In a recently released Choice Equities Capital Management’s Q1 2019 Investor Letter (track down here), the fund reported 10.5% quarterly return. It also examined several stocks in its equity portfolio, among which was, a new position – U.S. Xpress Enterprises, Inc. (NYSE:USX).
We added one new position in the quarter with the acquisition of shares of US Xpress, Inc. (USX). It is a deep value play featuring a deeply depressed price following a busted IPO which we will highlight further below. We exited investments in LKQ and Entercom primarily to make room for recent additions. Finally, in early April, we added a new position in a seller of home-based goods which itself looks to be on sale, trading at half its prior forward earnings multiple on depressed earnings due to one-time growth investments. The company has a differentiated model and is in its very early days of its new store expansion initiatives.Late April also saw us add two new starter positions which we are excited to talk about in future letters once we have fully established our positions.
USX – US Xpress was founded in 1986 by Max Fuller and Patrick Quinn after they received a gift of 48 trucks from industry veteran Clyde Fuller, Max Fuller’s then-retiring father. Since then, the32-year-oldtrucking company has grown to become the 5th largest in the category of asset-based fleets in the US featuring a blue-chip customer base where eight of its top ten customer relationships have been in place for 15 years or more. Originally highly acquisitive when they were public the first time in the ‘90s and ‘00s, the business was bought out from public markets in a management led buyout in 2007. After an IPO last May, the company reemerged as a public company under the direction of CEO Eric Fuller, Max’s son.
Describing the IPO as a bust may perhaps be overly polite. Originally looking to price around $19-20 / share, investors anxious that a still growing truckload cycle was set to soon slow were only willing to pay $16. Other signs gave potential investors pause as well. Entering the IPO, the company was over-leveraged and seeking capital to fund operational improvements. Its fleet was old at 28 months on average and needed updating. It self-insured its accidents to limits of $10M versus more typical levels of $1-3M. And it trailed peers on many important operating metrics like utilization, driver turnover and maintenance and insurance cost ratios.
The company’s second turn as a public company has gotten off to a rocky start. The 2Q 2018report, the company’s first since coming public, narrowly missed estimates due to a service issue with a large customer in its dedicated division. The 3Q report was little better as the company experienced its worst quarter of accidents in the last fifteen years. Even though the carrier had renegotiated its insurance limits from $10M to $3M on improved credit worthiness after using the IPO proceeds to pay down debt, they did not have the newly lowered limits in place in time to prevent a second missed quarter. As a cyclical company without a loyal shareholder base heading into a nasty market sell off, shares were punished ultimately bottoming around $5.
Despite these hiccups since coming public, the company has made quite a bit of progress. The leverage (from 4x to 2.2x) and interest rate (from 11% to 5%) are meaningfully improved. They have the aforementioned new insurance agreement in place. They have also shown some improvement at the Operating Ratio (OR) line and made progress on lowering driver turnover and improving utilization. But there is still much further to go. The fleet age remains on the high side relative to public company peers. Accordingly, 2019 will be a big capex year as they purchase trucks with expiring leases which the company anticipates will lower the fleet age to a very respectable 18 months at year end. The fleet upgrade will further pave the way for the company to drive insurance and maintenance expenses lower while also becoming more attractive to drivers thus limiting turn over and in turn improving utilization metrics. Across these three buckets, we see opportunities to lower expenses by as much as 300 bps and drive the OR into the low 90s in the near term, to a level much closer to its peers.
Importantly, management appears aligned with shareholders and incentivized to achieve these improvements. Eric and Max Fuller together own 11.3M shares of the company and notably added to their position at the IPO, purchasing another $20M worth of stock at $16 from some exiting shareholders. Also of note is that the company appears to be singularly focused on closing the OR gap to its peers as this metric is the primary driver of bonuses in the company’s short term incentive plan. Though the freight market has indeed softened relative to the decade highs seen last summer, it remains generally tight as contract rates continue to grow and offers a potential tailwind should the market tighten up again later this year as many of the tariff related inventories that were pulled forward last fall and winter are cycled through. With the wettest winter in the contiguous US on record now behind us, it seems estimate revisions for both the company and the group may be nearing a turning point in coming quarters.
Should the company execute steadily on these initiatives, we see the company potentially earning near $2 of EPS in 2020. At that point, this trucker would look more like an average trucker in terms of OR with leverage closing in on 1x which would suggest a peer average multiple of 12 –16x would be likely. A potential acquisition in a consolidating industry also seems to offer downside support, as even Swift Transportation, universally reviled by most trucking investors, was purchased for 8x EBITDA just two years ago. As the chart below highlights, shares look cheap on EBITDA, really cheap on earnings, and really really cheap on forward earnings power.
Name Ticker Price Mkt Cap Sales 2018 Adj. OR NTM PE TTM EV/EBITDA Net Debt/ EBITDA Tractor Age Knight-Swift KNX $33.28 $ 5,760 $ 5,344 86.9% 12.4x 5.2x 0.6x 2.1 Schneider SNDR $20.39 $ 3,846 $ 4,977 92.4% 13.2x 4.9x 0.0x 2.6 Werner WERN $33.63 $ 2,350 $ 2,458 88.7% 12.8x 5.2x 0.2x 1.8 Heartland HTLD $19.99 $ 1,638 $ 611 82.9% 20.9x 8.1x -1.0x 1.3 USX USX $6.04 $ 292 $ 1,805 94.1% 5.3x 3.1x 2.2x 2.4/1.5
U.S. Xpress Enterprises is one of the leading trucking companies in the US, with a market cap of $291.67 million. Over the last six months, the company’s stock lost 22.98%, having a closing price of $6.00 on May 14th. U.S. Xpress Enterprises is trading at a P/E ratio of 8.52.
At the end of the fourth quarter, a total of 13 of the hedge funds tracked by Insider Monkey were bullish on this stock, same as in the second quarter of 2018. Below, you can check out the change in hedge fund sentiment towards USX over the last 14 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists an “upper tier” of noteworthy hedge fund managers who were increasing their stakes considerably (or already accumulated large positions).
More specifically, Zimmer Partners was the largest shareholder of U.S. Xpress Enterprises, Inc. (NYSE:USX), with a stake worth $15.6 million reported as of the end of September. Trailing Zimmer Partners was Scopus Asset Management, which amassed a stake valued at $5.1 million. Citadel Investment Group, Marshall Wace LLP, and BlueMar Capital Management were also very fond of the stock, giving the stock large weights in their portfolios.
This article is originally published at Insider Monkey.