Will Echo Global Logistics Ring Out?

| About: Echo Global (ECHO)

Echo Global Logistics (NASDAQ:ECHO) provides cost-saving solutions to their clients for total shipping needs across all transportation modes using a proprietary technology platform. In their 2011 annual report, Echo referenced their five-year financial objectives. Echo is targeting annual total revenue in the range of $1.3 to $1.5 billion and operating margins of 30 to 35 percent benchmarked against 2010 financial results.

Echo's 2010 annual revenue was $426,373,975. That makes revenue of $1.3 billion to $1.5 billion an increase of 205% to 252%. In a five year timeframe, revenue would ideally grow consistently at 28.5% a year to meet such a lofty goal. So, can Echo really grow revenue from $426M to $548M to $704M to $905M to $1.16B to $1.49B?

The majority of Echo's growth in 2009 and 2010 was organic. But Echo also utilizes an aggressive acquisition strategy. As of September, 2012, Echo had acquired fourteen businesses over the past four years. Echo has honed an acquisition strategy that pursues companies they can "successfully integrate, adding geographic coverage, mode diversification, customer relationships and sales and operational talent". Rapid integration of these fourteen companies maximized Echo's return on investment. Echo focused on finding companies with the right cultural fit to enable seamless assimilation of new staff. Their leading edge technology helped them migrate back office processes. They also managed to accomplish those fourteen acquisitions without incurring any long-term debt.

So, how are they progressing toward their revenue goals? Revenue YOY from 2010 to 2011 increased 41% from $426M to $602.7M. Of this $176.7M increase, $62M (more than one-third) was derived from 2010 and 2011 acquisitions. Through the third quarter of 2012, Echo increased revenue to $546.5M and is projecting fourth quarter revenue to be $200M to $215M. This puts 2012 revenue in the range of $746.5M to $761.5M at an increase rate of 23.9% to 26.3%. So, two years in and Echo is tracking about 8% ahead of schedule - assuming a steadily-paced schedule (which is truly, most likely, an unreasonable assumption).

Regardless of a steady or unsteady pace, Echo still faces a daunting challenge to meet their self-imposed goal of $1.3B to $1.5B revenue in 2015. Based on their pattern of previous acquisitions, is it reasonable to believe Echo can locate, negotiate purchases of, and assimilate approximately ten additional companies in the next three years? With growth being dependent on canvassing for companies whose competencies complement their existing business and whose locations expand their geographic footprint, it is not likely Echo would accomplish their acquisition goal with a single large purchase. Yet, it is also not likely they can accumulate another dozen small companies and expect to double their revenue in three years. A clue may exist in Echo's most recent acquisition of Sharp Freight Systems of Yorba Linda, CA. Sharp's TTM revenue was $71M - significantly greater than any prior acquisition. If Echo's growth through acquisition strategy is adjusted to target four to five companies similar to Sharp, those revenue goals just may well be within range.

That would leave the plans focused on organic growth as the key factors to keep on track in order to achieve the overall revenue objective. Organic growth includes ensuring sales force productivity, obtaining more enterprise clients, leveraging their technology investments, growing their truckload share and expanding their inter-modal capabilities. In all those regards, Echo has proven themselves competent.

Now to a quick discussion on operating margins. Echo is not yet close to its five-year objective for operating margin. Their most current quarter's reported operating margin was 17.3% . All else being equal, if they double their revenue, EPS should double. If they double their operating margin in the same timeframe, extrapolation of their EPS moves it to the $2.60 range. Using the transportation industry's current P/E of 16.94, that would mean a share price of $44 for Echo in 2015.

But, "all else" can't be guaranteed to be equal. Risk factors will likely prevail somewhere along the way in the next three years. Still, Echo's track record is a worthy reference for future performance. So while they may not succeed in doubling both their revenue and operating margin in the next three years, it is reasonable to for an investor to spend time and energy considering whether Echo's share price could appreciate handsomely over the next three years, compared to its current 50 day moving average of $17.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.