American Commercial Lines ACLI
December 31, 2007 - 3:48pm EST by
finn520
2007 2008
Price: 16.22 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 813 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

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  • Jones Act
  • Shipping
  • Manufacturer
 

Description

Thesis
American Commercial Lines (“ACLI”) is a leading barge shipper and manufacturer, the 2nd largest player in each category.

See Heffer504’s 7/6/2005 writeup (under symbol ACOM) for background.  The company currently has a $846m market cap and $1.3b EV.

 
I think that ACLI is trading at 6.7x 2010 EV/EBITDA 8.8x 2010 EV/EBIT and 10.1x 2010 P/E, assuming roughly flat Barge Transportation EBITDA and improving Barge Manufacturing EBITDA as legacy low-margin contracts roll-off.  Barge Transportation industry dynamics are good, both internally and externally, and ACLI management is focused on transforming the company into a profit-driven player in a historically sleepy industry.  At 8x EV/EBITDA, there is 30% upside.
 
I believe the asset value of the barge fleet is worth $1.1b, or $10 per share, providing a floor against the current EV of $1.3b.  The company has repurchased 12m shares, or 20% of the float, for $300m in 2007.  In addition, Sam Zell, a very knowledgeable insider, recently upped his stake from 11.7m shares to 12.5m shares at $13.71 per share, giving him a 25% stake.

 

Big picture

The economics of barge transportation have vastly improved over the past few years and should remain strong for the foreseeable future.  Externally, rail shipping and truck shipping are nearing full capacity and it will be difficult, expensive, and time-consuming for them to add capacity.  Barge has a large cost advantage over rail and truck (0.7 cents per ton mile vs. 2.3 cent per ton mile vs. 26.6 cents per ton mile) and uses much less fuel as well.  Barge is also a much slower and less predictable form of shipping.  ACLI was rolled up in the 1990’s and, with new management in place since an emergence from Chapter 11 in 2005, is now operating as an externally focused, profit driven competitor.  Management’s goal is 25% EBITDA margins for the entire company.  I think that is aggressive, but that 20% EBITDA margins are achievable, with Transportation remaining stable and Manufacturing improving.  The company has several presentations on its web site which give good detail on the industry dynamics.  I am always wary of "brave new world" thesis regarding industries, but this one makes sense to me, and it has much in common with the railroads thesis.

 
Barge Transportation

Barge Transportation breaks down into two categories: dry and liquid, and the revenue split is roughly 75/25 for ACLI.  In dry, ACLI is the number 2 player with 15.8% market share (Ingram is number 1 with 21%).  The top 5 dry players have 67% market share.  In liquid, ACLI is also the number 2 player with 13% market share.  Kirby (KEX) is number 1 with 32%.  The top 5 liquid players have 64% market share.  KEX has averages 22% EBITDA margins and a 16% pretax ROIC over the past 10 years, and that has been very stable.  KEX trades at 10.2x EV/EBTIDA and 22.6x P/E.

 

As mentioned above, the external dynamics for the industry have improved over the past few years.  Internally, ACLI management is taken the following steps to improve the business:

-Instituting fuel, inflation, labor, and turnaround time terms on virtually all contracts.

-Increasing capacity utilization through more efficient scheduling.

One of the biggest issue with barge shipping is turnaround time.  In the average cycle, a barge is in-transit for 15 days and stationary for 30 days.  For every 1 day decrease in turnaround time, ACLI increases capacity utilization by about 3% without adding new barges.  Management is addressing this by increasing the demurrage fee, which is the daily charge for having the barge sit, and is trying to get its competitors to go along.

-Shifting product mix to emphasize liquids at the expense of grain.  Liquids is a higher margin and more stable business, as it tends to take place on long-term contracts, 2 years+, vs. spot for grain.  Management is aiming to increase its Liquid business from 25% to 40% of revenues.  In 2007, they opened a new Liquid headquarters in Houston, and most of their capex will be on liquid barges for the next few years.

