This Freight & Logistics Business Could Deliver a Lot of Value
Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Con-way (NYSE: CNW) has experienced pretty good returns since the beginning of the year, up nearly 40% to $38.90 per share. All famous investors, including Joel Greenblatt, Jim Simons, and Steven Cohen, have either reduced or exited their positions in the company. However, Barron’s is still bullish on Con-way, believing that it could surge at least 18% to $46 per share. Let’s take a closer look to determine whether or not we should invest in Con-way at its current trading price.
Con-way, incorporated in 1958, is the provider of transportation, logistics and supply-chain management services, operating in four business segments: Freight, Logistics, Truckload and Other. Most of its operating income, $143.9 million, or 63% of the total income, was generated from the Freight segment, while the Logistics and Truckload segments produced around $44.6 million and $44.9 million, respectively, in operating profit. Among the four segments, the Truckload segment enjoyed the highest operating margin at 8%, while the operating margins of the Freight and Logistics segments were 4.3% and 2.7%, respectively.
Business turnaround after declining operating performance
2006 could have been considered the heyday of Con-way, with its peak operating margin then at 9.5%. However, its operating performance has been falling off the cliff, sliding to only a 2.4% margin in the most recent quarter. EPS dropped from $4.98 per share in 2006 to $1.85 per share in 2012. However, investors should focus on the company’s business restructuring to improve the margin, driving the business forward. In the next three years, Con-way plans to improve the margin of the Freight segment and increase performance in the Truckload segment, which concentrates on the premium segment of the truckload industry. The margin improvement could be achieved via refining pricing and sales with land-based pricing, increasing network efficiency with linehaul load planning and investing in optimization tool technologies. For the Logistics segment, its Menlo Logistics unit was chosen for the company’s future growth by expanding the company’s footprint internationally, investing in higher margin services and delivering operational efficiency via lean principles.
For the full year 2013, Con-way expected to spend around $300 million in capital expenditure. The company estimated that around 60% of its 2013 revenue would come from the Freight segment, 30% from Menlo Logistics and the remaining 10% from the Truckload segment.
FedEx and UPS are also big players in LTL market
Con-way’s less-than-truckload (LTL) business ranked the second largest with around 9.4% of the total LTL market, after only FedEx (NYSE: FDX)Freight with around 14.9% market share. United Parcel Service (NYSE: UPS) Freight sits in fourth place, representing about 6.9% of the total LTL’s market. According to Logistics Management, the LTL market has experienced an ongoing turnaround, including yield management focus and contractual relationships. Recently, all three freight businesses have announced increases in their rates. Con-way’s freight rate will increase by 5.9% for non-contractual business while FedEx and UPS will raise their rates by 4.5% and 5.9%, respectively.
Investors might be bullish on FedEx with its $1.7 billion cost cutting program in the next three years. The company could substantially reduce its expenses by using a more fuel-efficient aircraft fleet, shrinking the business capacity in Asia and cutting jobs. The company expects to generate 7%-13% growth in its adjusted EPS and spend $4 billion in capital expenditure. Both FedEx and Con-way have quite a low valuation. At $38.90 per share, Con-way is worth around $2.2 billion on the market. The market values Con-way at 6.15 times its trailing EBITDA. FedEx is trading at $96.50 per share, with a total market cap of $30.6 billion. It is valued a bit cheaper, at 5.6 times its trailing EBITDA.
UPS, in contrast, is quite expensively valued. It has the total market cap of $80.6 billion. At $85.40 per share, the market values UPS at a much higher valuation than the other two companies, at 27.3 times its trailing EBITDA. UPS expects low single-digit growth for the full year 2013 and estimates around $4.80 to $5.06 in earnings per share, a growth of 6% to 12% compared to the adjusted EPS last year.
My Foolish take
Among the three, I like FedEx and Con-way because of their low valuations and the clear turnaround initiatives, which could improve their business and the bottom-line. Both of them are trying to increase the operating margin via leaner and more efficient operation and cost reduction. For Con-way, the value could be unlocked further by spinning off Menlo Logistics and/or through stock buybacks and dividend raises.
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Anh HOANG has no position in any stocks mentioned. The Motley Fool recommends FedEx and United Parcel Service. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!