Description

Wabash National (NYSE: WNC)

Industry Leader Exposed to Inflecting Trailer Market, Market Disrupting Technology and Last-Mile E-Commerce Delivery with Multi-Year Runway for Market Share and Earnings Growth.

• Wabash National (WNC) is the class 8 trailer market share leader and is set to benefit from a multi-year elongated cycle that a significant number of market participants have bet against in the near-term.

• We have performed extensive fleet and dealer checks which indicate WNC’s legacy trailer business will be up 10%-20% in 2018. Expectations are for it to be flat to down.
  - New, innovative products will be introduced in the market during 2018, driving significant market share gains over the next 2-5 years, similar to the introduction of DuraPlate in 1996.

• The recent acquisition of Supreme Industries diversifies Wabash away from legacy class 8 trailer market into the high-growth medium duty 2-5 market that serves last-mile e-commerce delivery.

• Consensus estimates for 2018 and 2019 are very low, at $1.65 in 2018 and $1.62 in 2019, respectively. We believe the company will deliver $2.20-$2.30 in EPS during 2018, and $2.50+ in 2019.

• Short interest is at an all-time high (30% of the float), and structural buying due to the repurchase of May 2018 convertible notes are all likely to result in WNC stock trading significantly higher over the next six months.
  
  Wabash was founded in 1985 by a small group of entrepreneurs who began manufacturing Class-8 dry van trailers in Lafayette, Indiana.  They started by building five trailers a day and eventually levered customer centric innovation to become the largest manufacturer of Class 8 trailers in the United States with about a 21% market share today.  The dry van trailer market is very cyclical and Wabash has taken steps over the last several years to diversify its business by adding tank trailers, composites, mobile clean rooms and now with the acquisition of Supreme, medium duty truck bodies.
  
  The current set-up for Wabash National (WNC) is one of the best risk/reward opportunities we see over the next three to six months. The company is positioned to benefit from record trucking profits over the next two years due to increased economic activity tightening capacity as a result of the hurricanes and the ELD mandate. We believe Wabash will also see significant benefits from the introduction of its new molded structural composite trailers and truck bodies that will enable the company to take share from competitors in the expanding market. The recent acquisition and integration of Supreme Industries will further diversify Wabash into the medium duty truck body market and expose the company to the high-growth last-mile e-commerce delivery trend. In addition to these fundamental tailwinds, Wabash is currently a full boat tax payer and will see benefits not only from a lower corporate rate, but also from any demand increase due to the expensing of capital expenses in 2018. Importantly, the market is caught on the wrong-side of the boat in a big way, with an all-time high short interest of 30% betting the trailer market will turn down in 2018. With the stock trading at <9x 2018 and 2019 EPS, and consensus estimates 35% too low, we see the potential for substantial and quick stock price appreciation over the next three to six months as the fundamental picture becomes clearer and shorts are forced to cover. Our near-term price target for Wabash is $30 per share, representing nearly 50% upside over the next six months.
  
  1) The Trailer Market
  
  The largest percentage of Wabash National’s revenue and profit is derived from dry and refrigerated trailers. The Commercial Trailer Product segment generates roughly 65% of the total company revenue, and is driven primarily by investments made by large and national trucking fleets. These investments are driven by the underlying profitability of the trucking business.  In 2015, carrier profits came under pressure and orders for trailers followed suit in 2016.  This year and next, carriers will see accelerating profitability.
   
  
  
  Three primary factors will enable truckers to generate record profits in 2018 and 2019. These factors are: increased economic activity, the tightness in the market created by the recent hurricanes and the approaching hard-deadline for the ELD mandate.  
  
  Carrier demand is driven in large part by increased industrial production.  You can see from the chart below that industrial production peaked in late 2014 as the US went through a mild industrial recession with the slowdown in energy.  Trailer demand peaked soon thereafter in 2015 and fell about 7% in 2016.  However, as industrial production has reaccelerated so too have trailer orders this year.
  
