Universal Logistics Holdings, Inc. (“ULH” or the “Company”) is a diversified trucking/logistics business with a demonstrated history of consistent profitability through a range of business environments. The Company is experiencing strong macro (and pricing) tailwinds. The Company is underfollowed, with only one sell-side broker covering and little/no mention on any investment-oriented websites. Shares trade at a meaningful discount to comps. The primary risk is potential conflicts of interest due to family control; however, these issues appear manageable.
Business
Diversified trucking and logistics provider
Auto represents ~30% of revenues
Top 10 customers ~40% of revenues
Segments (% of 2021E revs)
Contract Logistics (36% revs)
Logistics (25% revs): in-plant or offsite management of customer inventory and materials handling; sequencing and sub-assembly; packing; container management; 5-10yr contracts; high renewal rates; 58 active programs @ 119 locations
Truckload (23% revs): transport services incl dry van, flatbed, refrigerated, and specialized; 1,270 tractors; 306 agent and Company terminals
Brokerage (13% revs): freight brokerage using 3rd party transportation services, freight forwarding, customs brokerage management
Thesis
Respectable historical financial performance; particularly for a cyclical
Low double digit EBITDA margins
20%+ ROEs
Consistent cash flow generation
Has remained consistently profitable through a wide range of business environments
Mix of owned and outsourced capacity provides meaningful flexibility in cost base
In past 20 years the Company has only been FCF negative in a single year; in that year (2016) the Company generated meaningful operating cash flow and was only FCF negative due to much higher than usual capex
Despite meaningful exposure to auto vertical; made money w/SAAR @ 9mm annualized (vs 17-18mm annualized today)
Improving mix of business
Successful record of historical M&A activity has increased the Company’s exposure to higher margin value-added business lines (i.e. logistics)
Management is transitioning away from 3rd party brokerage; this shift will be margin accretive as 3rd party brokerage is a margin outlier with 1-3% target margins vs 6-12% for the non-brokerage businesses
Auto sector exposure has been reduced from 40% (2017) to 30% currently
Meaningful macro and pricing tailwinds
Management has commented that business prospects for all its segments are either stable or improving, the first time in its history that none of its segments has faced a deteriorating environment
Cyclical tailwinds from rising economic activity and demand due to post-COVID reopening
Secular transportation tailwinds from increasing e-commerce; work-from home demand
Tailwinds have been driving consistent shipping spot rate strength
Driver shortage should be supportive of strong rate environment
45,000 drivers were suspended from the workforce nationally due to launch of new Commercial Driver’s License (CDL) Drug & Alcohol Clearinghouse; 34,000 did not complete return-to-work program (0.7% of NA driver pool)
Driver schools have been operating at half capacity for a year now due to COVID; this has emptied the new driver pipeline
Speculation that driver shortages may be structural and long-lasting
Potential Moroun family conflicts of interest appear manageable, economic incentives should help keep family aligned with minority shareholders
See “Risks” section below for detail on family’s holdings
Family’s ULH equity stake is worth ~$500mm, roughly double its stake in PTSI
Estimated family net worth of ~$1.6bn; ULH stake meaningful in context of overall net worth
Company’s healthy EBITDA margins vis-à-vis competitors gives some comfort that related parties are not overcharging ULH for services
Very limited sell-side coverage; Stifel only covering broker; likely a meaningful contributor to valuation disparity with comps
Valuation is an order of magnitude cheaper than competitors
5x EBITDA vs 10x for trucking comps, 12.5x for logistics comps
7-8x P/E vs 20x for trucking comps, 22x for logistics comps
This valuation disparity is despite the Company having a better business mix than many of the comps (i.e. strong contribution from logistics, whereas many of the comps are pure trucking companies)
Upside/Downside
Risks
Family-controlled; questionable incentives; related party transactions
Moroun family controls ~70% of shares outstanding
Holding is part of larger transportation-centric investment portfolio; risk of conflict between various holdings
65% of P.A.M. Transportation Services (PTSI); provider of truckload dry van services
DIBC Holdings; owner of Ambassador Bridge between Detroit and Windsor, Ontario
Central Transport (closely held); LTL truckload carrier; ~$850mm revs; 200 customer service centers; facilities in 45 states
Family’s private diversified holding company, CenTra, provides services to Universal
Admin support services (legal, human resources, tax, IT); $3mm billed to ULH in 2020
Facilities; $13mm rent billed to ULH in 2020
Insurance and employee benefit plans; $47mm billed to ULH in 2020
Manuel Moroun, family scion, is recently deceased (2020); had reputation for very sharp elbows in Detroit business community; once sued by two sisters alleging he cheated them ou of their inheritance (later reconciled)
Added 19-year old family member (college student) to Company’s board of directors (replaced the retiring family scion)
Cyclical + modest (2x) leverage
Strong Class 8 orders in recent past (have been running at 2x replacement rate for several months); rising Class 8 orders are often a precursor to shipping rates declines
Driver training pipeline refills as COVID comes under control
Disclaimer: The author's fund had a position in this security at the time of posting and may trade in and out of this position without informing the VIC community.
I do not hold a position with the issuer such as employment, directorship, or consultancy. I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
Increased market recognition of value disparity w/comps, continued earnings growth/upgrades, growth to value rotation beneficiary
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