U.S. Xpress Enterprises (USX) aimed to time the IPO market, but investors do not have great demand for the shares given the high earnings multiple and leveraged state of the balance sheet. Nonetheless, the company is making some real strategic moves which improve the business and its profitability, creating potential appeal if it becomes evident that more improvements will be delivered upon.
U.S. Xpress claims to be the 5th largest asset-based truckload carrier in the US, focusing on the eastern part of the country. The company owns a fleet of 6,800 tractors, some 16,000 trailers, as well as 1,300 tractors provided through independent contractors.
For a long time, the company focused on obtaining scale and executing on long-haul trips, but more recently, it has focused more on shorter rides which are more profitable and require less driver capacity, as supply of drivers is very low at this point in the cycle.
One important point to note, while the strategic focus on short distance rides does appear to benefit the bottom line, more changes have taken place at the same time. Eric Fuller has been appointed president in 2015 and was named CEO in 2017, as he replaced roughly two-thirds of the near 100 top executives and managers of the business, quite an overhaul in such a short period of time.
IPO & Valuation
The company ended up selling 18.1 million shares at $16 per share, far below the preliminary offering range of $18-20 per share. If we exclude the 1.4 million shares offered by selling shareholders, the company will see gross proceeds of $267 million in connection to the IPO.
Taking into account the proceeds from the IPO, which will be used to reduce net debt, we can construct some pro-forma valuation numbers. The company itself guided for a net debt load of $336 million in the pro-forma numbers of the S1 filing, yet that was based on a preliminary offer price of $19 per share.
That suggests that net debt currently comes in closer to $385 million as the same number of shares is sold $3 per share lower. The 48.2 million shares outstanding value the equity of the company at $771 million at the offer price, thereby valuing the entire business at $1.16 billion. This valuation has risen towards the $1.2 billion mark as shares actually opened for trading at $16 and change per share.
Like other truck peers, U.S. Xpress has seen tough times in 2016 as well, as the business was of course in transformation mode with regards to its managers as well as focus on shorter distance routes. The company reported a 6% fall in 2016 sales to $1.45 billion, although a significant portion of the decline resulted from lower fuel surcharges.
Deleveraging of top line sales numbers resulted in operating earnings falling from $48 million in 2015 to $28 million in 2016. Sales did recover to a new high at $1.56 billion in 2017, yet operating profits were stuck at little over $28 million, as the company posted a net loss with interest rates being pretty elevated at roughly $50 million. Note that this was and remains a very leveraged business.
The company has been off to a great start in the first quarter of 2018. Sales were up by 17% to more than $425 million, as strong growth resulted in real operating leverage with operating earnings increasing from less than $2 million in Q1 of 2017 to $15 million in Q1 of this year.
If we were to annualise these results, the business could do $1.7 billion in sales, with $60 million in operating earnings and adjusted EBITDA of around $85 million. With net debt at $385 million, leverage ratios remain very high at 4.5 times. Assuming 5% cost of debt on net debt, interest rates are seen at $20 million for profit before taxes of $40 million. After applying 20% taxes, net earnings come in at $32 million for earnings of $0.65-0.70 per share.
This modest earnings power and high leverage are probably key reasons behind the softer pricing at $16 per share. Even at this discounted levels, shares trade at an earnings multiple in the low to mid 20s.
Don't get me wrong, I have some real doubts about the business. The company has made some real operational changes in recent years, which appear to be paying off in the first quarter of 2018, creating real earnings momentum. Nonetheless, the valuation in terms of current earnings multiples (based on Q1 2018 numbers) is very high; leverage is very high as well. At last, we should not forget that we are enjoying real economic tailwinds at this point in time.
Comparing sales multiples with other peers is not that easy, as there are many differences in terms of activities within the wider trucking industry, ranging from brokerage to contract logistics, while some companies lease and other companies own their equipment. Not to mention the huge differences in terms of the average length per driver.
While some can argue that EBITDA multiples remain relatively modest, note that the company owns its trucks and consequently is asset heavy, making this not the perfect metric to evaluate asset-light peers.
Hence I am not buying the "discount" in the IPO price. Based on the current earnings numbers, I am only comfortable to buy at around $12-13 per share, yet wonder if first-quarter operating performance can improve further into the rest of the year. If further margin gains can be delivered upon, I might re-evaluate my cautious stance in the coming quarters, as for now I place the shares on my watch list.
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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.