ArcBest Corporation: Cheap Valuations & Good Growth Prospects (NASDAQ:ARCB)


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Investment Thesis

Just a few years in the past, ArcBest (NASDAQ:ARCB) shifted from a pure-play LTL participant to an built-in logistics firm and gained the flexibility to satisfy a number of wants of shoppers with its built-in options. This helps the firm to develop buyer partnerships. Large cross-selling alternatives between LTL and its logistics enterprise coupled with a rising logistics enterprise ought to assist the corporate put up good income development in the long run. I additionally anticipate long-term working margin growth within the firm’s LTL enterprise helped by excessive working leverage. While there might be some strain from tough macro circumstances within the quick time period, valuations are low cost and it seems that the road is perhaps underestimating the long-term development prospects.

ARCB Key Metrics

After the pandemic, the corporate recorded a wholesome ~35% y/y development in income in a superb demand surroundings in 2021. The sturdy development in 2021 income was supported by good quantity in addition to pricing development in Asset-Based enterprise and a rise in demand for logistics providers. The addition of MoLo to the Asset-Light enterprise additionally benefited the corporate. The Asset-Based enterprise tonnage/day improved by ~8% y/y whereas income/CWT elevated ~15% y/y in 2021. Operating leverage from elevated quantity within the community and better pricing helped the Asset-Based working margin, which improved 540 bps y/y to 11.2% in 2021. Asset-Light’s adjusted working margin additionally elevated to three.2% as the corporate was capable of higher handle prices.

ARCB Operating Metrics

ARCB Operating Metrics (Annual) (Company Data, GS Analytics Research)

The sturdy pattern from 2021 continued in Q1 2022 and the corporate recorded ~61% y/y development in revenues, pushed by good development in yields within the Asset-Based enterprise and profit from the MoLo’s acquisition within the Asset-Light enterprise. The consolidated working margin additionally grew ~340 bps y/y as a consequence of margin enchancment in each segments.

ARCB Asset-Light and Asset-Based Quarterly Revenues

ARCB Asset-Light and Asset-Based Quarterly Revenues (Company information, GS Analytics Research)

In Q1 2022, the Asset-Based income elevated by ~27% y/y, which displays a stable income/CWT development of ~21.1% y/y and a slight enchancment in tonnage/day of ~3.6% y/y. The phase’s adjusted working margin elevated by ~570 bps y/y helped by sturdy pricing. The Asset-Light phase additionally recorded good income development of ~104% y/y, primarily pushed by the addition of MoLo. Its adjusted working margin elevated by ~70 bps y/y.

ARCB Quarterly Operating Metrics

ARCB Quarterly Operating Metrics (Company information, GS Analytics Research)

Yield continued to develop at a wholesome tempo in a stable pricing surroundings. The firm recorded its highest ever quarterly Asset-based income per hundredweight of $43.70 in Q1 2022, which is a ~21.1% y/y development. So far it has benefited from a decent capability surroundings, gas surcharge, and freight combine adjustments.

ARCB Asset-Based Revenue per Hundred Weight Including fuel surcharge

ARCB Asset-Based Revenue per Hundred Weight Including gas surcharge (ARCB investor presentation)

The firm supplied intra quarter replace on its enterprise traits in its 8-Okay in June. The development continued within the months of April 2022 and May 2022. Asset-Based Revenue/CWT elevated ~19.3% y/y and ~17% y/y in April and May, respectively. The phase’s tonnage/day grew by ~3.5% y/y and ~6% y/y in April and May, respectively. The Asset-Light phase’s Revenue/day grew by ~122.2% y/y in April and ~82% y/y in May.

ARCB Operating Metrics For April and May 2022

ARCB Operating Metrics For April and May 2022 (Company 8-Okay submitting)

Growth Prospects

While the corporate has continued to put up sturdy development, if we glance carefully at April and May information, the expansion price appears to be slowing. For the month of May, consolidated revenues together with MoLo grew 38% per day y/y, which was slower than Q1 income per day development of ~60% y/y. The firm is dealing with a headwind from the slowing macroeconomic surroundings as a consequence of rising rates of interest. The spot truckload market has additionally proven some softness in current instances. In the quick time period, ArcBest could discover it difficult to document significant quantity development because the surroundings is difficult and the comparisons additionally get more durable within the second half as there was an distinctive demand surroundings in 2021. This is mirrored within the stock’s low valuation.

However, the corporate’s long-term development prospects look very promising. According to the corporate, 78% of its prospects indicated a necessity for multiple logistics service provided by ArcBest. 38% of shoppers already leverage multiple logistics service provided by the corporate. So, the corporate can goal remaining prospects to get them on board for a number of providers that ArcBest has. The firm’s preferrred prospects, who’re loyal and fewer value delicate, presently spend greater than $5 billion on Asset-Light logistics providers. The firm is utilizing information and analytics in decision-making and data gathering to focus on these prospects and supply them built-in logistics options. This isn’t solely serving to the corporate enhance its revenues however can be serving to enhance profitability and retention. In 2021, the corporate recorded 5x extra income in cross-sold accounts and 4x extra revenue in cross-sold accounts. The retention price can be 9% greater on cross-sold accounts. So, I see a giant alternative right here.