  
  
  In addition, the tightness caused by improved economic conditions and the hurricanes have had a pronounced effect on both supply and demand for freight. With respect to supply, the total number of freight loads fell by 10% nationally and 72% out of Houston directly after Harvey.  Houston is the fourth largest city in the US and is an important freight hub for reefers and dry vans.  From a demand standpoint, a large number of truck shipments are needed for ongoing construction projects to rebuild Houston post-Harvey.  Hurricane recovery efforts have increased freight demand, by pulling trucks out of their normal cycle. According to John Larkin, managing director of Steifel’s  Transportation capital research, “these storms which attacked South Texas and Florida really have created a severe tightening of supply and demand [and] may have accelerated the tightening of supply and demand about six months.” “[But] here we are; there aren’t enough trucks, turned-down loads are way up, spot rates are astronomical in some parts of the country, [and] trucks are flocking to the high rates – which [is] leaving other parts of the country with too few trucks.”
  
  
  
  
  On December 18th the Federal Motor Carrier Safety Administration further intensified market tightness when it began enforcement of the Electronic Logging Device rule that requires truckers to maintain an electronic log of the number of diving hours they book to insure compliance with Federal driving time limitation rules. These electronic logs are necessary because many truckers have historically been guilty of cheating on their paper logs. Based on our channel checks with numerous trucking companies, the ELD mandate will remove between 3%-6% of overall trucking capacity in 2018 and 2019. The impact will be most acutely felt by the smaller operators who are inadequately prepared for the new mandates compared to larger carriers who have already adopted ELDs for their fleets. This reduction in capacity, in conjunction with an expanding economy, will likely improve trucking rates by 5%-12% in 2018. Based on our discussions, it appears shippers are scrambling to lock-up capacity, which is driving up rates. The increase in rates will likely last into 2019, as there is no quick fix for that size of capacity reduction and driver shortage. The increased rates will, net of an increase in some costs, flow to the truckers’ bottom-line and allow them to generate record profits. Our checks indicate that the most likely use of this increased profitability is an investment back into the fleets, i.e., new truck and trailer orders. As most fleets are unwilling to buy used trailers, the increased level of spending will be a large benefit to Wabash National.
  
  The chart below illustrates that current capacity utilization for class-8 trucks is at an all time high. We suspect that this is the result of the trifecta described above and that it strongly supports the need for new trailers to increase efficiency.  Additional trailers can increase driver efficiency through drop and hook which allows a driver to drop one load with a shipper and immediately hook up to a new load without taking the time to unload the trailer the trucker was pulling.   Because the average dry van costs about $25 thousand dollars, we believe many carriers and shippers are looking to improve efficiencies through adding additional trailers to take advantage of drop and hook.
  
  Our thesis is backed up by our extensive dealer checks. We have spoken with nearly a dozen of the largest regional Wabash dealers, and on average the respondents indicated that they believed orders would be up 10% – 20%  in 2018. This is also backed-up by looking at the most recent industry data, which shows that TTM net trailer order growth is north of 30% as we end 2017 (see charts below).  Moreover, the OTR Global report which also indicates 2018 strength. Of the four Wabash dealers surveyed by OTR, one expects orders to be up 11%-15% y/y, two expect orders to be up 6%-10%, and one is expecting flat y/y in 2018. These forecasts compare to the consensus expecting legacy Wabash revenue to be flat to down in 2018. The bottom line is that we believe the trucking and trailer markets are very strong, and much better than the market is currently anticipating.
  
  
  
  The resurgence in the trailer market can also be seen in Wabash’s backlog trend. The company’s backlog, which historically has been a leading indicator for revenue growth, was up on a year-over-year basis for the first time since 4Q15. We believe this is a harbinger of positive organic growth in the coming quarters.

We also note that the two most recent reads on current trailer demand, from October and November, have exceeded expectations. This is important because a) these data points came after the most recent conference call, and b) management indicated on the third quarter call that any upward trailer demand revisions could “put upward bias on projections”. This following quote is from the 3Q17 conference call:

“If demand comes in at the levels that it's come in this year, it will be very similar to what FTR is suggesting for next year. That's very strong and that could put upward bias on projections and that's why we've left a lighter range at this early stage. We'll get more clarity as we proceed forward obviously next quarter and as we go through the year.”

