WABASH NATIONAL CORP WNC
April 03, 2012 - 1:27pm EST by
quads1025
2012 2013
Price: 10.35 EPS $0.00 $0.00
Shares Out. (in M): 68 P/E 0.0x 0.0x
Market Cap (in $M): 707 P/FCF 0.0x 0.0x
Net Debt (in $M): 392 EBIT 0 0
TEV ($): 1,100 TEV/EBIT 0.0x 0.0x

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  • Recent Acquisition
  • margin expansion
  • M&A Catalyst
  • Cyclical

Description

EXECUTIVE SUMMARY

On March 27, 2012 Wabash National Corporation ("Wabash") announced that it entered into a definitive agreement to acquire Walker, a leading manufacturer of liquid-transportation systems and engineered products for $360 million.  The acquisition is expected to close by the end of 2Q12.  This is not only a highly strategic acquisition for the Company but also a financially attractive one which should cause a meaningful near-term re-rating of the stock.  Simple math indicates that the acquisition of Walker should contribute ~$30 million in incremental FCF to Wabash.  Because the acquisition is all cash, the value of that FCF should flow through directly to the current equity holders.  Applying a very conservative FCF yield metric of 12%, the $30 million in incremental FCF should translate into $250 million in additional market cap, or ~35% higher than Wabash's market cap of $668 million prior to the acquisition announcement.  This conservatively calculated total market cap of $918 equates to $13.50 per share, or ~30% higher than the Company's current stock price.

COMPANY DESCRIPTION

  • Wabash is one of North America’s leaders in designing, manufacturing and marketing standard and customized truck trailers and related transportation equipment.  The Company’s customer base includes many of the nation’s largest truckload carriers, leasing companies, private fleet carriers, less-than-truckload common carriers and package carriers.  The Company is organized into three reporting segments:
    • Commercial Trailer Products (82% of 2011 Revenues) – this segment manufactures standard and customized truck trailers.  Product categories for this segment include dry vans, platform trailers, refrigerated trailers, specialty trailers, and used trailers.
    • Diversified Products (8% of 2011 Revenues) – this segment manufactures trailers and related products using specialty composites and specialty wood products as well as manufactures mobile storage tanks used in the oil and gas industry for fracturing wells.
    • Retail (10% of 2011 Revenues) – this segment sells new trailers produced by the Commercial Trailer Products segment, provides replacement parts and accessories, and sells used trailers.

INVESTMENT THESIS

  • Strategically and Financially Attractive Acquisition of Walker – On March 27, 2012 Wabash announced that it entered into a definitive agreement to acquire Walker, a leading manufacturer of liquid-transportation systems and engineered products for $360 million.  The purchase price equates to 6.8x 2011 adjusted EBITDA for Walker.  This is a transformation acquisition for Wabash as it will increase the Company’s enterprise value by ~50% and will increase the Company’s pro forma 2011 EBITDA by ~140% from $39 million to $92 million.  The main aspects of the transaction are as follows:
    • Consideration – Wabash is acquiring Walker in an all-cash transaction for $360 million on a debt-free, cash free basis.  Wabash has received committed financing from Morgan Stanley and Wells Fargo of up to $450 million to fund the acquisition and refinance its existing credit facility.  Management has not yet provided any guidance as to the pricing on the credit facility.
    • Rationale – Strategically, the acquisition of Walker is highly advantageous for Wabash.  Walker occupies the #1 market position in North America in the manufacturing of liquid transportation systems.  The acquisition provides Wabash with exposure to attractive end markets, including chemicals, dairy, food & beverage, energy, aviation and pharmaceuticals.  In addition, the acquisition expands Wabash’s geographic footprint both domestically and in higher-growth international markets.  Further, the liquid-transportation system market tends to be significantly less cyclical than the trailer industry, which should help stabilize Wabash’s revenues and earnings.
    • Timing – The transaction is expected to close by the end of 2Q12.
    • Closing Conditions – The transaction in subject to customary regulatory approval, including HSR.  Shareholder approval is not required.  The transaction is not subject to financing as Wabash has already received a financing commitment.
    • Financial Impact – Management expects the acquisition to be immediately accretive to the Company’s net income.  On their conference call discussing the transaction, management guided to a total of $10 million in operating cost synergies, 50% of which are expected to be realized within the first year after the acquisition closes.  Further, the acquisition will increase Wabash’s margin profile as Walker’s EBITDA margins are currently 15.4% vs. Wabash’s of 3.3%.  The transaction will not have any negative impact on Wabash’s current NOL balance ($166 million).  In fact, the transaction is actually incrementally positive to Wabash as far as its NOL’s as Walker will increase Wabash’s profitability and assist the Company in extracting greater value of its NOL’s on an NPV basis through faster utilization.  Internal estimates indicate the transaction will be >30% accretive to Wabash’s 2013E EPS. 

