government shutdown for part of the year (since resolved) which also hit consumer demand (the public sector is a huge employer in PR).
- Business slowed for several of TRBR’s customers - auto importers and others. Southbound utilization (the bulk of all traffic) fell to around 80% from the high 90s.
So why is the stock up, and what’s the reason to be optimistic?
- The drydockings are over, have been fully expensed, won’t recur for 5 years (and will be a fraction of the cost next time around).
- Government shutdown is resolved
- Solid earnings in Q1 – seasonally the weakest of the year - despite a still-depressed southbound capacity factor (80.3%)
- Southbound rates continue to increase but are still below the levels seen in the mid 1990s
- TRBR has won 2 major new contracts (as well as a few minor ones): Ford, which kicks in Q2, and the US military, which after a few teething issues should kick in Q3, helping to boost capacity factors. Marginal contributions of the extra cargo are huge in this business (the barge is sailing anyway).
- TRBR has signed a deal with Pacer Stacktrain. The companies “have exclusively teamed up to move 53-foot domestic shipping containers on an integrated, intermodal basis between the United States and Puerto Rico for customers of both companies.” This is significant for two reasons
- Incremental source of cargo for TRBR
- TRBR is equipped to handle 53’ containers where their peers are still on 40’ meaning that cargo has to be unboxed and reloaded. This represents a savings in time and cost for cargoes coming from the West Coast, and these cost savings may help them to win over new accounts.
· Zero future taxes (almost). TRBR has elected for tonnage tax treatment – taxes will be less than 1% going forward. This is a little known goodie that president Bush has made available for US shippers. Per their Q1 release: “Trailer Bridge intends to make a tonnage tax election for 2007 that it believes will result in a significant and permanent reduction in the Company's effective federal tax rate. The Company's effective federal tax rate during the first quarter of 2007 was less than 1%. Trailer Bridge anticipates that its effective tax rate on a run rate basis will be less than 1% going forward.” And on top of that, the company still had unused NOLs anyway…
· TRBR has announced that they are finally deploying one of their three extra barges in Q3 of this year. The company will be launching a service to the Dominican Republic via Puerto Rico. While the service will probably operate at around breakeven initially, we believe that it should be nicely profitable in 2008, and will give an extra sailing to Puerto Rico, making TRBR a more attractive option for shippers there too. As the book of business in DR builds, we expect to see a second barge put into service on this route.
Add it all up, and what do you have?
I will ignore the DR business for now, and focus on the existing business.
· Rates up, Volumes up. We foresee capacity factors creeping back up toward the 90% range this year as the military and Ford contracts come on line, the Pacer Stacktrain deal starts to kick in and we move into the busier Q2-4 (Q4 is the peak). We expect another increase in 2008 as we get a full year of these deals, plus a few new deals from the pipeline. Add in the 1-2% increase in overall volumes in Puerto Rico (some improvement in the outlook for the PR economy would be a bonus). Rates look likely to continue increasing this year in PR.
· Taxes go to 1%
Estimates and Projections:
Here are the last 2 years and my estimates for the next two, all pro forma no taxes for comparison. Please note that these estimates are for the current “core” business, and do not include anything for the revenues or costs of the new service starting later this year, and the 2006 FCF dip is due to the $12.5MM drydocking expenses discussed above:
|
|
2005 |
2006 |
2007E |
2008E |
|
Total Revenues |
105.9 |
110.2 |
119.5 |
126.5 |
|
Utilization (south) |
89% |
87% |
87% |
91% |
|
EBITDA |
23.2 |
10.0 |
27.7 |
31.3 |
|
D&A |
4.4 |
5.3 |
5.5 |
5.5 |
|
Interest |
(10.5) |
(10.2) |
(10.5) |
(10.3) |
|
Capex |
(6.1) |
(3.6) |
(5.4) |
(4.7) |
|
Taxes |
n/a |
n/a |
n/a |
n/a |
|
FCF |
6.55 |
(3.87) |
11.82 |
16.23 |
The market cap of TRBR is just under $150 MM (12.3MM shares x $12.05 each).
The company has about $10MM of cash (the interest charges above are purely for debt service, I have stripped out interest received).