Notably the October and November data were very strong, and above expectations. October trailer orders were up 51% y/y, while the November data was up 19% y/y and lapping a difficult comparison. We believe these data points are strong enough to result in upward revisions to 2018 guidance when management gives an updated outlook concurrent with the 4Q17 results.

2) Supreme Acquisition

In late September of 2017, Wabash purchased Supreme Industries (STS), the number two manufacturer of medium duty truck bodies in the US for $342M.  Wabash has projected that the transaction will be accretive in 2018 and generate $20 million in annual cost synergies and $10-20 million in revenue synergies by 2021.  The acquisition will also result in decreasing the cyclicality of Wabash and reducing its exposure to the dry van market to 50% of sales.




The acquisition is strategically complimentary in several ways, but most importantly it provides Wabash with the ability to leverage the technology it has developed for the Class 8 dry van market into the higher-growth last-mile medium duty truck market which is being driven by the expansion of e-commerce. Last-mile ecommerce delivery is projected to grow at 12% per year or 3x the rate of GDP due to e-commerce growth.  This represents a $2B+ market opportunity for Wabash.


Under new leadership and with Wabash’s best in class technology, Supreme is positioned well to gain market share in the high-growth segment.  Wabash’s molded composite technology (see below) can be used in Supreme’s final mile reefer trucks for the delivery of fresh and frozen food goods.

Another fundamental tailwind for Supreme is that one of its largest customers, Ryder, has significantly under-spent relative to its maintenance cap-ex to the tune of $400M over the lasttwo years, and that 2018 would be a catch-up year. We believe that Supreme will be a direct beneficiary of this catch-up spending.  

The financial benefits of the transaction are also clear, as it was well known Supreme was not run as efficiently as other players in the industry. That said, Supreme generated gross margins of 21%, 500bps higher than legacy Wabash, which creates an opportunity to realize substantial synergies during integration. Cost synergies alone should add 10% to EPS over the next two years. The last-mile segment is growing rapidly, and should Supreme gain the market share we believe it is capable of, look no further than Spartan Motors to get a sense for what the impact can be on the stock price.  Spartan is the owner of the medium duty truck body brand Utilimaster and based in large part on the market’s excitement for final mile growth, Spartan’s stock has risen from about eight dollars a share in early 2017 to over $17 per share today. The difference is that Spartan recently held an investor day and attended seven conferences this year and Wabash’s conservative midwestern management has attended none.

3) New Technology = Market Share Gain
Wabash is the technology leader in the industry, and its products are well regarded for both their durability and their quality. When people in the industry want to buy quality, they buy Wabash. As a testament to the quality of the product Wabash offers a 10-year warranty on its trailers, whereas Hyundai (the low-cost option) provides a five-year warranty. Wabash’s legacy of innovation goes back to the 1980’s when the company first began developing its patented DuraPlate technology. Wabash was able to more than double its market share with the commercial introduction of DuraPlate in 1996, as seen below.




We believe that Wabash is currently at a similar stage as it was in 1996, as the company is on the verge of rolling out its most innovative product since DuraPlate,. The product is called Molded Structural Composite (“MSC”), which recently won the 2017 CAMX Award for Unsurpassed Innovation. The MSC product has been under development since 2013 for use in refrigerated solutions for both the trailer and medium duty truck body market. The MSC project has been championed by Brent Yeagy (age 46), Wabash’s COO who is to take over the CEO role from Richard Giromini (age 64) in June of 2018. Yeagy has been the public face of the MSC project and it is likely to be a key focus of the company going forward.
In the beginning of 2017, the company purchased a composite manufacturing facility in Little Falls, MN for $3M.  The facility had previously been used as a composite boat factory, and its prior owners spent nearly $100M on the plant’s infrastructure. Management told us that most of the legacy infrastructure can be used for the manufacture of MSC panels. In addition to the $3M purchase price, Wabash spent another $7M on the facilities to support the initial launch of the MSC product.
The first of its kind, the product has been met with a welcome reception and already has partners signed up to utilize the technology, including large truckers such as Werner, Leonard’s Express, Combined Transport and K&B. The MSC reefer trailer improves thermal efficiency by up to 25%, reduces weight in the truck body by up to 20%, and doubles the puncture resistance by up to 2x. In addition, the company indicates that using molded structural composites for the floor system means the trailer can handle more weight – up to 24,000 pounds – compared to conventional refrigerated vans that are rated for up to 16,000 pounds. In a recent interview Wabash COO Brent Yeagly observed, “With its hybrid floor, our new refrigerated van can be used for both refrigerated and dry loads. That feature promises to improve profits for shippers as a result of increased backhaul opportunities, which is the ability to carry goods on a return trip.”
There is also demand for the MSC technology arising out regulatory change. The FDA’s Final Rule on Sanitary Transportation of Human and Animal Food went effective this summer and requires much more stringent van cleaning and temperature monitoring which is likely to increase the cost of reefer transit and thereby make the efficiencies of the new Wabash MSC trailer even more important.  Brock Ackerman, owner of K&B Transportation one of the four “launch fleets” for the new trailer, told Fleet Owner magazine that a key feature of this new design for food haulers like him is its smooth interior wall. “That smooth wall means there are few areas where bacteria can get into and ‘hide’ within the trailer,” he explained. “With the new FDA food safety rules coming out, that’s a big plus.”

