Daseke Stock Price Has Displayed Its Strongest Performance Since Being Public

Summary

• Daseke's stock price is up over 34 percent from the lows set in early-June.
• Execution of recent acquisitions will continue to be important as the primary growth thesis is predicated on consolidation of a highly fragmented $133 billion market.
• The company remains on track to hit its $140 and $200 million adjusted EBITDA targets for 2017 and 2019.
• The focus on adjusted EBITDA targets is possibly one of the factors driving recent performance; and likely will be a continued driver for near-term potential gains.

Daseke’s (NASDAQ:DSKE) stock price has been on a tear from early-June. The stock price has risen from a low of $8.87 to $12 per share during this short period. I initially wrote an article on the company back in April – the high points of the article were that Daseke presented a unique opportunity for investors seeking exposure to the open deck market for trucking. But I remained a little cautious based upon the company’s leverage and transition towards increasing profitability.

Soon-after this article, I initiated a small position in the company’s common shares. This move was predicated on the benefits of owning an asset-based open deck carrier with national scale. As consolidation in the trucking industry continues, and federal mandates come into place, I am a believer that the strongest asset-based businesses will thrive. Adding a company like Daseke into my portfolio under management is a nice fit further diversifying existing exposure to the trucking industry via e-commerce, intermodal and less-than-truckload (LTL).

Source: Daseke, Inc. – Consolidating the Flatbed & Specialized Logistics Market, Acquisition Conference Call, July 6, 2017

At the company’s most recent acquisition conference call, the slide above has been used consistently to depict Daseke’s market potential. Based on the three deals in 2017, Daseke, has the largest flatbed and specialized fleet in North America, with over 3,600 tractors and 7,500 trailers, with 1.2 million square feet of warehouse space dedicated to industrial logistics and distribution services.

Per the sourced FTR information, less than 1 percent of the market, or just under 400 companies, have a fleet greater than 100 trucks. This strongly sets Daseke apart from the competition, with the opportunity to continue growing via the consolidation model. This graphic truly gets at the interest and opportunity for an investor to own Daseke.

Accretive deals allow for the potential to drive growth, the uniqueness is that Daseke is structured more as a holding company, leveraging its integration opportunities to benefit all its operating companies. This allows the potential for synergies, most importantly, having these companies operating within a freight management system, versus their more fragmented peers, with less scale.

The direct connection for investors based on the consolidation thesis, is the long-term potential for increases in operating revenues, adjusted EBITDA and free cash flow. In my initial article, I was critical of Daseke’s leverage position and profitability. Upon further review, and after a modest adjustment to the company’s debt to adjusted EBITDA on a gross basis, I decided it was worth the risk to increase the position based on the underlying consolidation thesis.

After the first quarter report, and on a gross basis, Daseke’s debt was 3.4 times adjusted EBITDA. While still moderately higher than some of its trucking peers, I decided to revisit another company’s success, through consolidation, XPO Logistics (XPO). XPO currently sports a ratio of the company’s debt at 3.8 times adjusted EBITDA, on a gross basis.

I understand the other considerations for how debt to adjusted EBITDA may be measured, and that Daseke’s management is focused on keeping it below a multiple of 3 times adjusted EBITDA, with the exception that acquisitions may lead to a higher level. Additionally, when looking to profit growth, XPO was not able to generate a substantial increase in its profits during the acquisition phases, but has witnessed tremendous success after integration.

Granted Daseke’s model is not identical to XPO, nor will the company likely be acquiring companies at a similar scale, but given time, and the company may be able to achieve similar results as operating revenues, net income, adjusted EBITDA and free cash flow rise.

Investors may be wondering what is different, or why now, has the stock price witnessed the recent run-up? I do not have a perfect answer, but I suspect that as the last three deals have been made, markets are looking more closely to management’s adjusted EBITDA estimates of $140 and $200 million for 2017 and 2019.

With the previous three announced acquisitions including The Schilli Companies and Big Freight Systems and more recently, The Steelman Companies, Daseke has witnessed an increase to 2016 revenue and adjusted EBITDA of $166 and $20 million respectively, representing 25 and 23 percent improvement. This places management’s need for further deals around the $30 million adjusted EBITDA level.

Importantly, with a stock price close to $10 per share, Daseke would have been trading at 4.7 times adjusted EBITDA, assuming these three deals, on a trailing twelve-month (TTM) basis. Looking to the $140 million target for 2017, and Daseke was trading close to 3.7 times adjusted EBITDA on a forward basis.

Source: Transports In Focus

In the tables above, Daseke’s EV/EBITDA metric is based upon the most recent TTM, excluding the three recent deals. But as can be seen comparatively, Daseke would be have been trading at the lowest valuation, with the exception being P.A.M. Transportation (PTSI), when factoring for the three newly acquired company additions.

Source: Transports In Focus

At the same token, Daseke’s operating revenues for the first quarter of 2017 ranked 11 ^th out of 17 peers. However, as the recent deals have illustrated a 25 percent increase, Daseke could soon be approaching a position within the top ten.

For valuation, there is a general trend towards larger scale companies having a higher valuation. Interestingly, the two highest valued peers include JB Hunt Transport (JBHT) and Landstar System (LSTR), which is a core competitor for Daseke. I am not prepared to assign Daseke an EV/EBITDA multiple at 10 times, but somewhere between 5 and 7 times is not unreasonable, especially as the company continues to scale.

I view this as an important consideration and a possible driver for Daseke’s recent surge. Depending upon how all three deals were financed, including any additional debt and cash expenses, as well as the 1 million share dilution, and Daseke could be valued by EV from $700 to $950 million by year-end 2017. By 2019, this range could increase from $1 to $1.5 billion. This type of near-term levels has potentially substantial positive implications for the stock price.

Now that the stock price has reached the $12 per share level, and including the three recent deals, Daseke is trading 5.2 times adjusted EBITDA on a TTM basis. If this valuation multiple is carried forward and/or witnesses further expansion as the company scales, investors may witness further gains over the next few years.

Analyst’s Disclosure: I am/we are long DSKE, JBHT, XPO. 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.