 

For modeling purposes, I am assuming that revenues hold at just shy of $800m for the next several years, with EBITDA margins improving to 19.8%.  This will take place against a background of decreased barges and increased rates, with much of the latter being driven by product mix towards liquids.

 

Barge Manfuacturing

ACLI and Trinity have a duopoly, with 41% and 58% share of the market.  Historically, this has been a cyclical and not great business.  However, the cycles are fairly predictable, as barge life is roughly 25 years and cannot be extended much past that.  There was a huge building boom from 1979-1981 due to a tax credit at the time and those ships are in the process of rolling off.  The 1979-1981 barge class represents 21% of the existing 17,900 dry cargo barge fleet.  Management says that capacity is practically sold out for the next 5 years, and capacity can’t really come on during that time due to ramp-up times (at least 1.5 years, at which point you would be midway through the cycle).

 

As of FYE 2006, 69% of contracts were legacy, i.e. signed before existing management took over, and roughly 5% EBITDA margins.  That percentage will go down to 50% in 2008, 30% in 2009, and 10% in 2010.  Managements goal for new contracts is 15% EBITDA margins.  I get gross EBITDA of $35m in 2008, $45m in 2009, and $50m in 2010 on $300m in revenue in each year.  I am giving them some modest credit for $20m in planned cost cuts by 2010.  The gross EBITDA number differs from the net EBTIDA number due to boats that the transportation division purchases at market rates.  My gross EBITDA numbers come out to $33m in 2008, $47m in 2009, and $52m in 2010, and net EBITDA of $23m in 2008, $35m in 2009, and $40m in 2010.

 
Replacement Value
For replacement value, I did a straightforward calculation of number of barges times esitimated remaining life times value of new barge.  I get $538m for dry barges, $288 for tank barges, $258m for towboats, $15m for land, and $22m for buildings, for $1.1b in total.

Catalyst

Industry dynamics continue to improve.
Barge Manufacturing business improves.
Barge Transportation stabilizes with mix shift.
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    Description

    Thesis
    American Commercial Lines (“ACLI”) is a leading barge shipper and manufacturer, the 2nd largest player in each category.

    See Heffer504’s 7/6/2005 writeup (under symbol ACOM) for background.  The company currently has a $846m market cap and $1.3b EV.

     
    I think that ACLI is trading at 6.7x 2010 EV/EBITDA 8.8x 2010 EV/EBIT and 10.1x 2010 P/E, assuming roughly flat Barge Transportation EBITDA and improving Barge Manufacturing EBITDA as legacy low-margin contracts roll-off.  Barge Transportation industry dynamics are good, both internally and externally, and ACLI management is focused on transforming the company into a profit-driven player in a historically sleepy industry.  At 8x EV/EBITDA, there is 30% upside.
     
    I believe the asset value of the barge fleet is worth $1.1b, or $10 per share, providing a floor against the current EV of $1.3b.  The company has repurchased 12m shares, or 20% of the float, for $300m in 2007.  In addition, Sam Zell, a very knowledgeable insider, recently upped his stake from 11.7m shares to 12.5m shares at $13.71 per share, giving him a 25% stake.

     

    Big picture

    The economics of barge transportation have vastly improved over the past few years and should remain strong for the foreseeable future.  Externally, rail shipping and truck shipping are nearing full capacity and it will be difficult, expensive, and time-consuming for them to add capacity.  Barge has a large cost advantage over rail and truck (0.7 cents per ton mile vs. 2.3 cent per ton mile vs. 26.6 cents per ton mile) and uses much less fuel as well.  Barge is also a much slower and less predictable form of shipping.  ACLI was rolled up in the 1990’s and, with new management in place since an emergence from Chapter 11 in 2005, is now operating as an externally focused, profit driven competitor.  Management’s goal is 25% EBITDA margins for the entire company.  I think that is aggressive, but that 20% EBITDA margins are achievable, with Transportation remaining stable and Manufacturing improving.  The company has several presentations on its web site which give good detail on the industry dynamics.  I am always wary of "brave new world" thesis regarding industries, but this one makes sense to me, and it has much in common with the railroads thesis.

