By Monte Sol Capital :
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In ten years this company has multiplied its revenue 100 times.
It hasn't posted a losing year in a decade. What's more, over the
period shown this company has made exactly zero acquisitions. All
of the growth has been internally generated.
The company is Autoinfo (AUTO.OB). Autoinfo is the corporate
parent of Sunteck, the eighth largest truck freight broker in the
United States. Sunteck is a non-asset-based broker, meaning it
doesn't own the trucks-it just provides the logistics.
Truck freight brokerage is a major subsector of the third-party
logistics industry ("3PL"). You can read more about the 3PL
industry here . Within the 3PL industry, truck freight
brokerage is one of the most straight-forward, and thus low-margin,
businesses. But there is also an argument to be made that U.S.
truck freight brokerage has one of the better growth outlooks in
3PL. You can read Brad Jacobs, the CEO of XPO Logistics ( XPO ), make that
argument here .
Apart from AUTO there are three U.S.-based brokers that are (1)
publicly traded; (2) non-asset-based; and (3) focused mostly or
wholly on trucking. Here they are:
The average 2013 P/E for these companies is 18x, and there isn't
a whole lot of variance. These three companies operate very similar
business models, and the market has awarded them very similar-and
very much above-market-multiples of earnings.
AUTO is much smaller than the three businesses listed above, but
it is in exactly the same business. Here is the same table again,
but with AUTO added in:
Which of these is not like the others?
AUTO trades at a 65% discount to its peers. Value investors
often talk about buying "fifty cent dollars". Well, AUTO looks more
like a thirty-five cent dollar, and a fast-growing one at that.
There is one important difference in the way these companies
operate. CH Robinson ( CHRW ) generates its
sales almost entirely from brokers who are salaried employees of
the company. By contrast, Landstar ( LSTR ) and Autoinfo
generate their sales almost entirely from brokers that are
independent, commission-based agents. These independent agents are
in essence third-party contractors who use the parent company's
brand name (e.g. Landstar or Sunteck), back office and IT systems,
and shipping networks. In return, the parent companies keep a cut
of the business the agents generate.
On occasion, some investors have voiced concern about whether
independent agents can simply leave and go work for a competitor,
and whether that possibility makes the independent agent-based
business model inferior. Does it? Maybe, maybe not. Looking at the
ten-year financials for Landstar and Autoinfo, it is hard to find
any sign of an inferior business model, whether as measured by
growth rates, which are exceptional for both companies, or by
margins, which are equal to those of similar-sized peers.
For an agent, switching parent companies is a lot of work. The
agent must transfer all financial and technical links to the new
parent, and every customer must open a new account with the new
parent company. But it is certainly not impossible.
The stock market seems undecided about whether the employee vs.
agent issue matters. At the moment LSTR, an agent-based broker,
trades at a 20% P/E discount to CHRW, which uses close to 100%
salaried agents, and Echo Global ( ECHO ), which is about
two-thirds salaried. But LSTR has also traded at an equivalent
multiple to CHRW and ECHO at many times in the past.
The AUTO/Sunteck business is almost identical to Landstar's,
albeit much smaller. Both businesses are even based in Florida. The
market has never been shy about giving LSTR a 16-20x P/E; what
multiple should the market give AUTO? Even using a highly
discounted 12x multiple in order to account for illiquidity and the
risk of agent defection, AUTO should be worth close to $2.00 based
on a reasonable $0.15 estimate for 2013 EPS.
Yet today AUTO trades at $0.85, a 6x P/E looking forward.
Usually such a low earnings multiple indicates that a company is
deeply cyclical, has serious operational problems, or competes in
an industry in terminal decline. None of these concerns are
remotely applicable to AUTO, as you can tell from glancing at the
historical financials at the start of this piece. Nothing is
wrong with AUTO . In fact, Sunteck is a very good little
business-it is simply unknown by most investors. The market cap is
a microscopic $30 million, and the shares are tightly held by just
a few parties.
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The float--the portion of the company owned by "everybody
else"--amounts to just $8 million dollars at today's price. The
conventional wisdom says that a tiny float won't incentivize
institutional investors to descend en masse and close the
valuation gap. But the less-recited flip side is that even a minor
amount of capital will be sufficient to have a major impact on the
price of the shares, whether through open market purchases or
through an outright acquisition of the company.
And there are actually some pretty major amounts of capital out
there. As I've written about previously, there is a lot of money
flowing into 3PL strictly for the purpose of consolidation. XPO has
$300 million in the bank earmarked specifically for acquisitions,
and its CEO has said explicitly that U.S. truck brokerage is his
target. AUTO is unquestionably on his radar. AUTO is on the radars
of a number of other public and private 3PL CEOs as well. Private
equity firms are lurking as well-freight brokers make attractive
buyout targets because of their steady profits and the ease with
which they can be combined. All that money and all those interested
parties make AUTO a coveted asset.
There is also pressure to sell. In April two activist investors
(Baker Street and Khrom Capital Management) filed a 13-D reporting
14% ownership of AUTO and requesting that the company explore a
sale. Forcing a sale will be difficult without the cooperation of
the other major holders because insiders own so much of the
company. But the activist pressure should be enough to get the
board thinking hard about how to bring the AUTO share price more in
line with the intrinsic value of the company.
AUTO might be too small for big investors to pay attention to
it, but at $300 million of gross revenue, it is plenty large to be
of interest to a number of 3PL industry players. Its growth
prospects are superb and its current price makes it a compelling
bargain. How much longer will it trade publicly?
Monte Sol and its affiliates own shares of AUTO.
Disclosure: I am long [[AUTO.OB]]. I wrote this
article myself, and it expresses my own opinions. I am not
receiving compensation for it. I have no business relationship with
any company whose stock is mentioned in this article.
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