Saia: Recent Correction Is A Buying Opportunity

seekingalpha04-29

SAIA is gaining market share in the LTL industry and seeing good pricing and volume increases despite tough macros.While SAIA missed consensus estimates due to tough macros, I believe these headwinds ...

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Jon Tetzlaff/iStock Editorial via Getty Images Investment Thesis I last covered Saia, Inc. (NASDAQ:SAIA) in August 2023. While the company had good growth prospects, the valuation was already reflecting those prospects, leaving a little room for error. So, I downgraded my rating to neutral at that time. My fears came true when a slight miss in estimates caused a massive correction post SAIA’s Q1 2024 results. I have revisited my thesis post the recent correction. While I believe there are some near-term headwinds, the longer-term growth prospects for the company remain intact. Valuation has also come down to a reasonable level if we look at FY25 earning estimates. So, I believe the recent correction presents a good buying opportunity in this long-term compounding story. Hence, I am upgrading my rating to a buy. SAIA Revenue Analysis and Outlook After witnessing double-digit revenue growth in FY21 and FY22 thanks to strong demand, SAIA's revenue growth was impacted in early 2023 as demand normalized and interest rates started rising. However, the bankruptcy of Yellow Corporation (OTC:YELLQ) led Yellow’s customers to start shifting their freight requirements to SAIA, which resulted in increased shipping volumes and benefitted SAIA's revenue in recent quarters. In the first quarter of 2024, SAIA reported operating revenue of $754.8 million, up 14.3% Y/Y. This was attributed to increases in shipments and tonnage, mainly due to the redistribution of freight following the Yellow Corporation’s shutdown in late July. LTL shipments increased by 15.7% Y/Y to 2.1 million shipments, and LTL tonnage was up 6.2% Y/Y to 1.4 million tons. Revenue per hundredweight, or yield, grew by 7.6% Y/Y and 10.5% Y/Y excluding fuel surcharges, driven by effective mix management and pricing actions. SAIA’s Historical Revenue Growth (Company Data, GS Analytics Research) Looking forward, while there are some near-term headwinds, the company should still be able to post decent growth and the long-term market share gain story remains intact. The transportation business is usually correlated with GDP growth, and if we look at Q1 2024 GDP numbers, macros are not really that helpful. SAIA is gaining share in the LTL industry despite tough macros and was able to increase its daily tonnage by 6.2% Y/Y in Q1 2024 which was better than the 3.2% Y/Y decline in daily tonnage posted by its peer Old Dominion Freight Line (ODFL). March was a bit slower month with 5.2% Y/Y growth which resulted in the company missing consensus topline estimates but April has picked up with 6.5% Y/Y tonnage per day growth (which is again better than 2% to 2.5% Y/Y growth for ODFL) and, on SAIA Q1 2024 earnings call, management talked about demand strength in last few days. Given the company is still growing and gaining share, I am not too worried about the macro headwinds. Once the broader macrocycle reverses, the company should emerge stronger on the other side with a higher market share. Another thing to note is that the pricing environment remains strong. The company’s revenue per hundredweight was up 10.5% Y/Y excluding fuel surcharge, with strong performance in contract revenues. This pricing increase was also better than ODFL’s 6.7% Y/Y revenue per hundredweight improvement. So, SAIA is doing well on the pricing front as well. From a longer-term perspective, the company is focusing on opening new terminals and expanding its geographic presence. The company continues to invest in its network and expand its footprint, and plans to open 15-20 new terminals this year. For 2024, the company is planning ~$1bn in capital expenditure to pursue its long-term growth plans, which is a step-up versus ~$440 mn spent in 2023. Overall, I like the company’s excellent execution, which should help it navigate the current tough macro environment and position it well for long-term growth. SAIA Margin Analysis and Outlook The company’s margins benefited from higher volumes in Q1 2024. As a result, the operating margin improved by 60 bps Y/Y to 15.6% due to operating leverage on increased volumes. SAIA’s Operating Income Margin (Company Data, GS Analytics Research) Looking forward, the company’s margin is expected to improve 150-200 bps sequentially in Q2 2024 as per management’s guidance. Usually, Q2 is sequentially higher in terms of volumes and the company seasonally sees better margins in the second quarter versus the first due to operating leverage. However, the seasonal improvement this year is a bit lower than the historical