At these estimates, TRBR is trading at 12.5x 2007 and 9.1x 2008 FCF, with FCF growth estimated in the mid teens. That doesn’t give credit for the $0.80 of cash per share.
Maintenance Capex is lower than D&A – I used $4mm as an estimate, though the company will tell you that they believe it is lower. Higher capex in recent years has been opportunistic buys of tractors, containers etc. I think they can continue to grow FCF in the teens from there (the incremental contribution of an extra piece of cargo is very high, given the largely fixed-cost nature of the business). Ultimately I would expect utilization to creep back up to the mid to high 90s (it was 96.5% in 2004) and rates to continue to increase at rates above GDP. None of the incumbents compete on price, and I don’t expect them to start – they remember how the early 2000s felt. TRBR is the lowest priced, lowest cost and most efficient operator, so they have room to raise prices and their peers will have to remain profitable.
I think that given the solid growth, 15x 2008 FCF is entirely reasonable for the existing business. That would get you to $243mm of value, or $19.80 per share.
Bonus:
On top of all this you have the option that the new Puerto Rico / Dominican republic business actually takes off. There will be some upfront capex associated with buying new containers etc, which will probably be financed with a mixture of cash and debt. The business should break even at relatively low capacity utilization given that they already have the Florida and PR facilities that they need, and the barges are ready to go.
The business leverages existing facilities and overhead, and if the DR business eventually gets to where the PR business is, I would expect a barge to contribute around 6mm of EBITDA (conservatively less than the expected per barge number for the existing fleet). How do I get there? Well – TRBR has 2 types of barges: 5 with a capacity of 281 53’ containers and 2 with capacity for 405 53’ units. The ones in PR service are 2 of each type. So, crudely taking 31mm of estimated 2008 EBITDA for the 4 in service, running an EBITDA/container and then grossing up for 281 on one of the spare units gets you to $6.4mm (at a similar 90% utilization). In fact, leveraging corporate overhead and so forth it might be higher, but DR costs and revenues may differ. $6.4mm is a decent first order approximation.
If all 3 barges enter service, that’s $19.5mm of EBITDA (to be clear, we’re talking a few years for all 3 to enter and get to high utilization). The company guesses around $17MM of investment in equipment (extra tractors, chassis so forth) for the first barge in service, probably less for the next two, but we’ll use it for all 3. Finance that at 8%, $1.4MM interest. Lets say $1mm incremental capex. The FCF contribution would then be 6.4-1.4-1 = $4MM per barge in service. For all 3, that’s a bit over $12MM potentially. At 15x, that’s another $180MM potentially, or $15 of value.
Add it all up, and you have $20 on the existing business with growth, and a free option on another $15 of value creation starting Q3 and developing the next few years. All yours for $12.05….
Oh and by the way, if relations with Cuba ever normalize, TRBR is pretty well positioned for that too, but that’s a long dated option…
And finally, who could end any writeup in this market without suggesting that the company would be a buyout target? I don’t bank on it, but the synergies for TRBR with one of the other PR liner firms would be significant (asset utilization, labor, overhead, facilities etc.) and could justify ultimate values as high as $40.
Risks:
- Further deterioration in PR economy. Seems like it should get better, especially if you take a longer term view, but in the short term, anything can happen (witness last year with the government shutdown)
- Lumpy business. Contract wins and losses will happen (eg: Kmart) but barring further mergers etc. I see TRBR winning more than they lose
- Increasing costs – TRBR is the most fuel efficient, greenest, and lowest cost provider. The other players are rational. I expect that costs will continue to be passed through as they have been the last few years
- Liquidity – its improving as the stock rises, but this is still a relatively low volume stock between news events and earnings calls. That leads to volatility in the name. That said, you have tons of valuation support and a lot of upside.
- Possible failure of the DR initiative. I think the DR business will break even at low levels of capacity utilization, and should help win incremental business in PR too. Worst comes to the worst, they can shut it down, but I don’t think this decision was lightly made, and I expect them to breakeven by the start of 2008.
Catalyst
Roll on of Ford volumes
Start of the military contracts
Startup of the DR business, potential addition of another (currently idle) vessel in 2008/9
Seasonal volume increases Q2-4 (Q4 is the peak).
Potential initiation of coverage (low probability)