Dane Capital Management, a New York-based hedge fund that focuses on value and special situations investments, is bullish on Daseke Inc (NASDAQ: DSKE). In its most recent investor letter, the fund said that it likes Daseke because the company “has $1.3bn in revenue, yet still only has 1% market share in the flat-bed trucking industry, an industry likely to exceed $140bn in revenue in 2018.” Daseke is a consolidator of flatbed and specialized transportation in North America. Here are Dane Capital’s comments about the company.
Daseke was one of the Fund’s top performers in 2017, and has been a top-2 position. We’ve liked the company because it has $1.3bn in revenue, yet still only has 1% market share in the flat-bed trucking industry, an industry likely to exceed $140bn in revenue in 2018. The company is trying to roll-up the industry and take advantage of the public-private arbitrage multiple disparity. Importantly, it does not compete in publicly marketed deals, but in privately negotiated transactions. In 2017, it made 8 accretive acquisitions. We also like that CEO Don Daseke had signed a 3-year lock-up on his almost 40% ownership in March 2017 (so there are still almost 2 years remaining). As a result of the company’s significant, accretive growth, the stock was as high as $14.49 on January 16th.
The concept of a roll-up in the logistics/asset-light space is something that we’ve seen work before – trucking logistics business XPO was a sub $100mn market cap prior to Brad Jacobs investing and taking control of the company in September 2011. He has successfully rolled up the industry and has built XPO into a $12bn market cap company (Forbes has a current article on the company http://bit.ly/2qZ9Zdo) and its stock has compounded at 38% since 2011. We think Daseke has a similar opportunity in the “asset-right” space.
All was going according to plan. However, on Monday morning, February 12th, the company announced a follow-on offering of 7.4mn shares with proceeds to the company — the stock had closed at $12.98 the previous Friday. In our view, the transaction was completely botched. In our experience, banks typically pre-screen a deal with buysiders, or, at a minimum have an accurate sense of supply/demand dynamics. The transaction priced the night of Wednesday the 14th at a deal price of $10.60 – a shocking 20% haircut from deal announcement. Perhaps the company had a transaction teed up which fell through, but clearly this has resulted in a crisis of confidence. The stock soon broke deal price and ended the quarter at $9.79. This represented a quarterly 31.5% decline in the price of shares, and a 43.6% decline in warrants, which our Fund also holds.
All of this has happened against a back-drop of a flat-bed rate environment that is red-hot. According to dat.com, on April 24th “flatbed load-to-truck-ratio has exceeded 100 loads per truck for four weeks in a row.” Last week the site said flatbed load-to-truck was at record levels. Daseke is down another 13% this month and now trades at a paltry 6x EV/EBITDA. Fortunately, it can still make acquisitions at even lower multiples (although we’d be equally comfortable with them buying back their own shares). We expect the stock price to improve when the company reports what should be good numbers in the next few weeks, and we’ve encouraged management to authorize a stock repurchase plan.
While this provides limited consolation, XPO again presents an excellent analog to Daseke. Between June 1, 2015 and Jan 20, 2016, shares plummeted 64% from $50.86 to a low of $18.06 on January 20, 2016. XPO missed 2Q 2015 EPS by $0.02, and in September 2015 announced a large acquisition which meaningfully increased their scale, however nothing calamitous seemed to be at hand. In fact, highly regarded former Stifel analyst (and now banker) John Larkin, maintained a Buy and $62 price target throughout this period. Notably, this was a noticeably weak period for the industry.
As it turns out, XPO digested its large acquisition, results remained solid, and sentiment changed. Anyone who bought XPO at its lows (and held), when sentiment was seemingly at its worse, has a 5-bagger on their hands just over 2 years later.
We think it remains the early innings of Daseke’s growth opportunity. We are optimistic that looking out quarters or years, we will make multiples on our investment.
Finally, it’s notable that most of Daseke’s comps are within 10% of 52-week highs, not at a 52-week low like Daseke. If not for a botched follow-on, we think we’d be sitting on a stock in the teens. We are confident that the current situation is temporary and our patience will be rewarded.
Daseke Inc (NASDAQ:DSKE) has a combined fleet of more than 5,200 trucks and 11,000 flat bed and specialized trailers serving 49 U.S. states as well as Canada and Mexico.
DSKE isn’t a very popular stock among hedge funds we track. As of the end of the last year, there were 18 funds in our database with positions in the company. Over the past 12 months, the company’s share price tumbled more than 21%. The stock moved up over 4% over the last three months.