Wabash National Corporation: Washed Out or Hidden Upside?

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 |  About: Wabash National Corporation (WNC)
by: Terence Channon

On Monday, April 30, 2007 after the market close, Wabash National (NYSE:WNC) a maker of truck trailers (and unfortunately one of my holdings) reported earnings for 1Q 2007. Analysts estimated WNC to post EPS of $0.08 per share with the range going from $0.05-$0.13. WNC came in at $0.03 per share.

Although the weakness in their numbers was not unexpected per the general market conditions, the stock price was slammed and dropped over 7% on the heaviest volume since August, 2006 to close at $14.22. Needless to say, I was not a happy camper, but my long-term stance and prospects on the stock has not changed. Granted, it would be nice for it to go up and up everyday, but that is just not reality.

When I first bought WNC back in late 2006, I knew it was going to be several months before WNC could get things back in order. Of course, I was hoping for things to start to show signs of life earlier, at least in the stock price, sooner rather than later, but that has not been the case thus far.

The short-term outlook for WNC and the industry does not look great and it has reflected in the stock price, but after listening to the conference call and reading the 10Q report, I still believe that long term, WNC is a winner. It would just be nice for it to be a winner sooner rather than later, but sometimes, it can take up to a couple of years for things to turn around in the marketplace. Tontine Capital Partners tends to agree with this sentiment. The fund purchased another 378,000 shares (now owns 14%+ of WNC) on May 1 and 2 at an average price of $14.54. The stock has since rebounded off of its recent lows to trade in the $14.90 area.

Anyway, here is my take on the situation - both arguments for and against owning WNC.

Against

1. Weak Market: I will not spend much time discussing the cons as they are already rampant out there in the stock market. If they were not, the stock would likely not be as close to the lower end of its trading range as it currently is. In short, WNC is facing a softer market as there has been slowdown in overall truck shipments and tonnage – it is being blamed on the residential housing slowdown (e.g., fewer raw materials to ship). Less stuff to ship means less need for trailers and less money to spend on them.

2. Price Pressure from China: This is a very general argument as nearly every USA based manufacturer of anything faces challenges from overseas manufacturing. Trailers are commodity items, it would seem, and hence the only thing that matters is price.

For

1. WNC Backlog Remains Strong: Despite a weak market, WNC continues to book orders and their back log is about 8% higher than 90 days ago. Backlog is defined as signed, committed orders that have not yet been delivered or invoiced, so they cannot be booked as revenue. WNC continues to build on their backlog and generate increased quote activity. The current market activity has delayed the fulfillment and formal delivery of some of these orders, but WNC and myself are both confident the majority of the backlog will be fulfilled within the next 12 months. WNC has already booked 75% of its 2007 target, so that is a positive prospect.

2. WNC Share Repurchase Program: WNC repurchased an additional 218,600 shares during the 1Q 2007 under their authorized share buy back program. WNC has the ability to repurchase up to $32.8M worth of additional stock in open market or private transactions. I do expect WNC to 100% complete this buy back effort and likely purchase another 2,000,000 (approximately) shares over the course of the plan. WNC has already repurchased over 1.1M shares under the current plan. Short-term, the buying back of the stock likely will not directly have much impact on the stock price, but this is a great way to reward shareholders and I believe in the long-term, this will make to be a good use of corporate funds and should ultimately reward shareholders by reducing the number of shares outstanding.

3. Market Geared to Turnaround in Mid/Late 2007 and 2008
: Industry trends show that the market for trailers should start to see double digit growth in 2008 when compared to 2007 in terms of # of units ordered/shipped. I do believe that the transportation, especially when it comes to things like railroads, trucking, etc. should start to turnaround strongly within the next several months. The housing slowdown has been problematic for demand of shipping raw materials and goods, much of it done by truck and rail, so naturally, those industries have seen weakness. However, Warren Buffet has recently become a big believer of infrastructure plays in the USA.

4. WNC Customers Responding Positively to Price Changes: Although pricing is a big concern, especially with cost of commodities and raw materials going up and pressure from China manufacturing, WNC has not faced much push back. In fact, WNC has actually raised prices to customers, and it has not scared many customers off. Of course, at some point, things get too expensive, but it appears WNC is leveraging their strong tradition in the USA and placing more emphasis on higher-margin projects and items. For those who believe that USA manufacturers cannot compete with Chinese production costs, note the US-based steel companies and how many have been able to succeed and thrive by focusing on more solution-orientated selling and product lines. WNC is strategically moving in that direction.

5. WNC - $1M Delayed Charge Impact to Earnings: There was a note of a $1M charge taken by WNC in 1Q 2007 related to some clean up from late 2006. Adding that figure back into earnings and eliminating the extraordinary blizzard event that shut d!
own production for several days, WNC would have been right inline, or at least very close, with analyst expectations.

Anyway, despite the above, the reality is at this stage, both myself and Tontine Capital Partners (forgive me for classifying myself in the same wind) are not looking like the brightest investors around, but WNC is going to take some more time to materialize. The reality is that the positive factors for WNC are a little ways out and somewhat buried within the company’s financial reports and the negatives, while certainly strong threats, are more generalizations rather than company specific problems.

This one is going to need another 12-18 months, but we will see upside earnings surprise and when that happens, especially with the huge amount of shares short that will need to be covered, $23-$28 is going to happen.

Disclosure: Author has a long position in WNC

WNC 1-yr chart

WNC