Thursday, June 13, 2013

Why I think Heartland Express can rally

In looking at an overall grasp on the turnaround in the US economy, one of the first places one wants to look is the consumer. Below, we can see that retail sales have been trending up since 2008; a short time ago eclipsing the highs seen in 2005-2006.

We consumers wonder, how do these products get to the store shelves? The companies manufacture the goods, then trucks transport the goods to the retail locations. Investors have caught eye of this, and transportation stocks, as well as the Dow Jones Transportation Index. Here is a YTD comparison of the trucking sector.

Today I want to take a look at the underperformer on that YTD chart from above, Heartland Express. Via Google Finance, they are a short-to-medium haul truckload carrier that provides regional dry van truckload services through their regional terminals as well as its corporate headquarters. It transports freight for shippers and generally earns revenue based on the number of miles per load delivered. Its primary traffic lanes are between customer locations east of the Rocky Mountains.

Heartland operates nine specialized regional distribution operations in Atlanta, Georgia; Carlisle, Pennsylvania; Chester, Virginia; Columbus, Ohio; Jacksonville, Florida; Kingsport, Tennessee; Olive Branch, Mississippi; Phoenix, Arizona, and Seagoville, Texas. The Company operates maintenance facilities at all regional distribution operating centers along with shop only locations in Fort Smith, Arkansas and O’Fallon, Missouri.

Back in mid January of this year, I highlighted this name when they were due to report Q4 2012 earnings. I liked them then, and said that they had room to run 10% or more this year. After observing their Q4 2012 and Q1 2013 results, I believe they are prepared to go even higher.

From their Q1 2013 quarterly report, they ended the first quarter with gross revenues of $134.3 million, net income of $19.7 million, and $0.23 earnings per share. Freight demand was comparable to the first quarter of 2012 and was hindered by a harsher winter, one less work day due to leap year in 2012, and the Easter holiday falling in the first quarter this year. Net income increased 19.0% from $16.6 million in the first quarter of 2012 while earnings per share increased 21.0% from $0.19 in the first quarter of 2012.

Operating income for the first quarter was positively impacted by a $7.0 million increase in gains on disposal of property and equipment in comparison to the first quarter of 2012 as they continue to benefit from a good market from their well-maintained tractors and trailers. They continue to grow in the Western United States. Their western division, based in Phoenix, Arizona, has grown at the rate of 10% since the 3rd quarter of 2005, its first full quarter of operation.

Net margins for the first quarter of 2012 was 14.7% compared to 12.3% in the 2012 period. Over the past four quarters they have achieved an operating ratio of 81.4% and an 11.9% net margin on gross revenues of $545.2 million. They ended the past four quarters with a return on assets of 12.4% and a 19.3% return on equity.

Fuel expense is the biggest concern to look at when evaluating a transportation company. Their fuel cost per mile increased for the third consecutive quarter and was the highest since the third quarter of 2008. Their net fuel cost per mile increased 3.9% during the first quarter compared to the first quarter of 2012. The U.S. average cost of fuel was $4.03 per gallon in the first quarter. They continue to focus on fuel economy and efficiency through the management of idle hours, investment in fuel efficient new tractors, trailer skirts, fuel surcharge billings, and strategic fuel purchasing decisions. These efforts lessen the impact of the volatile fuel prices.

Fuel prices will continue to go up as the economy improves, so Heartland has to do the best it can to combat high diesel prices long-term, which I believe is possible. With other alternatives coming to light as we advance with better technology, it would not surprise me if they became involved in natural gas trucks or other cheaper resources such as renewable energy, which would be costly initially, but more profitable for them in the long run.

Profitability for them looking through 2014 looks positive. Revenue looks to grow 7% and EPS 5%. 

I ran a Discounted Cash Flows (DCF) model and came up with a target price of $15.03 for a return of +8.93% with a current market price of $13.80.

Feel free to respond or send any questions to @Peter_Eller10 on Twitter