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JANL: A High Quality Business With 200% Upside Potential Over 12 Months

|Includes: CHRW, EXPD, Janel Corporation (JANL), LSTR
Summary

Trades at 40% FCF yield, 2.6x P/E and 5.7x EV/EBITDA. At peer multiples fair value is $15-18/share.

High quality business that is capital light, high ROIC, and generates strong FCF. Business has secular growth tailwinds from strong growth in e-commerce.

Management is highly incentivized as they own 70% of the equity and have options to buy more at $4.00-5.00.

Mispriced because small and undergone significant change in the last 12 months with the acquisitions of Liberty and Alpha/PCL which significantly increased EPS and FCF power of the business.

Janel Corp (OTCQB:JANL) is a non-asset based third party global logistics services company comparable to CHRW, EXPD, or LSTR. The company's services include freight consolidation, insurance, logistics planning, landed-cost calculations, tracking, repackaging through the company's eight full service locations. The company operates in an attractive, capital light (capex less than 1% of revenue), high ROIC (40% ROIC), FCF generative industry (2016 FCF of $0.72mm). JANL completed the acquisition of Liberty on August 14th, 2015 and the acquisition of Alpha/PCL on September 10th, 2014 both of which significantly increased the earnings power and FCF generation of JANL. JANL's fair value is at least $10.00/share, offering 200% upside potential over 12 months based upon a significant discount to peer valuation multiples to account to smaller size and limited liquidity.

Thesis

· JANL trades at a very attractive valuation with 40% FCF yield, 2.6x P/E, and 5.7x EV/EBITDA. Peers C.H. Robinson Worldwide, Inc (NASDAQ:CHRW), Expeditors International of Washington, Inc (NASDAQ:EXPD), and Landstar System, Inc (NASDAQ:LSTR) trade at 6.5% FCF yield, 16x P/E and 9.5x EV/EBITDA. Valuing JANL at peer multiples, JANL is worth $15-18/share. However, applying more conservative multiples to account for smaller size and less liquidity, JANL is worth $10.00/share, offering over 200% upside potential over 12 months.

· High quality business that is capital light, high ROIC, and generates strong FCF. Business has secular growth tailwinds from strong growth in e-commerce. First Data's Holiday SpendTrend report showed e-ecommerce spending up 16% y/y during the holidays.

· Management is highly incentivized as they own 70% of the equity and have options to buy more at $4.00-5.00.

· JANL is mispriced by the market because it is small and has undergone significant change in the last 12 months with the acquisitions of Liberty and Alpha/PCL which significantly increased the FCF generation and earnings power of the business.

Catalysts

· Continuing to report strong earnings - I estimate $1.24/share in EPS in 2016.

· Generating strong free cash flow

· Repaying debt

· Making more accretive acquisitions

Risks

· Leverage is higher with $7.4mm in debt and $2.75mm in preferred equity.

· Overpaying for an acquisition.

· Losing large customers.

Financials

I include the acquisitions of Liberty and Alpha/PCL into the model to drive the following earnings for 2016.

Revenue: $87mm

EBITDA: $1.83mm

EPS: $1.24/share

Bridge to FCF

EBITDA: $1.83mm

Less: capex $0.10mm

Less: interest $0.63mm

Less: preferred coupon $0.23mm

Less: cash taxes $0.15mm

FCF to equity: $0.72mm

FCF/share: $1.21/share

Capital Structure

Price: $3.18/share

Shares: 0.59mm

Market Cap: $1.88mm

Cash $0.94mm

Debt $7.40mm

Preferred $2.75mm

EV $11.09mm

Disclosure: I am/we are long JANL.