|Shares Out. (in M):||49||P/E||0||0|
|Market Cap (in $M):||187||P/FCF||11.5||10|
|Net Debt (in $M):||58||EBIT||0||0|
Radiant Logistics is a fast-growing business trading for 11x cash earnings. The company is a non-asset based third-party logistics provider offering services in expedited freight, customs brokerage, truck brokerage, and freight forwarding. RLGT has grown from nothing to almost one billion in revenue in about ten years, successfully pursuing a roll-up strategy despite its equity being undervalued more often than not. Intrinsic value has compounded 15-20% annually. CEO Bohn Crain founded the company and owns 20% of the equity. He pays himself and his staff modestly. I believe the shares can double over the next few years.
Radiant’s M&A program essentially serves as a liquidity plan for successful but small 3PL brokerages. A seller benefits by receiving value for a business which has an earnings stream but little to no franchise value once the owner is gone. Radiant generates value for itself and its shareholders by acquiring additional business at a very cheap price (~5X EBITDA, half in earn-outs) relative to public 3PL valuations (10-12x EBITDA). Despite the attractiveness of this arbitrage, RLGT doesn’t face excessive competition for these deals because the companies RLGT is acquiring are far too small to interest the larger 3PL companies. Two other public small cap 3PLs, XPO and ECHO, ostensibly compete with Radiant for deals, but XPO has shown more interest in asset-based logistics companies, while ECHO is focused on truck brokerage specifically whereas RLGT's interests are more diverse.
The shares are down almost 50% from their high earlier this year; this write-up will focus on what’s going on with the company today. The company has been written up a few times here and elsewhere. I direct you to those write-ups for an in-depth discussion of the business. You can view the most recent slide presentation here: http://www.sec.gov/Archives/edgar/data/1171155/000156459015007846/rlgt-ex991_6.htm
I think RLGT shares are very attractive at this price and I think the recent drubbing is unwarranted. Here is a brief summary of what has happened:
1) 1) In July the company issued a secondary for $38M at $6.75 (6.7M shares total; 5.3M by the company and 1.3M by existing holders).
2) 2) Shortly thereafter strong signs emerged of a downturn in the industrial economy.
3) 3) XPO, another 3PL consolidator, announced it would acquire Conway, an asset-based LTL provider. Asset-lightness has been a key part of the 3PL consolidation story and XPO’s move to acquire a trucking company may have caused investors to question the 3PL consolidation story in general.
4) 4) The sagas of VRX, PAH, etc. may be causing the market to view all serial acquirers more skeptically.
5) 5) Finally, a recent SeekingAlpha piece highlighted RLGT’s constant earn-out write-downs, and questioned whether the company needs to write down some of its goodwill.
All of the small-cap 3PL consolidators—XPO, ECHO, RLGT—have seen their shares fall considerably in recent months, probably resulting from a combination of points #2, #3, and #4. However, share prices have increased for large 3PLs such as EXPD and CHRW, and in addition, ECHO just announced strong results. I do not believe the sell-off in RLGT is rational. RLGT just reported its September quarter and results were good. Management says the company is not yet seeing signs of a broad slowdown in customer activity.
Further, I think RLGT’s secondary was excellently timed and beneficial to existing shareholders despite the dilution. The company has historically been judicious about its use of equity, given that RLGT shares have been undervalued for most of the company’s history. When the stock approached overvalued territory, Mr. Crain took advantage by raising a material sum of money quickly. The funds raised enabled RLGT to de-lever its balance sheet after its largest-ever acquisition (Wheels Group) and the company is now well positioned from a capital perspective, with net debt less than 2x pro forma EBITDA.
As for the SeekingAlpha piece, it raised some interesting points about RLGT’s accounting, but nothing that impacts RLGT’s profitability or intrinsic value. Management says that using cash-flow based NPV, it is not close to needing to write down any goodwill. The SA piece also alleges that RLGT reported a number of line items as a single item in order to conceal the complete write-off of a very recent (but very small—under $1M cash) acquisition. I think this is true. I don’t like it, but I think I understand it: RLGT and Mr. Crain have been fighting for years to get the market to value their company fairly, and I think one consequence has been that management has grown a bit promotional. Mr. Crain is smart, driven, and honest, but he also makes an effort to paint his company in the best possible light.
Historical Performance and Future Valuation
For fast-growing companies with rapidly changing capital structures, I like to use EBITDA less interest, divided by dilutes shares outstanding, as a proxy for changes in intrinsic value. Interest expense accounts for leverage (as well as the rates the company is paying) while shares outstanding adjusts for dilution. By this measure, Radiant has done very well:
|Net Interest Expense||0.0||0.0||0.1||0.3||0.1||0.2||1.3||2.0||2.3||3.8||8.7|
|EBITDA less Interest||0.3||1.2||1.4||3.5||4.7||7.3||7.5||8.6||11.8||12.4||22.3|
I model 15% for growth going forward. This seems reasonable based on historical performance.
As for a multiple, historically the large, organically grown 3PLs have traded for about 11x EBITDA. Where should RLGT trade relative to them? On one hand, the big 3PLs are large, well-run businesses that might seem to deserve a premium compared to piecemeal companies like RLGT. On the other hand, the consolidation opportunity being exploited by RLGT and its ilk is far more attractive than any expansion avenues available to the big 3PLs, who are chained to GDP growth due to their size and business maturity. I use 12x EBITDA for RLGT; 12x has historically translated to only about 17x cash earnings.
Below you can see my 2016 cash earnings calculation.
Looking out three years and assuming profits grow at 15%, RLGT will be generating about $0.45 per share in cash earnings. A high-teens cash earnings multiple would value the stock around $8.
There are a couple of risks. First, the company recently completed a large acquisition, of Wheels Group (it previously traded publicly in Canada). Integrating Wheels could take some time, and RLGT has sometimes taken longer than initially expected to get its acquired subsidiaries performing in line with expectations.
The economy is also a risk. These are cyclical companies. It is important to note, however, that their profits typically do not fall as far their revenues, because the cost of transportation—the main component of COGS—falls much faster than 3PL pricing.