Schneider National: High value play right now (NYSE: SNDR)
Things are not going particularly well for companies dedicated to the trucking and logistics industry. But again, things are not going particularly well for most companies and most industries due to general market malaise. One player in the trucking and logistics industry that has been hit quite hard lately, even though fundamental performance remains strong, is Schneider National (NYSE: SNDR). It would be one thing if the company’s shares were trading at high levels. But the thing is, the stock looks pretty cheap, both on an absolute basis and compared to similar companies. Given this low price and the fundamental strength of the company, I think the market is overreacting. Yes, it is true that fundamental performance will likely deteriorate to some degree due to general market conditions. But even if financial performance reverses and matches what we’ve seen in fiscal 2020, stocks would still be attractively priced.
An excellent prospect for value investors
Towards the end of March of this year, I wrote an optimistic article about Schneider National. In this article, I detailed that the company has been performing exceptionally well over the past few months, with fundamental performance driving the stock higher. Even though I thought the easy money that was available at the time had already been earned, causing the company to be more or less fairly valued against its peers, I felt like it still offered benefits in the future. Ultimately, these findings led me to rate the company as a ‘buy’, reflecting my belief that it would likely still outperform the broader market for the foreseeable future. Unfortunately, the market had other plans. With the S&P 500 plunging 18.7%, shares of Schneider National followed it lower, losing in value 19.7% overall.
While we can take comfort in the fact that equities haven’t done materially worse than the market as a whole, this performance is even worse than I expected. What is interesting is that the performance the company experienced was completely unjustified from a fundamental point of view. To understand what I mean, just look at the company’s performance from a revenue and profitability perspective over the past two quarters. These are the two quarters for which data is now available that was not available when I last wrote about the company.
Take income to start. In the first half of fiscal 2022, sales reached $3.37 billion. This is a huge improvement from the $2.59 billion generated in the same time a year earlier. There were a few key factors behind this increase. For example, the average number of trucks available to the company managed to increase from 9,412 to 10,390. In addition to this, revenue per truck per week also increased from $3,845 to $4,212. . On the intermodal side, the business also benefited from an increase in orders from 222,679 to 229,790. At the same time, we also saw a significant increase in revenue per order, from $2,351 to $2,735. This represents a 16.3% year-over-year increase.
For investors worried about the most recent data, we have the option of focusing on numbers covering only the second quarter of this year. During this period, revenues reached $1.75 billion. This is 28.4% more than the $1.36 billion generated a year earlier. Again, the business benefited from an increase in the number of trucks from 9,287 to 10,466. However, it also saw its revenue per truck per week increase from $3,985 to $4,242. And on the intermodal side, the number of orders increased from 113,894 to 119,563, while revenue per order increased from $2,399 to $2,788.
With revenues rising, profitability followed. Net income for the first half of fiscal 2022 was strong at $221.9 million. This is slightly more than the $161.3 million generated at the same time a year earlier. Cash flow from operations followed suit, increasing from $255 million to $353.7 million. Even if we correct for changes in working capital, it would have increased from $335.8 million to $417 million. And over that same period, we also saw EBITDA increase from $348.3 million to $539 million. As was the case with revenue, we also saw profitability increase across the board in the second quarter of this year. This can be seen in the table above.
For the whole of the 2022 financial year, the management even went so far as to increase the guidance of the company. They currently expect earnings per share to be between $2.60 and $2.70. This compares to the previously forecast range between $2.55 and $2.70. Halfway through, that would translate to a net profit of $473 million. No indication was given regarding the other profitability parameters. But if we were to annualize the data from the first half of the year, we should expect adjusted operating cash flow of $887.3 million and EBITDA of around $1.32 billion.
Using these numbers, we can easily assess the company. On a price/earnings basis, the company trades at a forward multiple of 7.9. The price of the adjusted operating cash flow multiple is even lower at 4.2, while the company’s EV to EBITDA is expected to come in at 2.7. If financial performance eventually returns to what we saw in 2021, those multiples would be 9.3, 5.2, and 4.2, respectively. And even if they returned to the levels seen a year earlier, they would still be reasonably attractive at 17.7, 6.4 and 6.2, respectively. As part of my analysis, I also compared the company to five similar companies. For the purposes of this analysis, I compared these companies based on their pricing for fiscal year 2021 to our outlook for the same period. On a price-earnings basis, these companies ranged from a low of 8.6 to a high of 35.6. Using the price/operating cash flow approach, the range was between 2 and 24.7. And when it comes to the EV to EBITDA approach, the range was between 4 and 18.3. In all three scenarios, only one of the companies was cheaper than our prospect.
|Company||Prizes / Earnings||Price / Operating Cash||EV / EBITDA|
|Saia Inc. (SAIA)||35.6||23.5||18.3|
|XPO Logistics (XPO)||26.3||12.2||11.1|
|Werner Enterprises (WERN)||12.4||9.7||5.7|
|Landstar System (LSTR)||17.9||24.7||12.1|
The data we have now tells me that the fundamental strength of Schneider National is impressive. Clearly, management has high expectations for the full year 2022. But even if financial performance were to return to what it was in previous years, shares would still be attractively priced. The stock is also cheap relative to similar players and I see no reason why we should be anticipating a massive deterioration in fundamentals to the point of overvaluing the entire space. Due to these factors, I must once again view the company as a strong buying opportunity at this time.