trend. The 150 to 200 bps sequential improvement in margins would imply an operating margin between 17.1% to 17.6% in Q2 2024 which is essentially flattish Y/Y as midpoint. While investors punished the stock for flattish margins, I am not too worried about it and believe the longer-term margin growth trajectory is still positive and the current margin headwinds are transient. Other than a muted freight environment, the company is also seeing headwinds from depreciation and other expenses related to recently acquired Yellow Terminals. Once the company improves the operations of these recently acquired terminals, its margins should improve. Management is still confident that the company should be able to post 100 to 150 bps Y/Y improvement in the operating margin for the full year and the company’s longer-term goal is to achieve greater than 20% operating margin (sub 80% operating ratio) is still intact. As the company continues to gain market share and add more volume to its terminals, its margins should improve in the longer term. The company is also able to charge a premium for its excellent services and is seeing strong price increases. So, I am optimistic about the company’s long-term margin growth prospects. SAIA Stock Valuation After the post-earnings correction, SAIA stock is currently trading at ~22.03x FY25 consensus EPS estimates, which is lower than its 5-year historical average P/E (FWD) of 25.50x. It is also lower than its peer ODFL’s FY25e P/E of 25.42x despite posting better growth performance. SAIA is following ODFL's playbook in the LTL space. ODFL, over the last fifteen years, has focused on growing revenues by providing excellent services, maintaining pricing discipline, increasing geographic reach, and gaining share versus unionized LTL companies. The pricing discipline also helped ODFL improve its margins. As a result, ODFL's stock price has increased from mid single digits around 2008 (adjusted for splits) to $182 as of last close, making it one of the best performing stocks in the last 15 years.   ODFL's stock price (Seeking Alpha) SAIA also started focusing on providing excellent services, maintaining pricing discipline and expanding geographic reach starting 2017, and the stock price rise has been a phenomenal ~10x since 2016 end.   SAIA Stock Price (Seeking Alpha) SAIA revenue last year was ~$2.9 bn while ODFL clocked $5.9 bn in revenues. ODFL was around $3 bn in revenue in 2016, and it reached $6.3 bn in revenues in 2022 (i.e. 6 years.) In the same period, its operating margins increased from 16.2% to 29.4% as high fixed cost of LTL network means a good operating leverage as volumes increase. I am expecting a similar revenue growth trajectory for SAIA over the next six years. For operating margin, I am closer to ~25%, as 2022 was an extremely tight market from freight demand perspective (benefitting ODFL) and we need to consider a more normalized number. So, over the next six years, we are looking for a potential doubling of revenues and operating profit and EPS posting even better growth. Over the last 5 years, SAIA has traded at an average forward P/E of 25.5x and this is well deserved given the company's excellent growth prospects. I believe integration of Yellow terminals has added some costs and caused investor worries around margins and valuation multiple contraction. However, this should be transient. Once the company is done with Yellow terminal integration and comp some of these headwinds in 2025, investor worries should fade and multiple should revert to mid-20s. Applying 25x P/E to next year's consensus EPS of $19.29 gives a price target of $482.25 or 12.5% upside from the last week's closing price. Risks The company faces risks from the current macroeconomic environment. If the broader macroeconomic environment worsens, it might result in slower growth than investors are expecting. There might be integration risks related to recently acquired Yellow Terminals and if costs related to refurbishment, integration, and operation of these new terminals exceed the company’s estimates, it could impact margins. Takeaway  While there are near-term macro headwinds and added costs due to Yellow Terminal integration, the company is executing well. The company should continue to deliver revenue growth thanks to price increases, market share gains, opening new terminals, and expanding its geographical reach. The margin should expand in the long term with the help of operating leverage on higher volumes and strong pricing. I believe as the company completes integration of Yellow terminals, some of the investor worries around cost/margin should fade and the stock's P/E multiple should return to its historical levels and result in stock upside. Hence, I am upgrading the stock to a buy rating.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2431863014"}