HEARTLAND EXPRESS INC (NASDAQ: HTLD)
A family owned trucking company
Stock Price: $11.33 USD
Market Cap: ~$900M USD
Enterprise Value: ~$1100M USD
Heartland Express is a family-operated trucking company founded in 1978 by Russell Gerdin and became publicly traded in 1986. The company provides short-to-medium haul truckload logistic services to its customers in the U.S., Canada, and Mexico. Most of their revenue is generated from the U.S. with immaterial revenue from Canada and Mexico.
Source: 2023 Heartland Annual Report
The company is currently run by the founder’s son, Michael Gerdin, who started his career with the company washing trucks. Having worked at various departments within the company, Michael was promoted to CEO and Chairman in 2011.
The total U.S. Transportation market size is ~1.5 Trillion. Of this, about ~30% is For-Hire Truckload, ~30% is Private Fleet Truckload, ~5% is Less-Than-Truckload(LTL) and the remaining are other modes of transportation like Rail, Pipeline, Water, etc.
The For-Hire Truckload market is heavily fragmented with lots of owner-operators and the top truckload carriers have ~10% market share. Heartland Express currently operates in a sub-sector of the For-Hire Truckload where they focus on dry van truckload with short-medium haul (~400 miles). They have focused on this niche over the last 40+ years with tremendous success in keeping costs low and having an Operating Ratio(OR) in the 80s. OR is a measure of operating expenses as a percentage of total revenues and the lower this percentage the better. They strive to have higher service levels (99% On-Time) which lets them not just compete on price and helps maintain good profitability. In a recent YouTube interview, the CEO mentions a couple of examples of their great service:
a) In 2023, they had ~30,000 pickups and deliveries of which only 6 were late!
b) They have won the FedEx Carrier of the Year award for 18 consecutive years. They also maintain a young fleet and at YE 2023 their trucks had an avg age of 2.2 years and trailers at 6.4 years (trailers are on the higher end due to the acquisitions).
The company had accomplished 45 consecutive years of OR in the 80s or lower and the streak was broken in 2023 due to their recent acquisitions. They acquired 2 companies in 2022, Smith Transport and CFI which almost doubled their revenues however the businesses weren’t efficiently run, and the industry downturn starting in late 2022 affected the company’s OR(2023 OR =96.5%). Usually, the Heartland Express management team takes about 3 years to turn the acquired business into a low 80s OR operation however the industry downturn amid the turnaround has pushed this timeline likely into 2026.
The shares are now trading at the same levels as in 2004 and one look at the long-term price graph might make people wonder what makes it a buy now? (The shares have traded almost flat since the early 2000s-2022). There are a couple of reasons why I think the shares are attractive now:
Source: Yahoo Finance
In the past, the company traded at lofty valuations as high as 5xBookValue(BV) to now at ~1xBV
The company has made 10 acquisitions since going public and management was able to turn around all (except the last 2 which are in progress) prior acquisitions into low 80s OR operations within 3 years. Based on management’s track record, I expect the last 2 acquisitions to be turned around too.
The management team believes in maintaining a debt-free balance sheet due to the cyclical nature of the trucking business and before 2022 had long-term debt for only 4 years since going public(1986). The company is aggressively paying down debt and once the debt is fully paid down management will have the option to buy back shares aggressively if shares remain undervalued. They have paid down debt by $258.9M since the acquisitions were completed in 2022. They ended Q2 2024 with $237M of debt and finance lease.
The company owns 27 terminal facilities and its headquarters in North Liberty, Iowa which is located on an intersection of interstates 380 and 80 is on 40 acres of land along a business corridor. The company sold one terminal in 2022 for a gain of $73M, and all the 27 terminals are on the books for ~$120M, which in my opinion is severely understated. This provides a Margin of Safety.
Free Cash Flow over the last 5 years prior to 2022 was an avg of ~$90M/year, with an avg OR of 85%. The company is trading currently at 10x historical FCF, this does not account for the recent acquisition which doubled the company’s operations.
The company has had positive net income every year since 2006 (could be longer my data only goes back to 2006). I prefer FCF vs Net Income as they depreciate their assets/trucks aggressively and capture the gains during equipment sale which shows up in the Cash Flow statement.
The CEO (incl his mother’s trust, family trust, etc) and officers control 39.8% of all the shares outstanding and their interests are aligned with minority shareholders. The CEO and the trusts have in 2024 bought over $6.7M worth of shares paying as high as $12.39/share. They have also bought tons of shares in 2023 and 2022 at higher prices.
The company in the past has paid special dividends and bought back shares which are all options they could pursue once the debt is paid down.
VALUATION:
Assuming by the end of 2026:
Debt is paid down
Industry returns back to equilibrium (Supply = Demand)
Management turns the business around and OR is at 85%
Revenue conservatively is ~$1B assuming industry uptick from 2023 levels but some shrink in revenues to get OR to 85%
This would result in a forward-looking operating income of $150M and Net Income of $121M, translating to EPS of $1.53 assuming 79M shares outstanding. With a conservative valuation of 15x multiple, I arrive at a share price of ~$23 USD. A double in 2 years including dividends from current share price of $11.55. FYI - The LTM P/E multiple range prior to 2022 for the company was between 15x - 39x.
Alternatively, we can also value the company at a throwaway private multiple of 5xEBITDA, which would translate to $150M(operating income) + $150(D&A, historically ~15%of revenue)=$300M and at 5 x $300M that would be $1.5B, which is ~67% higher than current Mcap. (Note: I am assuming debt is paid down fully by YE2026, which makes Mcap=EV). This valuation in my opinion is very low for ~85% OR trucking business with scale and owned properties/terminals. However, justifiable if management can’t turn around the business to historical OR.
RISKS:
Downturn persists longer
Turnaround of Smith and CFI acquisitions fail
Company taken private on the cheap
Author’s assumptions could be incorrect
Disclaimer: I own shares of HTLD. Nothing on this blog is investing or financial advice. Please see full disclaimer here.