Rush Enterprises: This Auto Dealership Stock Has A Potential Upside Of More Than 20%

| About: Rush Enterprises, (RUSHA)

Summary

Rush Enterprises is a Texas-based player that runs dealerships and service centers of commercial vehicles across the United States.

The company has been an excellent performer in the auto dealership and services industry largely due to its focus on the niche segment of commercial vehicles and its excellent management.

The growth and profitability of the company have been consistently good over the years and the recent fall in the stock price presents an excellent buying opportunity for medium-term investors.

Rush Enterprises, Inc. (NASDAQ:RUSHA) has a simple and a focused business model. The company is an integrated, one-stop shop for all solutions with respect to commercial vehicles. It has been in this business for many decades and has become a perfect example of a cash cow. The returns provided by its equity shares have been consistently outperforming the index returns and the future outlook of the company is positive.

The recent fall in the share price was a result of the fears associated with the company being at the peak of the truck cycle. It presents an interesting opportunity for medium-term investors. Our evaluation of the company’s fundamentals and our valuation indicate that this stock could provide an upside of more than 20% for equity investors having an investment horizon of 2 to 3 quarters.

Company Overview

RUSHA is an automobile dealership company headquartered in New Braunfels, Texas. It has a vast network of truck dealerships through which, it offers new and used vehicles for sale or lease. It also provides for servicing and maintenance of commercial vehicles. The company provides commercial vehicles of a vast variety of brands such as Peterbilt, Blue Bird, Ford, Mitsubishi and so on. The company is more than five decades old as it was founded in 1965 by W. Marvin Rush. Currently, it has about 100 dealerships and service centers spread across 21 states in the US and has a headcount of 6,825 employees for the year ended 2017.

A Falling Stock Despite Solid Quarterly Results

RUSHA has had a very consistent value proposition to its customers since inception – a one-stop shop for all commercial vehicle needs. Apart from selling new and used commercial vehicles, the company has a services segment which is not restricted to maintenance alone. It provides spare parts, accessories, vehicle modification solutions, vehicle-related financial services such as insurance, rental services, leasing, financing and so on. In fact, the company has historically made better profits from its services segment as compared to its vehicle-sales business.

In its recent quarterly results for the period ended 31st March 2018, RUSHA management reported an 18.76% rise in the revenues from $1044.8 million in the corresponding quarter of the previous year to $1240.78 million this year. The EPS also rose by 43.24%, which is phenomenal. The management is also expanding its higher-margin aftermarket business and increasing its independent parts and service business.

However, the shares of the company have been more or less flat and reports claim that the reason for this is the fear associated with the company being at the peak of the truck cycle. The cyclical nature of the truck industry has resulted in the recent sell-off in February causing the stock price to fall and RUSHA never really recovered from it, presenting an interesting opportunity to investors.

The company has Class A and Class B shares of equity which have both been consistently outperforming the Nasdaq index and its peer group over the years. We can re-emphasize this point by comparing RUSHA’s performance with the industry peer group of all Automobile and Truck Dealerships as defined by Morningstar.

In the comparison below, we see that for a period exceeding one year, the company’s share has consistently outperformed its peer group but the last six months have been particularly rough for the share. The fear associated with the truck cycle has hit the stock but there is no significant news that could affect the long-term positive outlook for the company.

Source: RUSHA/Morningstar

The Fundamentals Of RUSHA Continue To Be Rock Solid

Annual P&L ($ mn)

2015

2016

2017

Revenues

4980

4215

4714

Cost of Goods Sold

4094

3390

3776

Gross Income (excl. D&A)

886

824

938

EBITDA

267

246

307

EBIT (incl. extraordinary exp)

122

79

149

Pretax Income

108

66

136

Income Tax

42

26

-36

Net Income (Adj)

66

41

172

Source: Historical Data from RUSHA; Estimates based on calculations by Baptista Research

The historical revenues of RUSHA have been fluctuating with 2016 being one bad year in terms of negative growth. However, the long-term revenue outlook of the company is positive because of its unique positioning in the market coupled with the fact that it caters to a highly fragmented industry. The fragmentation of its clients implies that the company has a very low dependency on one particular client and it also has a reasonable bargaining power in terms of pricing.

The company received some income tax benefits in 2017, which boosted their Net Income significantly and the management is expecting a lower tax rate of about 25% for the coming years as per their earnings call.