We believe that these economic savings are compelling, especially for the reefer (refrigerated) trailers, and will allow the company to gain significant market share. Wabash began deploying 100 field trial units in 2017, and will likely be rolling fully commercialized product off the line in late 2018. In addition to the positive revenue impact we anticipate from gaining reefer market share, it should be noted that reefer’s are typically 50% more expensive than dry trailers, and carry a higher gross margin. Wabash is currently the #3 reefer player in the industry, selling 4,900 units in 2016. The compares to the #1 player, Utility, who sold 25,000 units.  This opportunity could represent an incremental $700M in sales, a 40% increase, over the next three to five years.

Perhaps the most disruptive acquisition of 2017 was Amazon’s acquisition of Wholefoods. In the summer of 2017, Amazon also started to accept food stamps under SNAP. Amazon’s push into grocery makes sense. According to data from eMarketer.com, since 2014, the percentage of shoppers willing to try on-line grocery shopping has gone from 4% to 31%.  Tom Albrecht, the CFO and Chief Strategy Officer at Celadon Group recently said in an interview with Freight Waves magazine that “in the next 5 years as Amazon conquers food delivery (or online grocery), this will lead to more freight density for their entire network, both food and non-food.”  We believe that Amazon’s focus on grocery will cause last mile refrigerated delivery to be the next mega-trend in transport.  

The final mile refrigerated mega trend is a huge opportunity for synergies between Wabash and Supreme as Wabash can leverage its MSC technology by selling into Supreme’s distribution network. Wabash has already created a medium duty truck body using the MSC technology and it is likely to be able to achieve much more rapid market acceptance with Supreme’s foot print and salesforce.  

4) Consensus Revenue Numbers are Very Low
One of the most compelling aspects to the Wabash story right now is that consensus numbers are very low. Over the past two weeks we have either visited or spoken with nearly a dozen of the largest Wabash dealers in the country. The one consistent theme from our conversations is that demand has picked up considerably in the past two to three months. On average dealers are expecting a 10%-20% increase in trailer demand in 2018. One dealer, the largest in the Southwest, indicated his order for 2018 was a large as his entire business in 2017, yet he only expected the supply to last him six months.
The checks are important because this increase in demand is not reflected by consensus expectations. Currently consensus expectations are forecasting 0% organic growth for the legacy Wabash business. Based on our channel checks the 10%-20% trailer growth would translate into revenue that is $200M higher than the consensus number of $2,017M. This is also before taking into consideration that the tank business, which is mostly tied to oil & gas, is likely to rebound from low levels in 2017. Assuming a 10% contribution margin, this $200M would add roughly $0.25 to EPS, compared to current estimates of $1.65.

