Friday, May 15, 2020

Wabash Your Head In

Wabash National "designs, manufactures, and distributes transportation and various industrial products primarily in the United States. The company operates through three segments: Commercial Trailer Products, Diversified Products, and Final Mile Products. The Commercial Trailer Products segment provides dry van trailers; platform trailers; refrigerated trailers; converter dollies, big tire haulers, and steel coil haulers; aftermarket parts and services; and used trailers."

The company's stock price has gotten crushed, down some 70% from its high two years ago and down 50% over the last few months. Demand for trailers and other heavy-duty goods-transportation products is undoubtedly cyclical, so one might think this business revaluation by Mr. Market is appropriate. I disagree.

The company's costs are surprisingly quite variable. More than half of the cost of one of these behemoths is in the material itself, with the direct labour component bringing total variable costs to about 75-80% according to management. And Wabash doesn't just build a bunch of these, hoping somebody buys them. These products are built-to-order, generally sold to the large companies that use them. Wabash is the market leader in many of these products, in some cases with the ability to build proprietary products no one else can.

Wabash currently has an enterprise value of $750 million, with net debt representing $350 million of that. Operating earnings have fluctuated between $100 million and $200 million over the last seven years. Obviously, this year will be different. So the key for Wabash is to make it to the other side of this recession, and of that there seems little doubt.

The company's next major debt payment of $135 million is not due until 2022, while the company's current cash position is $155 million. Wabash's backlog remains at $1 billion as of March 31st, only 10% lower than the quarter before. The changes in how people live may result in an oversupply of some types of trailers, but an increased need for others, which could keep a diversified, build-to-order enterprise like Wabash busy despite the recession. The company expects to be free cash flow positive this year, helped by at least $25 million in reduced working capital.

The main thing I don't like about this investment is the lack of insider ownership. The company's CEO owns just $1 million worth of shares, while generating earnings of over $4 million from the company in 2019. This kind of misalignment of shareholder and management interests can lead to poor capital allocation that generates returns for managers but not owners. Sure enough, the company lit over $300 million on fire in a 2017 acquisition that they've already written down by over $100 million.

I take solace in the fact that during times like these, acquisitions are unlikely. Furthermore, if they do take place, they are often at much better prices such that shareholders end up as winners rather than losers.

When I weigh the good with the bad, I consider Wabash to be an excellent investment at the current time. The stock is cheap for a market leader with deceptively high variable costs and staying power, and the company is unlikely to throw away cash again until such time as the cycle turns positive.

Disclosure: Author has a long position in shares of WNC

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