Trucking is in general a terrible business. It is highly fragmented, highly competitive, and there are basically no barriers to entry.
As a segment within trucking, long haul is even worse than average in today’s market. As gas/diesel prices have gone up and the cost to ship by rail has come down, the long haul segment has basically been made obsolete as intermodal (part truck, part train) is more cost efficient and only slightly slower.
That being said, bad businesses can be too cheap, and with a price/book of .58, this may be the case with USAK.
USAK has traditionally been a long haul truckload carrier (truckload = point to point for one customer rather than less than truck load which is basically distribution center to distribution center with a mixed cargo that has been grouped together geographically) and their results have suffered from it. As of their 2011 10K, they operated 2,250 tractors, and 6,250 trailers, which makes them larger than all the mom and pop outfits out there, but smaller than the big boys in the trucking industry.
However, in 2008 the company announced their “Vision for Economic Value Added (VEVA)” plan which they believed would help the company adapt to the changing realities around them. First, the company aimed to move to shorter hauls as 4 out of 5 truckloads in the US now are less than 500 miles and moved to make this core business more efficient.
Average haul in miles
Year ended December 31 2011 2010 2009
Total Company …………………………………………………… 532 560 599
Trucking service offerings:
General Freight ………………………………………………….. 544 569 618
Dedicated Freight …………………………………………….. ….396 433 471
As the company has moved to concentrate their routing between major metropolitan areas – focusing on less than 1,000 lanes. Additionally, there is a new push toward efficiency, with the goal being to have each tractor in their fleet loaded and unloaded 4 times per week. In order to help drive this move toward efficiency the company slimmed down its management structure and brought in an outsider with substantial operationally experience from JBHT.
Additionally, the company is going through a major technology upgrade in order to maximize efficiency in their routing and turn around times. Previously the company was reliant on antiquated internally developed operating systems that were internally hosted on main frame systems. Now the company is using 3rd party software and network servers allowing better coordination and business planning. This includes satellite tracking of cargos and trucks. This upgrade has not been without hiccups though, and the company points to difficulties in integrating the new system leading to a loss of confidence from customers and resultant business decline in Q3’11. This trickled down to higher driver turnover, at a time when the industry is suffering from a lack of drivers. Again, this is a terrible business where competition is based on price and service, so this temporary disruption is a big deal.
Furthermore, the company has moved to trim their cost centers, including reducing their executive team from 9 to 5 people, while simultaneously bringing on people with experience in more regional and asset light markets rather than their traditional long haul markets. The company estimates that the cost control efforts will lead to $5.6M in cost savings for 2012, and they continue to look for more opportunities.
Second, the company began to develop business lines that would allow them to be better partners for the increasingly sophisticated needs of their customers – namely an asset light “strategic capacity solutions (SCS),” which is basically a brokerage business, and an intermodal business.
Their plan is for SCS to represent 25% of their total base revenue, and in 2011 it represented 16.3%, up from 2.1% in 2007. This was on revenues of 67,085 vs 34,918 in 2010, so it seems as if they are making nice progress there. This is important b/c the asset light truckers trade at much better multiples than traditional truckers for the obvious reasons that there capex needs are much lighter. Capex for truckers is very high as maintenance costs for rigs grow exponentially after only 3-4 years of service.
While the company appears to be making the right long term moves and the recent tech upgrade appears to have been a temporary problem, it isn’t yet clear that the company will be able to successfully transition its business model. On one hand, as I said earlier, trucking is a terrible business which should make it easier for USAK to make inroads vs competitors in shorter haul, asset light, and intermodal. At the same time, as a terrible business the competition likely comes down to price as a function of economies of scale which they do not have, and service, which they have not yet gotten right. It isn’t clear how easily they will be able to win back business they lost during their tech upgrade.
That being said, there are some positive aspects to USAK – such as the fact that management owns 13% of the company and that 6 different insiders have been buying in the last few months at an average price of 8.29… 15% above recent prices. Additionally, in October of 2011 Celadon (CGI) announced they had bought 6% of the company at an average price of 7.08 and were interested in speaking with management about a possible merger. USAK management rejected the invitation much to the dismay of short term holders, but it is helpful to know that industry pros saw value at the 7.08 level (basically where the stock trades now) not long ago. Also comforting – GAM International bought almost 10% of the company at prices above $8 in March. I don’t believe GAM International is related to known value investors Gabelli Asset Management, but i will look into it.
The company reports on 4/20 and if it is clear that they have made progress in adapting their business model and increasing their efficiency while continuing to trim costs, USAK may be worth a deeper dive.