5) Tax Bill: 2 Impacts
The first and most obvious impact of the new tax bill is that Wabash is likely to see a significant drop in its corporate tax rate. Using 2018 consensus of $157M of pre-tax income, Wabash will see an approximate $0.35 EPS tailwind due to its corporate tax rate being reduced from 35% to 21%. With current consensus numbers at $1.65, this 21% boost will result in EPS of $2.00 per share, excluding any of the previously mentioned fundamental tailwinds.
Secondly, Wabash will likely be an immediate beneficiary of the new tax regulations regarding the expensing of capital investments. Under the new rules corporations will be able to expense their capital investments in the year they are purchased, which will likely lead to a heavier level of investment during 2018 and 2019. As this favorable impact comes at the same time trucker profitability is expected to grow to a record, the impact could be substantial.
6) Structural Angle: Convertible Debt
As of today the company has roughly $43M of May 2018 convertible bonds left outstanding. The strike price of these bonds is $11.70, and thus have been in the money for some time now. Typical of this situation, the short interest has risen in part due to owners of the coverts hedging out their stock position as the stock rose beyond the strike. By our estimation there are likely 1.5M-2.0M shares sold short as it relates to the converts. The company’s plan is to buy out the balance of these notes during the first half of 2018, in which case those note holders who have hedged their converts will have to go into the market to buy back the shares. We believe that this will exacerbate the upward momentum of the stock.

7) Short Interest
Speaking of short interest, Wabash is one of the most heavily short stocks on the NYSE. The 17.5M shares sold short represent roughly 30% of the total shares outstanding. It is our belief that this short position, which has increased from 10% to 30% in the span of two years, is betting that the trailer cycle peaked in 2014 and will promptly head south. Our research and channel checks indicate the opposite is true, at least for the next two years, and in conjunction with new product innovation and the favorable tax benefits, earnings estimates are likely to be revised up significantly over the next three to six months. If the story plays out as we believe it will, the extreme level of short interest will add fuel to the fire as WNC stock increases.

Conclusion
The set-up for Wabash over the next three to six months is extremely favorable. Because of increased carrier profitability arising out of the tightness caused by the new ELD and drug testing rules we believe the company’s end markets are going to experience two years of record growth which will result in elevated capital spending. The new MSC reefer trailers are Wabash’s biggest innovation since DuraPlate, which allowed it to take nearly 1300bps of market share when it was introduced. The acquisition of Supreme provides an entry into the fast-growing last-mile delivery segment, with market share upside as Wabash layers in its best in class technology. Favorable tax benefits due to the new bill will greatly benefit the company by significantly lowering its corporate tax rate, and incentivizing increased demand from its end market due to the new rule on expensing capital expenditures. The icing on the cake is this is a great set-up from a structural perspective, with 1.5M-2.0M shares of forced covering due to the convertible buy-back, and an additional 15M+ share short on the expectation 2018 and 2019 would be a down year for the trailer market. We believe Wabash has the potential to deliver significant near-term upside as these factors become evident, and that the stock will trade up to $30 (13x 2018E EPS of $2.25) by the middle of 2018.

Additional Disclosure: This information is provided for informational purposes only. This information is not complete and is only current as of the date hereof and may be superseded by subsequent market events or for other reasons. This information is not investment advice and is not a recommendation to purchase or sell any specific security. The author does not make any representations or warranties as to the accuracy or completeness of the information. The author has a position in the security presented, which may be increased or decreased at any time with no notice to the recipient of this information.   This presentation contains forward-looking statements that include statements, express or implied, regarding current expectations, estimates, projections, opinions, and beliefs of the author, as well as assumptions on which those statements are based. Words such as “believes,” “expects,” “endeavors,” “anticipates,” “intends,” “plans,” “estimates,” “projects,” “assumes,” “potential,” “should,” and “objective,” and variations of such words and similar words, also identify forward-looking statements. Such statements are forward-looking in nature and involve a number of known and unknown risks, uncertainties and other factors, including those described in this presentation, and accordingly, actual results may differ materially and no assurance can be given that the security presented will achieve the results discussed herein. Recipients are cautioned not to place undue reliance on any forward-looking statements or examples included in this presentation, and the author assumes no obligation to update any statements as a result of new information, subsequent events or any other circumstances. Such statements speak only as of the date that they were originally made. Please do your own due diligence.      

Catalyst

-Earnings 

-Upward revisions of estimates for trailer orders and tax changes

-Greater synergy guidance for Supreme 

-Short Covering after convert is taken out on May 1