Patriot Transportation Is A Forgotten, Undervalued Spin-Off

Patriot Transportation (NASDAQ:PATI) is a top-tier regional tank truck hauler servicing the southeastern United States. FRP Holdings spun off Patriot Transportation during January 2015 and it began trading under the symbol PATI. However, it began as a premier bulk tank carrier in 1962 under the name Florida Rock and Tank Lines. Florida Rock and Tank Lines continues its growth as an industry leader in the southeastern United States, transporting petroleum and other liquid and dry bulk commodities in tank trucks.

PATI operates under its one subsidiary, Florida Rock and Tank Line. The company specializes in hauling petroleum (82% of revenue), dry bulk and other liquid commodities(18% of revenue).

The tank lines transportation business is highly fragmented. This attribute offers PATI exciting growth opportunities with its strong balance sheet, free cash flow, clean capital structure and committed bank financing to benefit from industry consolidation. It is ranked #12 in US by revenue per the 2013 Bulk Transporter's Gross Revenue Report. Number one of the top 3 tank truck haulers in the markets, they generate 66% of the company's revenues.

Current Valuation

Patriot Transportation is a value outlier based on asset reproduction and earnings power. It has 21 terminals, 9 satellite locations, 488 tractors and 563 trailers located in Florida, Georgia, North Carolina, South Carolina, Alabama, and Tennessee. The terminals owned are in Florida (Jacksonville, Panama City, Pensacola, Tampa, White Springs), Georgia (Albany, Augusta, Bainbridge, Columbus, Doraville, Macon), and Tennessee (Chattanooga, Knoxville). Additionally, the company owns 468 tractors and 561 tank trailers. During fiscal 2016, Patriot Transportation purchased 78 new tractors and 24 trailers. Further, its current financial position reports $6.87 million cash and $6.44 million current account receivables, for a total current asset value of $17.95 million. It has Gross PPE of $102.19 million or net value of $41.38 million. The company's total equity value is 45.82 million, or $13.89 per share, with no debt.

Insider buying from the original founders of Florida Rock / Patriot Transportation, John Baker. The Baker family owns 37% of PATI. Edward L. Baker 5.14%, John D. Baker (Chairman) 13.39%, Thompson S. Baker (President and CEO) 5.69%, Edward L Baker (Chairman Emeritus) 1.227%. John D. Baker purchased 10,000 shares during June 2017 for $179,662, or $17.97 per share. During 2016, John D Baker purchased 6,233 shares for $121,712, or $19.53 per share.

Value institutions holding shares at higher prices are Royce Associates, PVAM Perlus Microcap Fund, T. Rowe Price Associates, Hyman Charles D, Willis Investment Counsel, Rutabaga Capital, Cove Street, and Teton Advisors.

Nine of the company's top 10 largest volume customers have been serviced over 10 consecutive years. During the past five years, annual revenues grew 54.60% with these loyal customers. Supported by consistent double-digit return on capital, its TTM ROIC is 12.17%. Trading near tangible book value recorded below fair market value, Patriot Transportation's EV/EBIT is 7.18 and EV/revenue is .45.

Historical Value Improvements

The stock is down -18% over the past 52 weeks. It is off its 52-week high of $27.32, versus the $17.95 closing price on 07/14/17. Revenues decreased slightly year over year. But profits reported with growing net cash, equity and reduction of liabilities and enterprise value to revenue and EBITDA.

Trucking Industry Comparisons (18 Companies)

I ran a screen for companies in the trucking industry and excluded the OTC-listed ones. My final, but not perfect, industry peer group is 18 companies. Many competitors are smaller private and not reviewed.

After doing the industry comparisons, Patriot Transportation is a strong value outlier with these attributes. It is ranked highest for financial strength and lowest for EV/EBITDA at 3. As a percentage above the historical low, P/Book, EV/Sales, and EV/EBITDA ranked the lowest. PATI has the smallest market capitalization, enterprise value, and short as a percentage of the float. The negative 18% stock return ranked the third lowest in the group.

Risks:

• Thinly traded with no Wall Street Coverage
• Loss of major customers from under-bidding by a larger competitor or bankruptcy
• Lack of Wall Street Coverage
• A continued labor shortage of available qualified drivers
• The increasing costs of workers' healthcare, fuel prices, insurance, equipment, taxes, tolls and regulations
• Reduced demand for hauling petroleum products from overcapacity or industry / economic trends
• Liabilities from environmental costs related to the hazardous materials delivered.

Opportunities:

• Future acquisitions, coupled with Wall Street coverage and continued profitable growth

Disclosure: Long PATI.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.