Thinking Big About Small Companies

Which of These is Not Like the Others? Part II

December 5th, 2012 | Posted by Torin in AUTO | Logistics

These are numbers for a real company:

In ten years this company has multiplied its revenue 100 times. It hasn’t posted a losing year in a decade. What’s more, over the period shown this company has made exactly zero acquisitions. All of the growth has been internally generated.

This company is Autoinfo, ticker AUTO. I mentioned it as a Monte Sol holding in my previous 3PL pieces. Autoinfo owns Sunteck, the eighth largest truck freight broker in the United States. Sunteck is non-asset-based, meaning it doesn’t own the trucks—it just provides the logistics. AUTO differs from RLGT, the subject of my previous 3PL pieces, because it is purely a truck freight broker, whereas RLGT specializes in brokering higher-value types of freight: time-definite, intermodal, cross-border, etc.

Truck freight brokerage is one of the most straight-forward, and thus low-margin, parts of the 3PL industry. But there is also an argument to be made that U.S. truck freight brokerage has one of the better growth outlooks in 3PL. You can find that argument here.

Apart from AUTO there are three U.S.-based brokers that are (1) publicly traded; (2) non-asset-based; and (3) focused mostly or wholly on trucking. Here they are:

The average 2013 P/E for these companies is 18x, and there isn’t a whole lot of variance. These three companies operate very similar business models, and the market has awarded them very similar—and very much above-market—multiples of earnings.

AUTO is much smaller than the three businesses listed above, but it is in exactly the same business. Here is the same table again, but with AUTO added in:

Which of these is not like the others?

AUTO trades at a 65% discount to its peers. Value investors often talk about buying “fifty cent dollars”. Well, AUTO is a thirty-five cent dollar, and a fast-growing one at that.

There is one important difference in the way these companies operate. CH Robinson generates its sales almost entirely from brokers who are salaried employees of the company. By contrast, Landstar and Autoinfo generate their sales almost entirely from brokers that are independent, commission-based agents. These independent agents are in essence third-party contractors who use the parent company’s brand name (e.g. Landstar or Sunteck), back office and IT systems, and shipping networks. In return, the parent companies keep a cut of the business the agents generate.

On occasion, some investors have voiced concern about whether independent agents can simply leave and go work for a competitor, and whether that possibility makes the independent agent-based business model inferior. Does it? Maybe, maybe not. Looking at the ten-year financials for Landstar and Autoinfo, it is hard to find any sign of an inferior business model, whether as measured by growth rates, which are exceptional for both companies, or by margins, which are equal to those of similar-sized peers.

For an agent, switching parent companies is a lot of work. The agent must transfer all financial and technical links to the new parent, and every single one the agent’s customers must open a new account with the new parent company. But it is certainly not impossible.

The stock market seems undecided about whether the employee vs. agent issue matters. At the moment LSTR, an agent-based broker, trades at a 20% P/E discount to CHRW, which uses close to 100% salaried agents, and ECHO, which is about two-thirds salaried. But LSTR has also traded at an equivalent multiple to CHRW and ECHO at many times in the past.

The AUTO/Sunteck business is almost identical to Landstar’s, albeit much smaller. Both businesses are even based in Florida. The market has never been shy about giving LSTR a 16-20x P/E; what multiple should the market give AUTO? Even using a highly discounted 12x multiple in order to account for illiquidity and the risk of agent defection, AUTO should be worth close to $2.00 based on a reasonable $0.15 estimate for 2013 EPS.

Yet today AUTO trades at $0.85, a 6x P/E. Usually such a low earnings multiple indicates that a company is deeply cyclical, has serious operational problems, or competes in an industry in terminal decline. None of these concerns are remotely applicable to AUTO, as you can tell from glancing at the historical financials at the start of this piece. Nothing is wrong with AUTO. In fact, Sunteck is a very good little business—it is simply unknown by most investors. The market cap is a microscopic $30 million, and the shares are tightly held by just a few parties.

The float—the portion of the company owned by “everybody else”—amounts to just $8 million dollars at today’s price. The conventional wisdom says that a tiny float won’t incentivize institutional investors to descend en masse and close the valuation gap. But the less-recited flipside is that even a minor amount of capital will be sufficient to have a major impact on the price of the shares, whether through open market purchases or through an outright acquisition of the company.

And there are actually some pretty major amounts of capital out there. As I’ve written about previously, there is a lot of money flowing into 3PL strictly for the purpose of consolidation. XPO has $300 million in the bank earmarked specifically for acquisitions, and its CEO has said explicitly that U.S. truck brokerage is his target. I can guarantee that AUTO is on his radar. I can guarantee the same for a number of other public and private 3PL CEOs. Private equity firms are lurking as well—freight brokers make attractive buyout targets because of their steady profits and the ease with which they can be combined. All that money and all those interested parties create a lot of buying pressure.

There is also selling pressure. In April two activist investors (Baker Street and Khrom Capital Management) filed a 13-D reporting 14% ownership of AUTO and requesting that the company explore a sale. Because insiders own so much of the company, actually forcing a sale will be difficult without the cooperation of the other major holders. But the activist pressure should be enough to get the board thinking hard about how to bring the AUTO share price more in line with the intrinsic value of the company.

AUTO might be too small for big investors to pay attention to it, but at $300 million of gross revenue, it is plenty large to be of interest to a number of 3PL industry players. Its growth prospects are superb and its current price makes it a compelling bargain. How much longer will it trade publicly?

Monte Sol accounts and their affiliates own shares of AUTO.

You can follow any responses to this entry through the RSS 2.0 Both comments and pings are currently closed.

%d bloggers like this: