Wabash National: Still Compelling Despite An Understandable Decline

seekingalpha09-04

Wabash National Corporation's shares have dropped 31% since my last 'buy' rating in February 2023, but are up 36.1% since my original 'buy' in September 2021.Revenue and profitability have been ...

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Jetta Productions Inc One really interesting company that I have followed for some time now is Wabash National Corporation (NYSE:WNC). The company, for those who are not terribly familiar with it, produces and sells a wide array of logistics goods. Specifically, through its Transportation Solutions business, it produces dry and refrigerated van trailers, platform trailers, tank trailers, and other similar pieces of equipment. Through its Parts & Services segment, it provides aftermarket parts and services; truck body upfitting solutions; food, dairy, and beverage equipment; and more. As an old school value investor, I find this kind of company very interesting. The more ‘boring’ a firm might come across as, the more intriguing I find it. However, since I began writing about the company a few years ago, my overall performance history with it has been mixed. Since I last reaffirmed my ‘buy’ rating for the stock in February of 2023, shares are down 31% while the S&P 500 is up a solid 35%. But in my defense, since my original ‘buy’ rating nearly two years earlier in September of 2021, shares are up 36.1% while the S&P 500 is up only 26.9%. Given the recent performance, performance mind you that has been bad because of weakening financial results, you might think that I would finally be ready to downgrade the stock. To be clear, I do think that the rest of this year and perhaps even next year could prove difficult for the firm. However, I think all of that and more is already priced into the business. Because of how cheap shares are, even factoring in current weakness, I do believe that maintaining the ‘buy’ rating I have had on it for nearly three years now makes sense. A wild ride If we were to look at just the past three fiscal years reported by Wabash National, we would be scratching our heads at the recent share price performance of the business. Revenue increased in each of these years, climbing from $1.80 billion in 2021 to $2.54 billion last year. You might think that this year-to-year increase has been because of a rise in overall shipments. But that has not been the case. There was a nice jump from the 45,365 new trailers that the company shipped in 2021 to 52,210 in 2022. But then, in 2023, the number dropped below the 2021 levels to 44,450. The picture regarding new truck bodies was a bit different, dropping from 2021 to 2022 before popping higher last year. Author - SEC EDGAR Data With this kind of rollercoaster, you might think that revenue would have fallen in 2023. But it actually came in higher to the tune of $34.4 million. Management attributed this mostly to higher revenue per new trailer unit, though the year over year increase in sales associated with new truck bodies certainly helped. Management attributed the higher revenue per new trailer unit to higher pricing in order to account for inflationary pressures, as well as improved pricing processes and what management called its ‘curated customer portfolio’. The increase in truck bodies last year compared to the prior year, meanwhile, was driven by strong demand. Also, to be perfectly clear, the main reason why shipments of new trailers dropped had nothing to do with demand. Rather, it was because of management's decision to ramp down its manufacturing of conventional refrigerated van trailers. Though it would be a dereliction of duty on my part if I didn't mention that the company did also experience a decline in demand associated with dry vans. Author - SEC EDGAR Data One thing that management has been focused on in recent years has been growing its Parts & Services segment. From 2021 to 2022, revenue associated with it expanded by 9.2%. And from 2022 to 2023, growth was a robust 14.2%. Management stated that strong demand for its outfitting solutions, as well as a change in product mix and higher revenue per unit involving its Engineered Products business, ended up being the primary reasons why revenue rose during this time. With revenue climbing, profits and cash flows have also risen. The company went from generating only $1.2 million in profits in 2021 to generating $231.3 million last year. Operating cash flow went from negative $7.5 million to positive $319.6 million. If we adjust for changes in working capital, we get an increase from $87.1 million to $277.5 million. And finally, EBITDA for the company expanded from $107.9 million to $360.3 million. As I mentioned already, part of the company's plans has been to increase the Parts & Services portion of the business. This, by definition, helps to increase profitability. As an example, in 2023, these operations accounted for only 8.6% of the firm's revenue. However, they accounted for 11.7% of gross profits. Almost always in this kind of space, providing parts and offering various services does come with higher profit margins than offering the original products the company specializes in. The firm also benefited under its Transportation Services segment from a profit perspective, mostly because of higher revenue per new trailer unit and truck body because of price increases that comfortably surpassed inflation. Author - SEC EDGAR Data Moving into the 2024 fiscal year, we have seen something a bit different and unfortunate. For the first half of the year as a whole, revenue dropped 18.5% from $1.31 billion to $1.07 billion. The Parts & Services segment, unsurprisingly, held up quite well, with revenue dropping by only 4.6%. However, the Transportation Solutions business reported a 19.8% decline in sales. Management attributed this mostly to a plunge in the number of new trailers sold from 23,610 last year to 17,745 this year. This significantly outpaced the higher revenue per new trailer unit that management captured because of price increases. The decline associated with truck bodies was more modest at 2.8%, with the number of units dropping from 7,835 to 7,615. Author - SEC EDGAR Data As would be expected of a capital-intensive business like this, a drop in revenue leads to a disproportionate decline in profits and cash flows. Net income declined from $125.5 million last year to only $47.1 million this year. Even though the company benefited from a reduction in certain manufacturing costs, including a reduction in material costs, the decline in volume really hit profitability. This is because the company must spread out the same fixed costs for each dollar of revenue that is coming in each year. If revenue drops, that spread becomes more detrimental to margins. Other profitability metrics followed a very similar path. Operating cash flow declined from $146.3 million to negative $6.4 million. On an adjusted basis, it fell by nearly half from $158.8 million to $80.2 million. The same holds true of EBITDA, with that metric declining from $199.5 million to $107.4 million. Author - SEC EDGAR Data The fact of the matter is that the industry that Wabash National operates in has always been quite volatile from one year to the next. After seeing the number of new trailers spike to 328,000 industry-wide in 2019, there was a plunge to 210,000 in 2020. By 2023, deliveries had risen up to 311,000. This year, however, according to third-party sources, this situation is different. For the first seven months of this year, there were only 82,000 net orders in the US. This happened to be 26% lower than what was achieved the same time one year earlier. And in July alone, net orders were down 37% compared to what they were in July of 2023. The strong orders achieved over the past couple of years following the plunge in 2020, as well as weak for-hire truck market fundamentals and dealer inventories that are already filled to the brim, meaning that the rest of this year will probably remain weak. Industry experts also worry that next year might result in some weakness because of regulatory concerns. Specifically, there is worry about fleet owners being unwilling to spend as we approach the implementation of stricter emissions standards for heavy-duty vehicles put out by the EPA earlier this year that should take effect in 2027. For its part, management has provided some guidance for investors. They expect revenue for this year as a whole to be between $2 billion and $2.2 billion. At the midpoint, that would be 17.2% lower than the $2.54 billion generated last year. They also anticipate earnings per share of between $1.50 and $1.60. At the midpoint, that would imply net profits of $70.3 million. If we annualize the other figures for this year, we would get adjusted operating cash flow of $140.1 million and EBITDA of $194 million. Author - SEC EDGAR Data Using these estimates, we can see how the stock is valued on a forward basis in the chart above. That chart also looks at a valuation scenario that considers 2023 figures. Even on a forward basis, shares look attractively priced to me, particularly relative to cash flows. In the table below, I then compared Wabash National to five similar companies. On both a price to earnings basis and on an EV to EBITDA basis, I found that one of the five companies was cheaper than our target. But on a price to operating cash flow basis, Wabash National ended up being the cheapest of the group.   Company Price / Earnings Price / Operating Cash Flow EV / EBITDA   Wabash National Corporation 12.0 6.0 6.0   Douglas Dynamics (PLOW) 23.5 10.7 12.0   The Shyft Group (SHYF) 65.4 26.7 33.1   Astec Industries (ASTE) 27.2 35.8 21.9   Terex Corp (TEX) 7.6 10.4 5.8   Manitowoc (MTW) 45.8 7.8 6.5   Click to enlarge I'm not the only one who thinks that shares are attractively priced. Back in February of this year, management increased their share buyback program by $150 million. That grew their plan to $180 million in total. For the first half of this year, the company has only repurchased $7.8 million worth of units. By considering that the $30 million that was initially part of its buyback offers was all that was left from a $100 million share buyback program implemented in August of 2021, I have no doubt that the company will make full use of the full $180 million worth of capacity over the next couple of years. For a company with a market capitalization as of this writing of $845.2 million, this is a lot of capital to return to shareholders. Takeaway  Fundamentally speaking, the most recent results for Wabash National have been incredibly disappointing. I can understand why market participants have been bearish since my last article. Having said that, the great thing about the company is that shares look cheap even if we assume that this weakness continues. If we see even further deterioration, it's possible that stock could still be attractively priced. Management clearly thinks so based on share buybacks. Add all of this together, and I do think that keeping the firm rated a ‘buy’ makes sense at this time.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"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":"4.28.3","shortVersion":"4.28.3","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/2464041302"}