(Almost) Free Lottery Ticket

Summary

• Potential 10-15 bagger in the DSKEW.
• Not bad for (about) a nickel per warrant.
• Thanks to the reader who brought me this idea.

This is the story of Daseke, a once promising Trucking Company that was run into the ground by its former CEO and management team. The push for needless acquisitions to fuel growth, bloated corporate structure, lack of industry expertise and worsening truck market pricing all contributed to its current status of being a pariah in the Trucking space.

My thesis is that much of this bad news and bad management is behind them and there are greener pastures ahead, which very few if any institutions recognize. Burned already big once, most have left this Company for dead, and rightfully so.

What has transpired in the past year –

1. The former CEO, Don Daseke retired (was removed) from the Company on August 15, 2019

2. New CEO was named on Feb 10, 2020 (he was the former Company COO hired in early 2019), new COO was hired May 12, 2020 and new CFO was hired April 23, 2020. All have extensive trucking and operational experience. In short, the Board cleaned house.

3. There has been a halt to all new acquisitions.

4. The business focus has been entirely on making this clumsy, inefficient Company more operationally focused and lean. These operational actions have led to the following over the past 6 months:

a. A reduction of business units from 16 to 9. This project is currently half way done and will be complete by the end of 2020. As of end of Q1, this has saved $30MM in annualized operating costs. At the end of Q4, the remaining $15MM in annual costs will be realized going forward. The total savings of this measure is $45MM in annual operating costs.

b. Divesting of Aveda, one of their most horrific acquisitions (and they made many). It is questionable what, if any consideration they will get for this asset. It is currently classified as Held For Sale. Aveda has driven operating losses and poor margin due to its exposure to the Oil & Gas sector and with this removed, operating margins will improve.

c. Focus on stockpiling cash. As of March 31, 2020, Daseke had $107.5MM in cash. Per a press release made on June 18, 2020, they reported cash the balance of $140MM as of June 1. While some of that $32.5MM increase in cash in 60 days may be related to selling some equipment such as tractors, etc, it is likely only a small percentage of total increase. The point is during this uncertain Covid-19 time, they have grown cash by $32.5MM within 60 days.

Based on the operational improvements listed above, Daseke is a more efficient Company whose cost structure is in far better shape than 6-9 months ago. Things are certainly not perfect at Daseke as their debt load is reasonably high, but with the improving economic environment and management’s focus to be efficient and control costs, it stands to reason that EBITDA is going to get much higher.

I am not advocating the stock. I believe there are much better risk/reward options currently in the market. What I am suggesting is to take a look at the warrants. Daseke was a former SPAC and as a result, there are 35MM outstanding warrants that expire in February 2022. While the stock was in the 14’s in early 2018, those days have been gone for good reason. The stock is now $3.75 ($7.75 away from their exercise price) and has risen from under $1 during the early Covid-19 days in March.

The warrants on the other hand are trading at $0.05. My belief is that since almost no one follows this Company anymore except for very small institutions, both the stock and warrants have been left for dead. With over 20 months left until expiration of the warrants, this is leveraged bet, which costs nearly nothing. Even with a stock this far out of the money, just the time value of the warrants is worth more than $.05. I believe the warrants can be looked at like a lottery ticket. If the stock goes up to $7 or $8 within 12 months, the warrants will likely price out between $.50 and $.75, for a return of 10-15x. If the stock does nothing, you can likely sell your warrants back over the next 12 months for $.05.

20 months is a long time for a leveraged bet. The stock (and warrants) should increase if management continues to improve operational efficiencies and while I am optimistic and confident, it is not a sure thing.

To further my optimistic viewpoint, on the June 18 press release, management said the following:

1. Daseke expects positive cash flows from operating activities and positive free cash flow in Q2.

2. Company has more than $220 million of liquidity including $140MM of cash available.

3. Management made substantial progress of divesture of Aveda assets and expects it to conclude this process by the end of Q3.

4. Financial results continue to benefit from previously announced integration and business improvements projects.

Taking the trending positive news from the Q1 earnings release as well as the above press release from June 18, one could surmise that Daseke is back on the right track, but unfortunately no one in the investment world cares due to its previous missteps. I believe that the Q2 earnings release on August 10 will show that Daseke is not the same Company it was even 12 months ago. If this thesis is correct and the Q2 call is positive, momentum and interest should build in the stock and warrants should follow. Assuming that Covid-19’s intensity stays the same, Q3 & Q4 results should trend upwards as well and the stock could well be on track for $7 or $8 by the end of December.

Conclusion

Bottom line is that this is as close to a lottery ticket that can be found in the market. A 20-month leverage bet that costs $.05 and is dependent on an underlying Company’s improving results that almost no one in the investment community follows. Heads, you win big and tails you will likely break-even or lose a little. I’ll take that bet every day and twice on Sunday.