UNIVERSAL LOGISTICS HLDGS ULH
April 05, 2021 - 11:47am EST by
zzz007
2021 2022
Price: 27.00 EPS 3.18 3.60
Shares Out. (in M): 27 P/E 8.50 7.5
Market Cap (in $M): 726 P/FCF 12 8
Net Debt (in $M): 451 EBIT 145 155
TEV (in $M): 1,177 TEV/EBIT 8.1 7.5

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  • COMPELLING VALUE LONG
  • secular tailwinds
  • Regulatory Tailwinds
 

Description

Universal Logistics Holdings, Inc. (ULH)

 

 Overview

  • Universal Logistics Holdings, Inc. (“ULH” or the “Company”) is a diversified trucking/logistics business with a demonstrated history of consistent profitability through a range of business environments. The Company is experiencing strong macro (and pricing) tailwinds. The Company is underfollowed, with only one sell-side broker covering and little/no mention on any investment-oriented websites. Shares trade at a meaningful discount to comps. The primary risk is potential conflicts of interest due to family control; however, these issues appear manageable.

 Business

  • Diversified trucking and logistics provider
  • Auto represents ~30% of revenues
  • Top 10 customers ~40% of revenues
  • Segments (% of 2021E revs)
    • Contract Logistics (36% revs)
      • Logistics (25% revs): in-plant or offsite management of customer inventory and materials handling; sequencing and sub-assembly; packing; container management; 5-10yr contracts; high renewal rates; 58 active programs @ 119 locations
      • Dedicated (11% revs): committed transportation capacity and yard management; 840 tractors
    • Intermodal (29% revs): drayage, storage, maintenance/repair; primarily short-to-medium distance delivery of containers between port/railhead/customer; 45+ terminals, 12 container yards, 1,930 tractors
    • Truckload (23% revs): transport services incl dry van, flatbed, refrigerated, and specialized; 1,270 tractors; 306 agent and Company terminals
    • Brokerage (13% revs): freight brokerage using 3rd party transportation services, freight forwarding, customs brokerage management

 Thesis

  • Respectable historical financial performance; particularly for a cyclical
    • Low double digit EBITDA margins
    • 20%+ ROEs
    • Consistent cash flow generation
      • Has remained consistently profitable through a wide range of business environments
      • Mix of owned and outsourced capacity provides meaningful flexibility in cost base
      • In past 20 years the Company has only been FCF negative in a single year; in that year (2016) the Company generated meaningful operating cash flow and was only FCF negative due to much higher than usual capex
    • Despite meaningful exposure to auto vertical; made money w/SAAR @ 9mm annualized (vs 17-18mm annualized today)
  • Improving mix of business
    • Successful record of historical M&A activity has increased the Company’s exposure to higher margin value-added business lines (i.e. logistics)
    • Management is transitioning away from 3rd party brokerage; this shift will be margin accretive as 3rd party brokerage is a margin outlier with 1-3% target margins vs 6-12% for the non-brokerage businesses
    • Auto sector exposure has been reduced from 40% (2017) to 30% currently

 

 

  • Meaningful macro and pricing tailwinds
    • Management has commented that business prospects for all its segments are either stable or improving, the first time in its history that none of its segments has faced a deteriorating environment
    • Cyclical tailwinds from rising economic activity and demand due to post-COVID reopening
    • Secular transportation tailwinds from increasing e-commerce; work-from home demand
    • Tailwinds have been driving consistent shipping spot rate strength
    • Driver shortage should be supportive of strong rate environment
      • 45,000 drivers were suspended from the workforce nationally due to launch of new Commercial Driver’s License (CDL) Drug & Alcohol Clearinghouse; 34,000 did not complete return-to-work program (0.7% of NA driver pool)
      • Driver schools have been operating at half capacity for a year now due to COVID; this has emptied the new driver pipeline
      • Speculation that driver shortages may be structural and long-lasting
  • Potential Moroun family conflicts of interest appear manageable, economic incentives should help keep family aligned with minority shareholders
    • See “Risks” section below for detail on family’s holdings
    • Family’s ULH equity stake is worth ~$500mm, roughly double its stake in PTSI
    • Estimated family net worth of ~$1.6bn; ULH stake meaningful in context of overall net worth
    • Company’s healthy EBITDA margins vis-à-vis competitors gives some comfort that related parties are not overcharging ULH for services
  • Very limited sell-side coverage; Stifel only covering broker; likely a meaningful contributor to valuation disparity with comps
  • Valuation is an order of magnitude cheaper than competitors
    • 5x EBITDA vs 10x for trucking comps, 12.5x for logistics comps
    • 7-8x P/E vs 20x for trucking comps, 22x for logistics comps
    • This valuation disparity is despite the Company having a better business mix than many of the comps (i.e. strong contribution from logistics, whereas many of the comps are pure trucking companies)

Upside/Downside

 

 Risks

  • Family-controlled; questionable incentives; related party transactions
    • Moroun family controls ~70% of shares outstanding
    • Holding is part of larger transportation-centric investment portfolio; risk of conflict between various holdings
      • 65% of P.A.M. Transportation Services (PTSI); provider of truckload dry van services
      • DIBC Holdings; owner of Ambassador Bridge between Detroit and Windsor, Ontario
      • Central Transport (closely held); LTL truckload carrier; ~$850mm revs; 200 customer service centers; facilities in 45 states
  • Family’s private diversified holding company, CenTra, provides services to Universal
    • Admin support services (legal, human resources, tax, IT); $3mm billed to ULH in 2020
    • Facilities; $13mm rent billed to ULH in 2020
    • Insurance and employee benefit plans; $47mm billed to ULH in 2020
  • Manuel Moroun, family scion, is recently deceased (2020); had reputation for very sharp elbows in Detroit business community; once sued by two sisters alleging he cheated them ou of their inheritance (later reconciled)
  • Added 19-year old family member (college student) to Company’s board of directors (replaced the retiring family scion)
  • Cyclical + modest (2x) leverage
  • Strong Class 8 orders in recent past (have been running at 2x replacement rate for several months); rising Class 8 orders are often a precursor to shipping rates declines
  • Driver training pipeline refills as COVID comes under control

 

Disclaimer: The author's fund had a position in this security at the time of posting and may trade in and out of this position without informing the VIC community.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Increased market recognition of value disparity w/comps, continued earnings growth/upgrades, growth to value rotation beneficiary

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