|Shares Out. (in M):||63||P/E||15.3||9.4|
|Market Cap (in $M):||1,330||P/FCF||11.8||0|
|Net Debt (in $M):||398||EBIT||145||0|
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Wabash National (NYSE: WNC)
Industry Leader Exposed to Inflecting Trailer Market, Market Disrupting Technology and Last-Mile E-Commerce Delivery with Multi-Year Runway for Market Share and Earnings Growth.
Wabash National (WNC) is the class 8 trailer market share leader and is set to benefit from a multi-year elongated cycle that a significant number of market participants have bet against in the near-term.
We have performed extensive fleet and dealer checks which indicate WNC’s legacy trailer business will be up 10%-20% in 2018. Expectations are for it to be flat to down.
- New, innovative products will be introduced in the market during 2018, driving significant market share gains over the next 2-5 years, similar to the introduction of DuraPlate in 1996.
The recent acquisition of Supreme Industries diversifies Wabash away from legacy class 8 trailer market into the high-growth medium duty 2-5 market that serves last-mile e-commerce delivery.
Consensus estimates for 2018 and 2019 are very low, at $1.65 in 2018 and $1.62 in 2019, respectively. We believe the company will deliver $2.20-$2.30 in EPS during 2018, and $2.50+ in 2019.
Short interest is at an all-time high (30% of the float), and structural buying due to the repurchase of May 2018 convertible notes are all likely to result in WNC stock trading significantly higher over the next six months.
Wabash was founded in 1985 by a small group of entrepreneurs who began manufacturing Class-8 dry van trailers in Lafayette, Indiana. They started by building five trailers a day and eventually levered customer centric innovation to become the largest manufacturer of Class 8 trailers in the United States with about a 21% market share today. The dry van trailer market is very cyclical and Wabash has taken steps over the last several years to diversify its business by adding tank trailers, composites, mobile clean rooms and now with the acquisition of Supreme, medium duty truck bodies.
The current set-up for Wabash National (WNC) is one of the best risk/reward opportunities we see over the next three to six months. The company is positioned to benefit from record trucking profits over the next two years due to increased economic activity tightening capacity as a result of the hurricanes and the ELD mandate. We believe Wabash will also see significant benefits from the introduction of its new molded structural composite trailers and truck bodies that will enable the company to take share from competitors in the expanding market. The recent acquisition and integration of Supreme Industries will further diversify Wabash into the medium duty truck body market and expose the company to the high-growth last-mile e-commerce delivery trend. In addition to these fundamental tailwinds, Wabash is currently a full boat tax payer and will see benefits not only from a lower corporate rate, but also from any demand increase due to the expensing of capital expenses in 2018. Importantly, the market is caught on the wrong-side of the boat in a big way, with an all-time high short interest of 30% betting the trailer market will turn down in 2018. With the stock trading at <9x 2018 and 2019 EPS, and consensus estimates 35% too low, we see the potential for substantial and quick stock price appreciation over the next three to six months as the fundamental picture becomes clearer and shorts are forced to cover. Our near-term price target for Wabash is $30 per share, representing nearly 50% upside over the next six months.
1) The Trailer Market
The largest percentage of Wabash National’s revenue and profit is derived from dry and refrigerated trailers. The Commercial Trailer Product segment generates roughly 65% of the total company revenue, and is driven primarily by investments made by large and national trucking fleets. These investments are driven by the underlying profitability of the trucking business. In 2015, carrier profits came under pressure and orders for trailers followed suit in 2016. This year and next, carriers will see accelerating profitability.
Three primary factors will enable truckers to generate record profits in 2018 and 2019. These factors are: increased economic activity, the tightness in the market created by the recent hurricanes and the approaching hard-deadline for the ELD mandate.
Carrier demand is driven in large part by increased industrial production. You can see from the chart below that industrial production peaked in late 2014 as the US went through a mild industrial recession with the slowdown in energy. Trailer demand peaked soon thereafter in 2015 and fell about 7% in 2016. However, as industrial production has reaccelerated so too have trailer orders this year.
In addition, the tightness caused by improved economic conditions and the hurricanes have had a pronounced effect on both supply and demand for freight. With respect to supply, the total number of freight loads fell by 10% nationally and 72% out of Houston directly after Harvey. Houston is the fourth largest city in the US and is an important freight hub for reefers and dry vans. From a demand standpoint, a large number of truck shipments are needed for ongoing construction projects to rebuild Houston post-Harvey. Hurricane recovery efforts have increased freight demand, by pulling trucks out of their normal cycle. According to John Larkin, managing director of Steifel’s Transportation capital research, “these storms which attacked South Texas and Florida really have created a severe tightening of supply and demand [and] may have accelerated the tightening of supply and demand about six months.” “[But] here we are; there aren’t enough trucks, turned-down loads are way up, spot rates are astronomical in some parts of the country, [and] trucks are flocking to the high rates – which [is] leaving other parts of the country with too few trucks.”
