Quality Distribution, Inc. (QLTY): Is This Chemical Transportation Business a Good Purchase?

Quality Distribution, Inc. (NASDAQ:QLTY) has been quite a volatile stock. Its stock price plunged from nearly $13.80 per share in March 2012 to nearly $5.30 per share in November 2012, and it bounced back strongly to more than $9.10 per share. Barron’s thinks positively of the stock, believing that the company’s earnings would be improved in the near future. Let’s take a closer look to see whether or not we should invest in the company at its current price.

Largest tank-truck network in North America

Quality Distribution, Inc. (NASDAQ:QLTY) has the biggest tank truck network in North America, providing logistics and transportation chemicals services to large corporations in the U.S. It has three main business segments: Chemical Logistics, Energy Logistics and Intermodal. Most of its revenue, $596.5 million, or 70.8% of the total revenue, was generated from the Chemical Logistic segment. The Intermodal segment ranked second, with $130.6 million in operating revenue, while the Energy Logistics segment contributed the least, with $115 million in sales in 2012. The for-hire chemical and food grade bulk transport market is quite fragmented, and Quality Distribution is the North American leader with around 15% market share. The company has quite a diverse customer base, as no single customer represented more than 10% of its total revenue.

Weak balance sheet with negative equity

What might make value investors stay away is its weak balance sheet. As of March 2013, it had negative equity of $(11) million, only around $1 million in cash and as much as $400 million in long-term debt. Moreover, Quality Distribution, Inc. (NASDAQ:QLTY)recorded a high level of goodwill and intangibles of $141 million. Thus, its tangible book value was much lower, at $(152) million. In the past five years, the earnings have been quite sluggish, fluctuating in the range of $(181) million to $50 million. Barron’s mentioned that its acquisition in the past two years, including $110 million for the truck logistics services business that mainly serves the fracking industry. The recent sluggishness in the gas drilling market has impacted Quality Distribution negatively. However, the company has transformed itself by utilizing its truck/equipment more efficiently.