Schneider National (NYSE:SNDR) started 2022 with a bolt-on acquisition, as this is enough of a reason to update an investment case which goes back all the way to the IPO of April 2017.
After a few years of relative stagnation, the company has seen a strong 2021, it has improved the balance sheet, as it has made a bolt-on deal here as well. All of this starts to look compelling here, and even as margin reversal might be in the works, it is the current earnings power, net unleveraged balance sheet and sufficient earnings power under normalized margins, which justify the valuation here.
When Schneider went public in spring of 2017 I covered the name which since 1935 has grown to become the second-largest truckload business in North America at the time, complemented by intermodal and logistics service operations. The company owned some 10,500 trucks (excluding nearly 3,000 owner-operated trucks), 38,000 trailers and intermodal containers.
The $725 billion US trucking industry (at the time) was still very fragmented with just 10 carriers posting sales of a billion or more. Focus on renewable and sustainable operations, usage of technology and slim margins, make that consolidation was certainly a big play in the making, benefiting the larger players.
While the business touted that it was light in terms of its capital requirements and customer contracts were based on long-term relationships, I found valuation multiples in the mid-twenties a bit too demanding.
Schneider went public at $19 per share and with 173 million shares outstanding at the time, equity of the business was valued at $3.3 billion, as the valuation rose to $3.6 billion if we include net debt. This valuation was applied to a business which generated just over $4 billion in revenues in 2016 on which it posted operating profits of $290 million, as margins of 7% saw a jump on the back of lower crude, and thus fuel prices. After taxes and interest expenses, I pegged earnings around $165 million, with earnings coming in around a dollar per share at the time.
I must say that I am happy that I did not get involved at $19. Since the offering, shares have been trading range bound between $15 and $30 per share, now trading towards the higher end of the range at $27 per share.
Fast forwarding to early 2020, the company has just posted its 2019 results nearly three years after the initial offering. Revenues had improved to $4.7 billion yet adjusted operating profits of $306 million have barely improved, albeit that they were down 20% from 2018. Adjusted earnings fell from $1.55 per share in 2018 to $1.24 per share in 2019, as the share count of 177 million shares is actually up a bit from the offering. The only comforting factor is that a modest net debt load since the offering has turned into a net cash position, equal to more than a dollar per share.
With shares trading in the low twenties ahead of the pandemic, shares have not gained substantial ground, albeit that the balance sheet has improved by $3 dollar per share, as net debt turned into a net cash position, while earnings power improved modestly as well.
The pandemic hardly impacted the operations with reported revenues down 4% to more than $4.5 billion as adjusted operating profits of $300 million were largely unchanged. Adjusted earnings per share rose a penny to $1.25 per share, as the company guided for 2021 earnings to improve to $1.45-1.60 per share, albeit that the growth comes with some net capital expenditures. As the pandemic did not put the company into jeopardy, the company actually paid out a special dividend of $2 per share late in 2020.
What followed has been a solid year with the midpoint of the earnings guidance hiked to $1.65 per share upon the release of the first quarter results. The company furthermore hiked the guidance in a convincing manner in the second and third quarter, with revenues seen at $2.15 per share upon the release of the third quarter results. Based on this momentum the company is on track to generate some $5.5 billion in sales in 2021 with operating margins coming in close to 10%.
With shares now trading at $27, the company has been awarded an equity valuation of $4.8 billion with 17 million shares outstanding, although the valuation drops to $4.6 billion if we account for a net cash position of just over two hundred million. After backing out net cash, the company trades at just 12 times earnings here.
Multiples are low, and the balance sheet is very strong, and truth be told is that the current earnings power is not sustainable. The company will feel the pressure of inflation (including fuel prices and wages) as the current margins were clearly not sustainable. That said, valuations look not so demanding here, as Schneider is now using the strong balance sheet to further expand the operations.
At the outset of 2022, the company has reached a deal to acquire Midwest Logistics Services in a $263 million deal, equivalent to nearly 6% of the current enterprise valuation. MLS is a truckload business with a thousand drivers and 900 tractors, set to add $205 million in revenues, revealing that a 1.3 times sales multiple has been paid. This looks a bit rich as Schneider trades at around 0.8 times sales here, while its margins currently come in around 10% already.
The deal is set to be accretive to earnings per share, but that is not too convincing as the company does not need to borrow for the acquisition, nor has the accretion been quantified. While the deal looks a bit rich, we have to realize that Schneider has large intermodal operations as well, and given that the deal is relatively small, I am not too worried about it.
With shares now trading at $27 the reality is that valuations are not demanding at all, yet I fear the reversal of the margins here and the fact that I am not too impressed with the operational performance of the business. The company has grown the operations since the public offering, but it feels as if performance has been lagging a bit versus other names, which is never a great sign, yet the valuations here start to look compelling enough to hold a small position here.
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