JANL: A High Quality Business With 200% Upside Potential Over 12 Months
Long/Short Equity, Special Situations, Value
Contributor Since 2013
Based in California, I focus on high quality businesses that have a long runway for growth. Passionate about investing and reading. Enjoy running and traveling with my wife.
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 (OTCPK: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 (CHRW), Expeditors International of Washington, Inc (EXPD), and Landstar System, Inc (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.