Description

Currently trading at <7x PE and <4x ebitda on 2019 numbers, shares of USX are cheap. Some might say this valuation is deserved, but recent signs suggest CEO Eric Fuller’s efforts to close the OR gap to its peers are making progress. If the company can close the gap to peers and become “average”, it seems an average multiple could follow.

Founded in 1986 by Max Fuller and Patrick Quinn on the gift of 48 trucks from Clyde Fuller, Max Fuller’s retiring father, the company has grown to become the 5^th largest asset-based fleet in the US. Originally an acquisitive company in the ‘90s and ‘00s, the company was bought out from public markets in a management led buyout in 2007. It then reemerged as a public company in May of last year with its recent IPO.

To say it was a busted IPO is perhaps generous. Even a cursory look at the company as it was heading into the IPO suggested it looked like a D grade trucker. It had 4x of debt and lagged its peer group average OR by ~800 bps. It self-insured to limits of $10M versus a more typical $1-3M level. And it trailed peers on nearly all important metrics like utilization, driver turnover and maintenance and insurance cost ratios. Its fleet was also not in good shape. It leased more than peers, and the trucks it did own carried an average age of 28 months old. All in all, things didn’t look great. And their timing couldn’t have been much worse. Originally looking to price around $19-20 / share, investors anxious that a still growing truckload cycle was set to soon peak were only willing to pay $16.

To say the company stumbled out of the gate could also be described as generous. Due to a moderate issue with a large grocery heavy customer in its dedicated division, the company reported a slight miss in 2Q 2018. Its 3Q report was no better as the company experienced its worst quarter of accidents in the last fifteen years. Even though the company had renegotiated its insurance limits from $10M to $3M in part due to improved credit worthiness with their lowered leverage profile at 2.3x, they did not have the new deal done and lowered limits in place in time to prevent another missed quarter. So now the newly public company was 0 for 2. As a cyclical company with leverage heading into a nasty selloff, shares were punished, ultimately bottoming around $5 or 4x EPS.

Despite all these troubles, the company has made some progress. The leverage (from 4x to 2.3x) and interest rate (from 11% to 4%) are meaningfully improved. They have the aforementioned new insurance agreement in place. They have also had decent OR improvement and made progress on lowering driver turnover and improving utilization.

But there is much further to go. Fortunately, the freight cycle looks supportive of further gains for now. Management expects another 100 bps of OR improvement in total in 2019, in part from fixed cost leverage on yields up MSD. The recent exit of cross-border Mexico operations should help drive the OR ~30 bps lower too. 2019 will be a big capex year for the company as many trucks with expiring leases will need to be purchased. The negative cash flow and heavy capex bill is certainly not a good look, but at the end of 2019, the company anticipates the fleet age will move to a respectable 18 months which positions the company with steady state maintenance capex moving forward and suggests a nice cash flow year in 2020 is likely. These changes should further support the company’s initiatives to improve utilization rates and lead to lower insurance and maintenance expenses and continue to drive the company OR lower towards peer levels.

Steady progress from here to 2020 suggest the company could do something near $2 of EPS. At that point, this trucker would look more like an average trucker in terms of OR with leverage trending towards 1x which suggests a peer average multiple of 12 – 16x would be likely. With shares under $10 today, investors are either completely overlooking the opportunity, or assigning near zero probability to this outcome.

Before concluding, an obvious question is how did the company find itself in this situation? And why should things improve from levels in which they had underperformed so severely in the past? Our checks suggest much of this has to do with corporate history and the company’s evolution of ownership. For most of its life, the company was dually owned by the Fullers and the Quinns and it seems unanimous agreement on the future direction of the company was not always a given. Now that the IPO has occurred (in which Max and Eric Fuller bought $20M of stock from Quinn family members at $16) and on the back of Eric taking the reins in 2015, the company appears to be following a more unified vision, primarily focused on closing the OR gap to peers. Appropriately, this metric is the primary one of focus in regards to management compensation metrics. Additionally, it is worth noting Eric and Max Fuller together own 11.3 million shares and should accordingly be motivated to create meaningful value for all shareholders.

Risks

-          Leverage

-          Economic sensitivity

-          Company execution

Catalyst

            OR improvement

-         Resumption of C/F positive position

-          Debt paydown