FUNDAMENTAL ANALYSIS

  • Summary – The fundamental outlook for Wabash is favorable and should help propel the stock of the pro forma entity upward independent of events and catalysts.
  • Market Leadership– Wabash has historically held the largest market share in trailer manufacturing in the United States.  The Company’s market share of United States’ total shipments in 2011 was approximately 23%.  Wabash, and its two largest competitors, Great Dane and Utility, are generally viewed as the top three trailer manufacturers in the United States and have accounted for greater than 50% of the United States new trailer market share in recent years, including ~60% in 2011.  Accordingly, the Company’s scale provides it with the following competitive advantages:
    • Brand Recognition – As currently the largest producer of trailers in North America, Wabash holds significant brand recognition in the industry, providing it with a competitive advantage over very small industry participants.
    • Technology – Wabash is able to use its size and scale in order to serve as a forerunner in technology development.  Technology in trailer construction can lead to reduced trailer operating costs, improved revenue opportunities, and solving unique customer transportation problems.
    • Distribution – Wabash’s 12 Company-owned retail branches and two used trailer locations extend its sales network throughout North America, diversifies its factory direct sales, provides and outlet for used trailer sales and support national contracts.  In addition, the Company utilizes a network of 27 independent dealers with ~62 locations through North America to distribute its van trailers.  In addition, the Company’s Transcraft distribution network consists of 90 independent dealers with ~141 locations throughout North America.  Overall, the Company’s extensive distribution capabilities provide it with an advantage over smaller industry participants.
  • Favorable Medium-Term Industry Dynamics – The trailer manufacturing industry should continue to experience a healthy demand environment as trucking companies replace their fleets which have suffered from underinvestment during the global economic downturn from 2007 to 2009.  The demand environment for trailers has continued to improve over the last several quarters and is projected to remain strong for the next several years.  After three consecutive years with total trailer demand well below replacement demand levels of ~185,000 trailers annually, 2011 proved to be a year of significant improvement in which the total trailer market increased ~68% from the previous year with total shipments of ~209,000.  ACT Research Company is estimating 2012 trailer volumes to be ~246,000 trailers, representing an increase of ~18% from 2011, with continued strong demand levels through 2016.  The research firm estimates annual demand in excess of 215,000 trailers annually throughout the next five years.  By comparison, total trailer industry shipments for the years ending 2010, 2009 and 2008 were ~124,000 trailers, 79,000 trailers, and 143,000 trailers, respectively, which were all well below industry replacement demand levels.  Further, the rebound in the trailer industry can also be seen in Wabash’s backlog which is $587 million as of December 31, 2011, up 14% from $513 million as of September 30, 2011.  On a year-to-date basis, Wabash’s backlog is up 22% over 2011 levels.  Of note, the average age of trucking fleets has continued to increase over the past several years as fleets deferred on their capital investments during the most recent industry downturn.  According to ACT, the average age of dry and refrigerated vans in 2011 remained at historical highs that were reached in 2010 of ~8.5 years and ~6 years, respectively, as compared to ~7 years and ~5.5 years, respectively, in 2007.  The increase in the age of trailers suggests an increase in replacement demand over the next several years.

