Description

Universal Logistics Holdings (ULH) is an asset-light provider of logistics and transportation solutions, primarily in North America. Despite risks due to family control, limited float, and industry/customer concentration, I believe the name has 50% or more upside to fair value.

zzz007 wrote up ULH in April of 2021 and closed the position in June of 2022 after the stock dropped almost 40% and then roundtripped back to roughly flat. Much of what zzz007 wrote in his pitch stands today, though the stock is up 50% from his writeup. The valuation gap with peers persists, with ULH trading at ~9x forward earnings, and its peers trading around 23x for logistics, and 27x for transportation companies, despite ULH’s better earnings growth, lower leverage, better margins, and better ROICs/ROEs.

ULH’s valuation is likely impacted by the fact that it is a controlled company, with the Moroun family owning approximately 73% of the common shares, as well as by the company’s concentration in the auto industry (~40% of annual revenues, with 20% of total revs from GM), and by its limited coverage on the street. 

From actual fundamental performance metrics (see comps below), as well as from my qualitative read of the transcripts, I believe the control discount is likely a source of opportunity in the valuation, more than risk, as it appears the company has been well-run over the years.

Background:

ULH operates four segments, contract logistics, intermodal, trucking, and brokerage. Contract logistics is the primary driver of value, and the other segments are more exposed to cyclical and highly competitive markets. 

Contract logistics:

This is the crown jewel of the company. The segment delivers value-added transportation services to support the in-bound logistics of OEMs and major retailers on multi-year, high retention-rate contracts. The company’s strategy is to embed its operations onsite and within its customers’ plants, where it offers services like sequencing and sub-assembly of parts, material handling, kitting and repacking, and container return management, and yard management. The company currently manages 68 value-added programs with its customers, and Q2 marked the 10th straight quarter of operating ratios below 90%. This is the backbone of the company, and management is confident that strength in the segment will continue.

Intermodal:

The company’s intermodal business operates a national drayage network across America, where it stores and moves containerized cargo over short distances. This segment has been struggling with both volume and rate declines, however, the company is pushing through cost cutting measures and reported seeing early signs of improvement toward the end of Q2. The CEO commented, “While it is too soon to say if we have turned the corner, we have seen some improvement and reasons for optimism. Our intermodal segment had its best results for the year in the final month of Q2, showing our cost-cutting measures are beginning to bear fruit, and we are seeing our highest truck productivity in several quarters.”

Trucking:

ULH’s trucking segment manages a fleet of trucks (both owner-operated and company-owned) and a network of agents to provide transportation for materials like steel, oil and gas, specialty industrial goods (particularly wind), and retail goods. While not as strong as the contract logistics segment, trucking has been holding its own in a tough freight market with fairly consistent margins. In Q2 the CEO commented “Trucking segment results were bolstered by an uptick in our specialized, heavy-haul wind business. We expect this to continue throughout the rest of the year, as we have a full pipeline… [and] for years to come, allowing solid trucking segment performance sheltered from the fluctuations in [the] broader truckload market.”

Brokerage:

The brokerage business coordinates a nationwide network of broker carriers to fulfill transportation needs for customers in retail goods, steel and metals, and industrial markets. This has been the weakest segment for the company, with margins slipping into negative territory in 2023 and worsening so far in 2024, in part due to overcapacity in the market which has put significant pressure on rates. The company is forthright that the segment is not meeting their profitability expectations, and they are taking action on it. In Q2, the CEO said “we are taking a proactive approach in evaluating the brokerage business, looking to rightsize the business as soon as possible and look to cut costs where possible to improve efficiencies and return to profitability. M&A remains a key part of our strategy.”

Performance trends:

Over the last few years, contract logistics has grown and carried the company as its other segments have battled through an extremely tough freight cycle. 

The trends are evident in this table of segment revenue and op income over the last 3+ years:

And year to date in 2024, contract logistics has contributed 60% of revenue, up from 50% last year, and essentially all of operating income. Trucking also contributed, but intermodal and brokerage have had losses. Despite the challenges in those two segments (the CEO called it the worst freight and transportation market he had ever experienced), total revenue and operating income have grown double digits both quarters, and the first quarter generated the best margins and EPS in the company’s history, and the second quarter was the second best on revenue, op margin, and EPS for any Q2 in the company’s history. 

The company is not sitting idly by as intermodal and brokerage suffer, but is committed to returning those segments to profitability, even if volumes don’t recover. In the Q1 call, the CEO said, “We are not dependent on an upswing in volumes to return the business segment back in the black. We are actively implementing new operational plans for our transportation segments, specifically the intermodal and brokerage segments. We have brought in new leadership and talent with a vast wealth of experience. We are evaluating our processes to identify any possible efficiencies and to control the costs we are able to manage. We remain hyper focused on optimizing the utilization of our assets.” 

In addition to strengthening these weaker segments so they can operate profitably even at cyclical lows, the company seeks to further diversify its portfolio through M&A. Hence, through both internal and external measures the company has the potential to outperform during a when this cycle turns.

Freight market cycle:

On the topic of cycles, we may be near the end of this prolonged down cycle. In Q1 the CEO said, “Although we haven't seen the start of the turnaround, we believe we are at the bottom of the cycle.” Coyote Logistics, in their most recent market update said, “The Q3 numbers are in — we have crossed the threshold and entered into an inflationary market… With the close of Q2 came the close of the fifth truckload market cycle in our observed history and the start of the sixth.” They noted that this cycle was tied for the longest, at 17 quarters, and had the highest peak and lowest trough. Tempering Coyote’s report are ULH’s comments on the brokerage market in Q2, that “some experts do not expect it to recover until excess capacities come out of the market sometime in 2026.”

While it remains to be seen if Coyote’s cycle timing call is correct, their data do suggest we’re closer to the end than the beginning.

If ULH can perform as well as it has during one of the longest and toughest transportation cycles, and succeeds in improving its trough-level performance to satisfactory levels for its weakest segments, it should be very well positioned when cyclical conditions do improve. 

Valuation:

Despite better fundamental metrics on most measures than its peers, ULH trades at significant discount. ULH has 3x the EBIT margins, is less levered, has higher trailing and projected EPS CAGRs, and substantially higher ROICs and ROEs than its peers across both trucking and logistics. Yet those peers trade at 150-200% premiums on the forward PEs for trucking companies, and 150-170% premiums on forward PEs for logistics companies.

I agree there are reasons to discount the company given the inability for external shareholders to influence decisions and given the heavy customer and industry concentration, but I don’t think it’s worth this much of a discount. 

All its peers trade at a premium to the market despite mostly worse fundamentals to the market. On the other hand, ULH has trailing earnings CAGRS beating the market for 3, 5, and 10-year time periods (24%, 31%, and 13%, using estimated 2024 full-year earnings as the end period), and is expected to continue outgrowing the market (though 2025 is likely to be somewhat lower than 2024 with the roll-off of a windfall program this year).

I’m not proposing that ULH should trade as high as its peers or the market’s current valuation, but I think with market-beating earnings history and prospects, solid returns on capital, and reasonable leverage, it could earn the market’s historical ~16x forward earnings. That would represent over 70% upside to fair value, which gives some margin of error for my view that it has 50%+ upside.

Catalyst

• Fixing its intermodal and brokerage businesses and returning them to profitability. -- The company is focused on this. 
• Freight cycle improving. -- There are signs this may occur within the next year or so. 
• M&A which further diversifies the company. -- The company is actively seeking targets.