- The company's stock price was negatively impacted by COVID, but has rebounded and is ahead of where it was pre-COVID.
- Focus on improving operating efficiency and spending in the near-term to improve operating margins is one catalyst.
- The second catalyst is the strong rebound and strong growth expectations in its Final Mile Products segment.
Wabash National Corporation (NYSE:WNC) began its transformation into a diversified provider of engineered solutions in the trucking sector. Historically, WNC has been tied to the transportation industry and demand for new truck trailers. This is a volatile sector with variability year-over-year. The acquisition of Supreme Industries in 2017 was the starting point of the transformation. This acquisition provided access to the fast growing final mile space. WNC's two legacy segments; Commercial Trailer Products & Diversified Products provide a steady cash flow and the Final Mile Products is to deliver growth and cash flow. Management has set out goals to improve their productivity and margins through their "One Wabash' approach. The importance is to stabilize variability by reducing variable and fixed costs. The catalysts here are twofold: 1. growth in the final mile business unit; and 2. operational improvement - with a goal of 8% operating margin (ranged ~6% over the last two years).
WNC is a dominant player in both Truck Body and Trailer Makers in North America.
Growth within the Commercial Trailer & Diversified Products segments is going to come through largely price increases, add-on orders and partially through organic growth. As part of their long-term goals, growth in these areas is going to be largely through acquisitions given the fragmentation in business coverage. All-in-all, growth in these segments is going to be highly tied to the trucking segment and the macroeconomic condition of the U.S.
The following chart is the new trailer shipments from the FYE 2020 10-K.
There is correlation between the new trailer shipments and revenue.
The goal of Final Mile Products is to diversify out of the ebbs and flow and create a steady revenue stream year-over-year. However, the near-term outlook for trucking volumes over the next several years.
The following was sourced from the 2020 10-K:
As we enter 2021 with continued uncertainty from the COVID-19 pandemic, ACT is estimating recovery in 2021 to more historically consistent production levels within the trailer industry of approximately 275,000 trailers. This represents an increase of approximately 36% from 2020. In addition, ACT is forecasting annual new trailer production levels for the four year period ending 2025 of approximately 305,000, 277,000, 284,000, and 289,000, respectively. We believe that estimated production will remain above replacement demand for 2021.
For reference, the replacement level is estimated at 220,000 trailers.
Additionally, the American Trucking Association ("ATA") is guiding for a rebound in 2021. Trucking volumes are expected to increase by 4.9% in 2021 and 3.2% per annum through 2026 thus adding support to an increase in new trailer production levels. In the long-run, ATA estimates that overall freight revenues in 2020 will total $879 billion, rising to $1.435 trillion in 2031.
Brent Yeagy, CEO stated in the latest conference call:
Conditions strengthened throughout 2020 in many of our customers' end markets and equipment demand is poised to improve in 2021. While we are focused in the near-term on executing on this cyclical upturn, we also continue to work on strategic initiatives to profitably grow the company in the long-term. Bringing new technologies to market combined with our focus on building out adjacent revenue streams will provide us with opportunities for growth beyond what the cycle gives us
Although the new trailer production levels are above the replacement level, there continues to be variability and slower growth. This is why improving margins is crucial to generating more predictable cash flows and steering away from wild swings in the stock price. This is one component of long-term stock appreciation.
Through the Wabash Management System and One Wabash approach, management's long-term operating profit margin goal is 8%. The last time they had an 8% operating margin was in 2017, before the Supreme Industries acquisition.
To improve the operating margin, management is looking at ways to improve utilization, and reduce fixed and variable costs. The following was stated in the 2019 10-K:
By focusing on continuous improvement and utilizing our balanced scorecard process, we have realized total cost per unit reductions as a result of increased capacity utilization of all facilities, while maintaining a lower level of fixed overhead. We are investing capital in our processes to reduce variable cost, lower inherent safety risk in our processes, and improve overall consistency in our manufacturing processes.