KEY RISKS

  • Macroeconomic Uncertainty – Although the trailer manufacturing industry is currently experiencing a healthy demand environment as trucking companies replace their fleets, the industry as a whole is cyclical and remains subject to broader economic conditions.  Both Europe and Asia, specifically China, have showed signs of economic weakness which could, in turn, cause a decline in the United States Economy.
  • Competitive, Low-Margin Business – The trailer manufacturing industry is characterized as a highly competitive, low margin business.  EBITDA margins for the business are typically low single-digit.  Unfavorable market conditions can cause margins to quickly turn negative.
  • Raw Material Cost Pressures – In manufacturing trailers, Wabash utilizes a variety of raw materials and components including specialty steel coil, plastic, aluminum, lumber, tires, axles and suspensions which the Company purchases from a limited number of suppliers.  Cost of raw materials and component parts represented ~77%, ~74% and ~75% of Wabash’s consolidated net sales in 2011, 2010 and 2009, respectively.  Although Wabash has been able to push through some price increases to offset raw material cost pressures, the competitive landscape of the business severely hinders any single company from holding pricing power.  Accordingly, margins could be negatively affected should raw materials experience significant price inflation.

FINANCIALS / VALUATION

  • Quick Math on Acquisition – Below is the "simple math" analysis that indicates the purchase of Walker should add ~$30 million in incremental FCF to Wabash
Incremental Free Cash Flow Analysis        
                 
Walker   2012E EBITDA     $ 55.6      
  Depreciation and   Amortization   (7.0)      
Walker   2012E EBIT     48.6      
                 
Acquisition   Term Loan 360.0          
Rate   6.0%          
Interest   Expense $ 21.6   (21.6)      
                 
Walker   2012E EBT     27.0      
                 
Taxes       0.0      
  Rate, %       0.0% (WNC has $166 million in   NOL's)
                 
Net   Income       $ 27.0      
                 
Depreciation   and Amortization   7.0      
Capital   Expenditures     (3.0)      
                 
Incremental   Free Cash Flow   $ 31.0      
  • Valuation – As presented in the Summary Financials below, pro forma for the acquisition Wabash should generate $136 million in 2013E EBITDA and $1.38 in 2013E EPS.   Accordingly, at the Company's current share price and with its balance sheet adjusted for the transaction, Wabash is trading at 8.0x 2013E EBITDA and 7.5x 2013E earnings.  These appear to be low multiples in comparison to Wabash's "cycle average" multiples of 9.0x EV/EBITDA and 16.0x PE.  As the Company is currently progressing through the early stages of an "up cycle", one should expect some multiple compression as earnings expand.  However, at 7.5x earnings, the stock simply appears to be too cheap.  Further, by my math the Company should generate ~$90 million in FCF in 2013. This equates to a 13% FCF yield, which also looks very attractive.
  • Summary Financials –
 
Wabash National Corporation (WNC)  
Operating   Model          
($   in millions)            
               
          2011 2012 2013
               
WABASH   NATIONAL CORPORATION      
               
New   Trailer Units          
  Manufacturing     44,800 55,332 61,530
  Retail and Distribution     2,800 2,979 3,313
  Total       47,600 58,312 64,843
               
New   Trailer Unit Growth, %        
  Manufacturing     91.5% 23.5% 11.2%
  Retail and Distribution     86.7% 6.4% 11.2%
  Total       91.2% 22.5% 11.2%
               
Average   Selling Price          
  Manufacturing     $ 23,708 $ 24,523 $ 24,523
  Retail and Distribution     $ 44,679 $ 32,714 $ 32,714
  Total       $ 24,942 $ 24,942 $ 24,942
               
Average   Selling Price Growth, %        
  Manufacturing     0.6% 3.4% 0.0%
  Retail and Distribution     (24.8%) (26.8%) 0.0%
  Total       (3.0%) (0.0%) 0.0%
               
