Heartland Express: Heart Of Fundamental Stability But Limited Price Upside

Summary

• Heartland Express, Inc. maintains stable performance amidst market volatility.
• The company outperforms the market with its above-peer-average revenue growth and margins.
• The solid balance sheet shows an adequate capacity to sustain a larger operating capacity.
• Dividend payments stay consistent and well-covered, but yields are unexciting.
• The stock price has shown a slight downtrend in the last month.

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The dry van truckload industry sees massive challenges amidst economic disruptions. But Heartland Express, Inc. (NASDAQ:HTLD) does not disappoint the market. It maintains a sound and better-than-expected performance. We can see it in the steady revenue growth and stable margins. Even better, it is a solid truckload company with impeccable liquidity. This factor is vital for capital-intensive companies like HTLD. Indeed, it cushions the blow of headwinds as it easily navigates the stormy market.

It is no surprise it can cover dividend payouts and stabilize returns. Cash levels are still adequate even after the recent acquisition. However, dividend growth and yields are not attractive. Meanwhile, the stock price has a slight downtrend but remains adherent to fundamentals. It also remains reasonable despite the limited upside potential.

Company Fundamentals

The transportation and logistics industry must endure challenges these days. The weaker purchasing power is impacting the demand side. With the sustained easing of restrictions, market capacity has already rebounded from 2020. As such, spot rates may keep dropping in the next twelve months. Despite this, Heartland Express, Inc. proves its ability to navigate the tough market. It maintains stable core operations with prudent operational adjustments. Currently, its operating revenue is at an all-time high of $274 million. It shows steady revenue growth and an 80% year-over-year growth. This excellent performance can be attributed to various factors.

Operating Revenue (MarketWatch)

The most obvious one is its growth capitalization on prudent M&As. This move allows HTLD to keep up with the market capacity and supply chain improvements. Even better, it has well-maintained truck drivers, tractors, and digitalization. It is a crucial aspect for stability as driver shortages in the US remain rampant. It is no surprise that it can optimize its larger operating capacity. It matches the company’s solid customer base to maximize its expansion.

Its solid customer base makes it easier for HTLD to set strategic pricing. Also, thanks to the most recent M&A that increased domestic market presence. This may also deepen customer ties some more. These actions help the company stabilize the supply and demand side. It is also easier for HTLD to cope with skyrocketing fuel prices through fuel surcharges.

Concerning its peers, Heartland Express remains relatively small, with a market share of 1.7% only. It is already a noticeable improvement from 0.98% in 3Q 2021. It also shows a better-than-peer-average performance. Its revenue growth is more than as much as the peer average of 25%. It is starting to go head-to-head with its larger close peers, such as Marten (MRTN), P.A.M. (PTSI), and Covenant (CVLG).

Market Share (MarketWatch)

Revenue Growth (MarketWatch)

Moreover, it outperforms most of its peers regarding operational efficiency. Operating expenses also have a substantial increase compared to 3Q 2021. The primary driving forces are rising fuel prices, labor-related expenses, and the larger operating capacity. Yet, its solid demand, strategic fuel surcharging, and increased market presence offset expenses. It shows that as HTLD expands, it maintains efficiency amidst macroeconomic headwinds. Hence, its operating margin of 15.7% is lower than in the first two quarters. But it is higher than 15% in the comparative quarter. Seasonality is also another factor to consider. It is even higher than the market average of 11%. Indeed, Heartland Express remains ahead of the market.

Operating Margin (3Q Financial Report)

Market Risks, Opportunities, and Core Competencies

Heartland Express, Inc. maintains a solid market performance. But it doesn’t mean it can stay complacent. Inflation has lulled to 7.1%, but it remains elevated. Fuel prices may remain high due to several factors. The war in Europe and increased market capacity across industries are some drivers. Thankfully, fuel prices have been downwards after peaking during Spring. But fuel prices may stay higher than pre-pandemic levels. It may also take more time to stabilize.

Median Fuel Prices (ST. LOUIS FED)

Amidst the mixed market conditions, Heartland may remain durable. It has a stable number of drivers and equipment, which is vital to stay ahead of the market. Also, its M&A will allow it to capitalize on increased market capacity. The rise in e-commerce may become another primary driver. Smaller businesses have a limited network capacity, so they cannot easily adjust their deliveries. They even maintain a market balance so Amazon (AMZN) cannot eat a large portion of logistics. So the rebound prospects of the industry, including Heartland, are still exciting.

Even better, the company can sustain its larger operating capacity. It has stable cash reserves to cover its expansion. Despite the cash decrease and massive borrowings increase, HTLD shows adequacy. Its Net Debt/EBITDA ratio remains low at only 0.46x. It shows that the company derives more than enough core income to cover its borrowings. We can confirm it using the Cash Flow Statement. The company maintains stable cash inflows to cover CapEx, outstanding borrowings, and dividends. The company maintains impressive viability and liquidity to stay sustainable.

Cash And Equivalents And Borrowings (MarketWatch)

Operating Cash Flow And CapEx (MarketWatch)

Stock Price Assessment

The stock price of Heartland Express, Inc. has been in a downtrend in the last month. But the one-year pattern remains almost unchanged. At $15.76, the stock price has been cut by 5% from the starting price. Despite this, it remains adherent to its fundamentals. The price-earnings multiple of 8.95x shows the reasonability of the stock price. I expect the 4Q EPS to be better than the comparative quarter. Inflation continues to decrease while the operating capacity increases. My estimated $1.80 annualized EPS sets a target price of $16.08. Yet, it only has a 2% upside. Likewise, the PTBV of 2.89 is high, but it is way better than the historical average of 3.1x. If we use it to find the target price, the derived value will be $16.39, a 4% upside.

Meanwhile, the company proves its commitment to shareholders with consistent dividends. But payouts, excluding special dividends, have always been the same. Dividend yields are only 0.51%, which is way lower than the S&P 600 and NASDAQ average of 1.41% and 1.35%. Its dividend payout ratio is 8%, so it has a solid capacity to sustain dividends. However, it may not increase since it must focus on repaying borrowings after the acquisition.

If I use the EV method (1.68B-0.42B) / 78,938,000 shares, the target price will be $15.96. It agrees with the PE and PTBV multiple. The stock price remains logical and is not expensive. Yet, it is also not too cheap due to a low potential upside of 1-4%. So investors may have to wait for a better entry point before buying stocks.

Bottomline

Heartland Express, Inc. remains on a solid footing despite market volatility. It has impressive revenue growth and stable margins. It also maintains adequacy to cover borrowings and dividends and sustain its expansion. Meanwhile, the stock price stays reasonable, but the potential upside is still limited. The recommendation, for now, is that Heartland Express, Inc. is a hold.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.