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Pacer (NASDAQ:PACR) is a cheap, asset-light business in an otherwise capital-intensive industry. While some asset-light logistics companies, such as Expeditors International (NASDAQ:EXPD), have performed extremely well over the long term, we believe the model has matured and is fundamentally less attractive than it was in the past. As a result, investors should investigate the sustainability of the company’s superior returns on capital. That said, the shares are enticing at 6x estimated 2009 EPS.

BUSINESS OVERVIEW

Pacer is an asset-light transportation firm. Two segments:

Intermodal (80% of revenue) facilitates the movement of freight by trailer or container using two or more modes of transportation. It consists of the Stacktrain, Cartage and Rail Brokerage operations, and provides services to transportation intermediaries, beneficial cargo owners and international shipping companies who utilize intermodal transportation.

Logistics (20% of revenue) provides truck brokerage, truck transport, supply chain services, freight forwarding, ocean shipping and warehousing, and distribution services.

Big Lots (NYSE:BIG), C.H. Robinson (NASDAQ:CHRW), GE, Sony (NYSE:SNE), Union Pacific (NYSE:UNP), Toyota (NYSE:TM) and ConAgra (NYSE:CAG) accounted for 19% of revenue in 2007.

SELECTED OPERATING DATA

FYE December 31

2005
2006
2007
YTD
9/30/08

% of revenue by segment:

Intermodal
75%
79%
80%
78%
Logistics
25%
21%
20%
22%

Revenue growth by segment:

Intermodal
5%
6%
5%
10%
Logistics
-2%
-13%
1%
15%
Total revenue growth
3%
1%
4%
11%

% of revenue by geography:

Domestic
89%
89%
88%
90%
Foreign1
11%
11%
12%
10%

Revenue growth by geography:

Domestic
2%
1%
3%
12%
Foreign
11%
7%
12%
5%

EBIT margin by segment:

Intermodal
8%
9%
7%
8%
Logistics
1%
0%
1%
0%

Corporate and other

-1%
-1%
-1%
-1%
Total EBIT margin
5%
6%
5%
5%

1 Foreign revenue is generated by the logistics segment, with the exception of Mexico, where the majority of revenue is generated by the Stacktrain operation.

INVESTMENT HIGHLIGHTS
  • Good business in capital-intensive industry. Pacer’s non-asset-based strategy limits capex and reduces working capital through deals with carriers and equipment providers. The strategy gives Pacer access to freight terminals and facilities and control over transportation-related equipment.
  • Competitive advantages: Ability to pass volume rate savings to customers; cross-selling; flexibility to tailor services in changing freight market.
  • Recently reorganized intermodal segment to reflect our strategy of placing additional emphasis on retail customers and door-to-door services.
  • Long-term deal with APL improves Pacer’s bargaining power with railroads, as APL freight moves from the West Coast to the Midwest, while domestic freight typically moves the other way.
  • Stock price implies 16% trailing FCF yield, 5x trailing P/E and 6x forward P/E.
INVESTMENT RISKS & CONCERNS
  • Management sees “tough economic period” in Q4 and “well into 2009.”
  • Logistics segment posted slight loss YTD due to excess capacity, declining prices and higher fuel costs. The truck services sub-segment incurred higher claims and bad debts due to bankruptcies.
  • Cyclical shipping volumes in transportation and logistics industries. Pacer’s asset-light model does not insulate it from factors affecting pricing and expenses. Pacer claims it retains volumes in downcycles and benefits from increased use of Stacktrain at the expense of long-haul trucking.
  • Dependent on rail, truck, ocean transportation services and equipment provided by third parties. Pacer has experienced shortages in the past, mostly in the October/November peak season. Pacer has contracts with Union Pacific (thru 2011), CSX (thru 2014), and KCSM in Mexico (thru 2012).
  • Competitors include Union Pacific, CSX, J.B. Hunt (NASDAQ:JBHT) and Hub Group (NASDAQ:HUBG), C.H. Robinson, Exel, Alliance Shippers, Burlington Northern (BNI), and the supply chain solutions divisions of Ryder (NYSE:R) and Menlo Worldwide.
  • $400+ million in lease commitments, the majority of which relate to railcars, containers and chassis. An undisclosed portion can be terminated each year.
  • Management owns only 1% of the company.
COMPARABLE PUBLIC COMPANY ANALYSIS
($mn)
MV
EV
EV/Rev
P/TB
08 P/E
09 P/E
EXPD
6,506
5,809
1.0x
4.9x
22x
20x
HUBG
1,002
938
.5x
15.9x
16x
15x
JBHT
3,114
3,803
1.0x
6.4x
15x
14x
UNP
29,160
36,765
2.1x
1.9x
13x
11x
PACR
359
395
.2x
6.9x
6x
6x
MAJOR HOLDERS

CEO Uremovich <1% │ Other insiders 1% │ Barclays 8% │ Vanguard 6% │ LSV 5%

RATINGS
VALUE

Intrinsic value materially higher than market value?

***
MANAGEMENT

Capable and properly incentivized?

**
FINANCIAL STRENGTH

Solid balance sheet?

***
MOAT

Able to sustain high returns on invested capital?

**
EARNINGS MOMENTUM

Fundamentals improving?

***
MACRO

Poised to benefit from economic and secular trends?

**
EXPLOSIVENESS

5%+ probability of 5x upside in one year?

**

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Source: Pacer: Cheap, Asset-Light Logistics Company