     
    Barge Transportation

    Barge Transportation breaks down into two categories: dry and liquid, and the revenue split is roughly 75/25 for ACLI.  In dry, ACLI is the number 2 player with 15.8% market share (Ingram is number 1 with 21%).  The top 5 dry players have 67% market share.  In liquid, ACLI is also the number 2 player with 13% market share.  Kirby (KEX) is number 1 with 32%.  The top 5 liquid players have 64% market share.  KEX has averages 22% EBITDA margins and a 16% pretax ROIC over the past 10 years, and that has been very stable.  KEX trades at 10.2x EV/EBTIDA and 22.6x P/E.

     

    As mentioned above, the external dynamics for the industry have improved over the past few years.  Internally, ACLI management is taken the following steps to improve the business:

    -Instituting fuel, inflation, labor, and turnaround time terms on virtually all contracts.

    -Increasing capacity utilization through more efficient scheduling.

    One of the biggest issue with barge shipping is turnaround time.  In the average cycle, a barge is in-transit for 15 days and stationary for 30 days.  For every 1 day decrease in turnaround time, ACLI increases capacity utilization by about 3% without adding new barges.  Management is addressing this by increasing the demurrage fee, which is the daily charge for having the barge sit, and is trying to get its competitors to go along.

    -Shifting product mix to emphasize liquids at the expense of grain.  Liquids is a higher margin and more stable business, as it tends to take place on long-term contracts, 2 years+, vs. spot for grain.  Management is aiming to increase its Liquid business from 25% to 40% of revenues.  In 2007, they opened a new Liquid headquarters in Houston, and most of their capex will be on liquid barges for the next few years.

     

    For modeling purposes, I am assuming that revenues hold at just shy of $800m for the next several years, with EBITDA margins improving to 19.8%.  This will take place against a background of decreased barges and increased rates, with much of the latter being driven by product mix towards liquids.

     

    Barge Manfuacturing

    ACLI and Trinity have a duopoly, with 41% and 58% share of the market.  Historically, this has been a cyclical and not great business.  However, the cycles are fairly predictable, as barge life is roughly 25 years and cannot be extended much past that.  There was a huge building boom from 1979-1981 due to a tax credit at the time and those ships are in the process of rolling off.  The 1979-1981 barge class represents 21% of the existing 17,900 dry cargo barge fleet.  Management says that capacity is practically sold out for the next 5 years, and capacity can’t really come on during that time due to ramp-up times (at least 1.5 years, at which point you would be midway through the cycle).

     

    As of FYE 2006, 69% of contracts were legacy, i.e. signed before existing management took over, and roughly 5% EBITDA margins.  That percentage will go down to 50% in 2008, 30% in 2009, and 10% in 2010.  Managements goal for new contracts is 15% EBITDA margins.  I get gross EBITDA of $35m in 2008, $45m in 2009, and $50m in 2010 on $300m in revenue in each year.  I am giving them some modest credit for $20m in planned cost cuts by 2010.  The gross EBITDA number differs from the net EBTIDA number due to boats that the transportation division purchases at market rates.  My gross EBITDA numbers come out to $33m in 2008, $47m in 2009, and $52m in 2010, and net EBITDA of $23m in 2008, $35m in 2009, and $40m in 2010.

     
    Replacement Value
    For replacement value, I did a straightforward calculation of number of barges times esitimated remaining life times value of new barge.  I get $538m for dry barges, $288 for tank barges, $258m for towboats, $15m for land, and $22m for buildings, for $1.1b in total.

    Catalyst

    Industry dynamics continue to improve.
    Barge Manufacturing business improves.
    Barge Transportation stabilizes with mix shift.

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