It is going to take capital outlays to improve the internal cost structure. The guided capital spending for 2021 is between $35MM-$40MM, which is slightly higher than the spending in the recent historical past. Cash flow will be slightly impacted by this, but nothing that will substantially impact the near-term cash flow outlook. The steady cash flow is due in part to management already taking action to improve the manufacturing process, divesting non-core operations and the reduction in staffing as a result of the pandemic. Management is intending to keep the operating structure lean and add when needed to support growth.
Mike Pettit stated the following in the latest conference call:
On long-term targets, I'd like to circle back and discuss what was laid out in our 2019 Investor Day. We had outlined targets that centered around achieving a consolidated operating margin of 8%. While the world has obviously changed immensely since we initially released these targets, I do want to reiterate that the team still sees 8% operating margin as a reasonable goal in the medium term. Given our longer term planning, I believe the 8% operating margin is achievable over the next two to three years.
While investors would have liked to see this achieved in a shorter time period, two years is not far off. WNC has to regroup to ramp up production and generate the mid-point revenue growth of 28%. The mid-point operating margin for FY21 is ~4%. While this is only halfway to their 8% goal, it is a vast improvement from the -5.8% in FY20. Management has stated in the 4Q20 conference call that improvement in operating leverage is going to come from the Final Mile Products segment. FY20 was a tough year for this segment and management is optimistic about its near-term performance. Dominant market position as a trailer maker and the industry outlook for final mile shipping supports management's optimism.
The second catalyst is the growth potential in the Final Mile Products segment. WNC was looking to diversify and looking for strong growth. The acquisition of Supreme Industries in 2017 was the ticket. Sales growth in FY19 was strong at 23% but declined 50% in 2020 due to the softened market from the pandemic. Management is expecting revenue to pick up in FY21 and the industry outlook supports this.
The Final Mile delivery market is projected to grow at a 16% CAGR through 2025 due to the increase in the business-to-consumer trend. Another source is expected 14% growth over the same period as a result of B2C and improved technology to provide such services.
The stock price was hammered in March 2020 due to the negative impacts COVID had on the business and continues to threaten. The stock price has since rebounded and is currently trading above the pre-pandemic levels due to the favorable outlook in the business and the industry outlook.
There is further room for stock price appreciation if there is progress with the two catalysts or fully achieved. If operating margin shows the trajectory to reach 8% in the next 12-18 months and there is growth in the FMP segment, the stock price should appreciate. WNC has a large market share and has integrated FMP. There are room and time for management to really focus and deliver margin improvement. They have the process in place and have been working at it. The pandemic has stymied these efforts, but now is the time to move forward.
Below is the guidance for FY21.
Source: FYE20 Earnings Deck
I largely took the FY21 mid-point guidance and estimated adjusted EBITDA of $136MM. For FY22, I took the industry expectations to determine revenue growth. The projected segment revenues were weighted leading to a total revenue growth of 5% in FY22. The resulting adjusted EBITDA is $157MM. For FY22, I estimated there would be an improvement in operating margin, but not at 8%.
Note: Historical data was sourced from Morningstar and projected data is based on the Author's estimates.
Per the table above, financial performance is expected to improve but is below the recent historical past. This is due to the conservative nature of the projection and the lingering effects of the pandemic. Despite these challenges, there is sufficient cash flow to make share repurchases, maintain the dividend or put money back in the coffers. Performance improves in FY22, but is still below recent performance. Remember, WNC will have to recoup the $20MM in lost revenue with the divestiture of Beall Tanks Trailers in FY19.
Based on historical EV/EBITDA multiple of 10x on projected FY22 EBITDA, the resulting target stock price is $21.
WNC is at an inflection point as it is transforming itself into a leaner company with a strong growth opportunity in its Final Mile Products segment due to the shift in consumer preference for goods and services to be delivered to their home. At the same time, WNC has begun to transform its operational approach and rationalize its operating expenses to improve operating margins. Typically, the industry is cyclical leading to uneven revenue generation. The risks include not capturing operational efficiencies, the continued softness in the industry due to Covid and slower than expected growth in the FMP segment. The growth potential with the FMP segment coupled with improved margins should stabilize free cash flow. Based on conservative assumptions, the price target is $21 per share.
This article was written by
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