ArcBest is executing a 3-point technique to drive long-term development. This technique consists of:

  1. Expanding income alternatives by means of deeper buyer relationships and likewise securing new prospects

  2. More balanced enterprise combine

  3. Optimizing value construction by means of the adoption of progressive know-how

In addition to cross-selling alternatives, the corporate can be doing M&As which are according to its 3-point technique. The current acquisition of MoLo is one such instance. In 2021, ArcBest acquired truckload brokerage firm MoLo for an preliminary buy value of $235 million, which was paid in money. It is quickly scaling and one of many quickest truckload brokerage firms within the US and has about 500 prospects and entry to 45,000 carriers. This acquisition ought to enhance the expansion of ArcBest’s Asset-Light phase with the assistance of a big scale.

The addition of Molo ought to profit not solely the Asset-Light phase but in addition the Asset-Based enterprise as a result of the Asset-Based enterprise is best utilized when mixed with the Asset-Light phase, as prospects choose to get an built-in resolution. So, this acquisition additional widens the cross-selling alternative and deepens prospects relationship.

Apart from this, MoLo ought to assist the corporate develop the dimensions of its contractual enterprise relative to identify enterprise, due to which ArcBest ought to carry out higher in a deflationary spot value surroundings.

This acquisition has additionally resulted in a extra balanced enterprise combine for the corporate, because it has elevated Asset-Light’s contribution to the consolidated income to 44% in comparison with 34% pre-acquisition.

ARCB Revenue Mix Pre and Post MoLo

ARCB Revenue Mix Pre and Post MoLo (Company Data, GS Analytics Research)

Apart from MoLo, the corporate has just lately invested $25 million in Phantom Auto. It affords Human-Centered distant operation software program, which allows drivers to remotely function, help, and supervise autos. ArcBest invests round $150 million yearly in know-how and innovation and these sorts of investments ought to help ArcBest in reaching development in each income and profitability.

The firm has began to profit from the higher entry to capability from the early stage integration of MoLo because the service partnerships of ArcBest at the moment are greater than double what they had been beforehand. ArcBest will now have 80,000+ service relationships after the addition of MoLo. This further capability within the community will assist improve the flexibility to serve bigger prospects throughout the segments.

The administration is inspired by the pattern of demand for the corporate’s key providers and has up to date its long-term monetary targets. For 2025, the administration is forecasting consolidated income of $7-$8 billion. Given softening macro surroundings, I wish to be conservative, however even when we assume the corporate isn’t capable of attain these targets and solely keep the present income run-rate with cross-selling alternatives offsetting any macro softness, the stock at P/E of ~5.97x present yr consensus estimates seems too low cost to disregard. With the corporate rising logistics enterprise by means of each natural and inorganic routes, these cross-selling alternatives are going to proceed rising. Hence, if one is okay wanting past the present cyclical slowdown, the corporate is a really fascinating long-term secular development story in making.

Operating Margin Outlook

In addition to specializing in income development, the corporate can be prioritizing income high quality by specializing in much less price-sensitive prospects. These efforts have yielded good outcomes up to now, as mirrored within the improved yields and working margins. Efforts to boost digital channels have additionally helped decrease prices.

Looking ahead, in the long run, asset-based working margins are anticipated to proceed benefiting from excessive working leverage. Costs associated to the LTL community, together with actual property prices, labour prices associated to native pickup, supply and cross-docking of shipments are largely fastened in nature until service ranges are considerably modified. So, as cross-selling asset-based providers to logistics shoppers develop and asset-based volumes enhance, the corporate will see improved margins in the long term. Apart from the working leverage, know-how and automation are additionally contributing to cost-cutting. The pilot check program at ABF Freight entails patented dealing with tools, software program, and a course of to load and unload trailers. It is bettering transit efficiency and decreasing cargo claims.

Further, the current MoLo acquisition may also assist add scale to the corporate’s asset-light enterprise and its margins will enhance with scale over the following few years.

For 2025, administration is forecasting Asset primarily based working margin of 10-15% and Asset-Light (excluding FleetNet) working margin of 4-6%. Management’s observe document of yield administration in current difficult instances has been good up to now, which additionally offers confidence of their potential to realize these targets.

Valuation and Conclusion

ArcBest is nicely positioned for long-term development because of the current MoLo acquisition and cross-selling alternatives. The sizeable enhance within the community capability, with the help of MoLo’s integration, additional enhances its place within the market to fulfill the rising demand from its prospects. ArcBest is an efficient long-term story with secular income development and margin growth alternative. The stock is buying and selling at simply 5.97x present yr consensus EPS estimates which is a major low cost to its 5-year common P/E.

ARCB P/E Valuation

ARCB P/E Valuation (Seeking Alpha)

Hence, I’ve a purchase ranking on the stock.

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