On December 18th the Federal Motor Carrier Safety Administration further intensified market tightness when it began enforcement of the Electronic Logging Device rule that requires truckers to maintain an electronic log of the number of diving hours they book to insure compliance with Federal driving time limitation rules. These electronic logs are necessary because many truckers have historically been guilty of cheating on their paper logs. Based on our channel checks with numerous trucking companies, the ELD mandate will remove between 3%-6% of overall trucking capacity in 2018 and 2019. The impact will be most acutely felt by the smaller operators who are inadequately prepared for the new mandates compared to larger carriers who have already adopted ELDs for their fleets. This reduction in capacity, in conjunction with an expanding economy, will likely improve trucking rates by 5%-12% in 2018. Based on our discussions, it appears shippers are scrambling to lock-up capacity, which is driving up rates. The increase in rates will likely last into 2019, as there is no quick fix for that size of capacity reduction and driver shortage. The increased rates will, net of an increase in some costs, flow to the truckers’ bottom-line and allow them to generate record profits. Our checks indicate that the most likely use of this increased profitability is an investment back into the fleets, i.e., new truck and trailer orders. As most fleets are unwilling to buy used trailers, the increased level of spending will be a large benefit to Wabash National.
The chart below illustrates that current capacity utilization for class-8 trucks is at an all time high. We suspect that this is the result of the trifecta described above and that it strongly supports the need for new trailers to increase efficiency. Additional trailers can increase driver efficiency through drop and hook which allows a driver to drop one load with a shipper and immediately hook up to a new load without taking the time to unload the trailer the trucker was pulling. Because the average dry van costs about $25 thousand dollars, we believe many carriers and shippers are looking to improve efficiencies through adding additional trailers to take advantage of drop and hook.
Our thesis is backed up by our extensive dealer checks. We have spoken with nearly a dozen of the largest regional Wabash dealers, and on average the respondents indicated that they believed orders would be up 10% – 20% in 2018. This is also backed-up by looking at the most recent industry data, which shows that TTM net trailer order growth is north of 30% as we end 2017 (see charts below). Moreover, the OTR Global report which also indicates 2018 strength. Of the four Wabash dealers surveyed by OTR, one expects orders to be up 11%-15% y/y, two expect orders to be up 6%-10%, and one is expecting flat y/y in 2018. These forecasts compare to the consensus expecting legacy Wabash revenue to be flat to down in 2018. The bottom line is that we believe the trucking and trailer markets are very strong, and much better than the market is currently anticipating.
The resurgence in the trailer market can also be seen in Wabash’s backlog trend. The company’s backlog, which historically has been a leading indicator for revenue growth, was up on a year-over-year basis for the first time since 4Q15. We believe this is a harbinger of positive organic growth in the coming quarters.
We also note that the two most recent reads on current trailer demand, from October and November, have exceeded expectations. This is important because a) these data points came after the most recent conference call, and b) management indicated on the third quarter call that any upward trailer demand revisions could “put upward bias on projections”. This following quote is from the 3Q17 conference call:
“If demand comes in at the levels that it's come in this year, it will be very similar to what FTR is suggesting for next year. That's very strong and that could put upward bias on projections and that's why we've left a lighter range at this early stage. We'll get more clarity as we proceed forward obviously next quarter and as we go through the year.”
Notably the October and November data were very strong, and above expectations. October trailer orders were up 51% y/y, while the November data was up 19% y/y and lapping a difficult comparison. We believe these data points are strong enough to result in upward revisions to 2018 guidance when management gives an updated outlook concurrent with the 4Q17 results.
2) Supreme Acquisition
In late September of 2017, Wabash purchased Supreme Industries (STS), the number two manufacturer of medium duty truck bodies in the US for $342M. Wabash has projected that the transaction will be accretive in 2018 and generate $20 million in annual cost synergies and $10-20 million in revenue synergies by 2021. The acquisition will also result in decreasing the cyclicality of Wabash and reducing its exposure to the dry van market to 50% of sales.
The acquisition is strategically complimentary in several ways, but most importantly it provides Wabash with the ability to leverage the technology it has developed for the Class 8 dry van market into the higher-growth last-mile medium duty truck market which is being driven by the expansion of e-commerce. Last-mile ecommerce delivery is projected to grow at 12% per year or 3x the rate of GDP due to e-commerce growth. This represents a $2B+ market opportunity for Wabash.
Under new leadership and with Wabash’s best in class technology, Supreme is positioned well to gain market share in the high-growth segment. Wabash’s molded composite technology (see below) can be used in Supreme’s final mile reefer trucks for the delivery of fresh and frozen food goods.