Source: RUSHA/Finviz

The above extract neatly summarizes some of the key financial metrics of RUSHA. We see a number of green flags with respect to the stock such as the ROE of 18.3%. This implies that the stock has provided excellent value for the equity investors’ money. There has been a decent growth in sales as well as EPS over the past 5 years. Another interesting aspect is that the ratio of long-term debt to equity is as low as 0.5. This is largely because the management has been actively reducing the leverage over the past five years.

The company has managed to use its free cash to steadily reduce the amount of debt on its balance sheet over a period of time and this is a very positive sign. This is perhaps the reason why they have not paid dividends and consistently re-invested all the profits back into the business. We can see the reduced leverage in the evolution of the ratios below:

Leverage Ratios

2015

2016

2017

Net Debt/ Equity

1.8

1.5

1.3

Net Debt/ EBITDA

5.7

5.1

4.4

Source: Based on calculations by Baptista Research

The steady approach of the management is clearly visible in the Balance Sheet and the Cash Flow Statement of RUSHA. The capex has been more or less stable over the years and the working capital management has also been smooth. The management has not resorted to excessive amount of financial investments and has stuck to investing in the company’s core business.

The Upside For RUSHA Is Great Once The Cyclical Fears Are Allayed

While the share price of RUSHA crossed $50 at the beginning of the year, it showed reasonable correction and fell back to $41 for the Class A shares. There is no negative news with respect to the company or the sector in terms of the future outlook and the fall in the share price has been purely due to the cyclical fears associated with the truck industry.

In fact, this fall presents an excellent buying opportunity for investors with a medium to long-term horizon. The reduction in the effective tax rate from 38% to 25% will boost earnings and raise the EPS. Also, the company is expected to continue its share buyback plan which will add to shareholder value.

Despite all these positives, the stock trades at a Price to Earnings as low as 19.2 and a Price to Sales ratio of 0.35. This means that there is immense scope for multiples expansion in the case of RUSHA.

This is also evident in the analysts' views of the stock. As per the extract below, we see that every single one of the 9 analysts following the stock has a target price that is above the company’s current market price. While most of these analysts are having either a BUY or a HOLD recommendation with respect to the stock, the target price is as high as $65 in the best case with a median scenario of $53.

Source: RUSHA/CNNMoney

We have used a technical approach in order to determine the target price of RUSHA over a horizon of 2-3 quarters. First of all, we have analyzed the candle chart of the stock in order to determine the levels of resistance when the stock is on its way up.

Source: Yahoo Finance

As we can see in the chart above, the stock has a key resistance at the price level of $50. It is clear that most analysts are expecting RUSHA to break this resistance and we also believe that it would be a reasonable assumption if the company continues to deliver good quarterly results. The next key resistance as per the chart is at $55. If we use Gann’s Square of Nines to determine the level of resistance, our first resistance is at $49 and the second resistance is at $57. We adopt a conservative approach and opt for the $55 resistance in the chart as our target price for the year, which is marginally above the median analyst recommendation.

Risks

The projected price of RUSHA in this article is specific to the date of the analysis i.e. 10th June 2018. We must emphasize that these projections are dependent on a number of factors – RUSHA’s continued growth in truck sales and the aftermarket business, the continued growth of profitability, free cash flows and the other assumptions taken into account.

Although we are reasonably confident of our projections, our analysis cannot be directed to providing any assurance about the achievability of the forecasted price. There is a possibility that the actual results of the company are different from the projections as a result of unexpected events and circumstances e.g. downturn within the truck industry, a significant change in the RUSHA management, changed investor perception regarding RUSHA and the auto services sector, trade recession, war and so on.

Conclusion

RUSHA is going through a temporary fall due to cyclical fears and there is no reason why the stock will not revive again. The company has been consistently outperforming the index and its peers for over a decade and its fundamentals are solid. The management is also on track to increase its high-margin services business, reduce the leverage and buy back its shares.

With all these positive factors working in its favor, our target price for RUSHA is $55 for a horizon of 2-3 quarters, which is an appreciation of about 22% over the current market price of around $44. It is important to keep track of the earnings reports and the news with respect to the stock but overall, we believe that RUSHA is a decent pick for medium-term investors.

Disclosure: I/we 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.