Revenues            
  Manufacturing     $ 1,062.1 $ 1,356.9 $ 1,508.9
  Retail and Distribution     125.1 97.5 108.4
  Total       1,187.2 1,454.4 1,617.3
               
Cash   Cost of Goods Sold     1,104.9 1,349.7 1,500.9
               
Cash   Gross Margin     82.3 104.7 116.4
  Margin, %       6.9% 7.2% 7.2%
               
S,G&A   Expenses     46.9 50.0 50.0
  % of Revenues     4.0% 3.4% 3.1%
               
EBITDA       35.4 54.7 66.4
  Margin, %       3.0% 3.8% 4.1%
               
               
          2011 2012 2013
               
WALKER   HOLDINGS          
               
Revenues       $ 344.0 $ 361.5 $ 381.8
  Growth, %       N.A.   5.1% 5.6%
               
Cash   Cost of Goods Sold     257.0 270.1 285.2
               
Cash   Gross Margin     87.0 91.5 96.6
  Margin, %       25.3% 25.3% 25.3%
               
S,G&A   Expenses     34.0 34.0 34.0
  % of Revenues     9.9% 9.4% 8.9%
               
EBITDA       53.0 57.5 62.6
  Margin, %       15.4% 15.9% 16.4%
               
CONSOLIDATED          
               
Revenues       $ 1,187.2 $ 1,638.7 $ 1,999.1
  Growth, %       85.4% 38.0% 22.0%
               
Cash   Cost of Goods Sold     1,104.9 1,487.4 1,786.0
  Synergies         (2.5) (7.5)
Adj.   Cash Cost of Goods Sold   1,104.9 1,484.9 1,778.5
               
Cash   Gross Margin     82.3 153.9 220.5
  Margin, %       6.9% 9.4% 11.0%
               
S,G&A   Expenses     46.9 67.0 84.0
  % of Revenues     4.0% 4.1% 4.2%
               
EBITDA       35.4 86.9 136.5
  Margin, %       3.0% 5.3% 6.8%
               
Wabash   National Corporation (WNC)  
Income   Statement          
($   in millions)            
               
          2011 2012 2013
               
Revenues       $ 1,187.2 $ 1,638.7 $ 1,999.1
  % Growth       85.4% 38.0% 22.0%
               
Cash   COGS       1,104.9 1,484.9 1,778.5
  Cash Gross Profit     82.3 153.9 220.5
  % Margin       6.9% 9.4% 11.0%
               
S,G&A       46.9 67.0 84.0
  % of Revenue     4.0% 4.1% 4.2%
  Total Operating Expenses   46.9 67.0 84.0
  % Margin       4.0% 4.1% 4.2%
               
EBITDA       35.4 86.9 136.5
  % Margin       3.0% 5.3% 6.8%
               
Depreciation       15.6 15.6 15.6
  Total Depreciation and   Amortization   15.6 15.6 15.6
               
EBIT       19.8 71.3 120.9
  % Margin       1.7% 4.3% 6.0%
               
Interest   Expense          
  Senior Bank Term A         27.0
     Total Interest Expense     4.1 14.5 27.0
               
Interest   Income     0.0 0.1 0.4
Other   Income/(Expense)     (0.4) 0.0 0.0
               
EBT       15.2 56.9 94.3
  Taxes       0.2 0.0 0.0
  Tax Rate       1.1% 0.0% 0.0%
  Net Income       $ 15.0 $ 56.9 $ 94.3
  % Margin       1.3% 3.5% 4.7%
               
  FD Shares Outstanding     68.4 68.3 68.3
  FD EPS       $ 0.22 $ 0.83 $ 1.38
  Growth, %     (106.6%) 278.7% 65.8%

 

Catalyst

Closure of the Walker transaction, expected at the end of 2Q12, and subsequent incorporation of the transaction into sell-side estimates.
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