Just like the broader
, various industries go through phases of retrenchment, growth and
then a peak. If you hold off on investing in these cyclical
industries until growth is robust, then you've missed the boat.
Various studies indicate that stock prices peak about 24 months
do. So to make money in these kinds of stocks, you have to envision
what the business will look like in 2014 and 2015.
Yet, few investors are thinking about cycles right now. The U.S.
economy slumped badly in 2008 as the country entered a
and has performed anemically ever since. Investors have come to
assume that we'll be in a funk as far as the eye can see.
Though, that's often the case when the economy is at a low point.
Only investors that focus on the cycles -- and can wade in at a
time of maximum pessimism -- can score big gains with cyclical
stocks. If you're one of those investors, then now is the time to
buy. Start looking for stocks that are deeply out of favor, but
have a history of robust
and sales growth when the cycle turns.
Wabash National (
, one of the leading providers of truck trailers that ply the
nation's highways. Orders have been subpar for quite some time, and
the fleet of trailers is now aging fast. Notably, trailers wear
out, thanks to heavy pounding, and 10 years is considered to be a
realistic lifespan for these big boxes. Whether it's an improving
economy or simply the need for major trucking firms to lower the
age of their fleets, Wabash should see decent results in 2013 and
should improve upon them going into the middle of the decade.
You have to go back to the middle of the past decade to see how
trade in relation to earnings growth. As noted earlier, this stock
often builds a head of steam prior to peak cycle earnings.
Wabash was deeply affected by the economic slowdown early in the
decade, and only managed to generate quarterly profits again in the
first-quarter of 2004. Wabash went on to earn $1.80 a share that
year, and $3.06 a share in 2005. Yet, the time to buy this stock
was in 2003. If you waited until 2004, then you already missed most
of the gains.
One way to look at where we are in the cycle is to look at
industry bottoms. In 1995 and again in 2002, demand for
semi-trailers slumped for roughly two years. This time around, that
slump has lasted four years.
Another measure: the average trailer on the road has
historically been around 6.5 years old. Now, that figure exceeds
eight years. Again, that's an average figure, and many trailers
actually exceed 10 years, which as noted, is typically time to
replace them. "Carriers view the age of the trailer in terms of
years, not in miles, (as tractors and autos are evaluated) because
trailers wear out any time they are exposed to the elements," note
analysts at Craig-Hallum. In fact, a number of trucking companies
have a firm 10-year limit on trailers, which even in the absence of
a growing economy. should begin this industry's upward cyclical
Shares steady throughout the cycle
In good times or bad, Wabash typically controls roughly 20% of the
, thanks to long-term supply contracts with the nation's leading
freight carriers. (Privately-held Great Dane and Utility each have
). The company is best known for its "DuraPlate" technology, which
is a composite plate dry van trailer with increased durability and
strength, compared to traditional aluminum plate trailers sold by
other vendors. DuraPlate trailers last nearly 10 years, which
partially explains the extended age of the fleet. Still, even these
units are getting close to the end of their usable life.
Management has leveraged into other categories, such as portable
storage units (PODS). DuraPlate is also used for truck skirts to
boost aerodynamics and fuel savings.
Better margins in the next upcycle?
In 2009, management realized that the economic slump might last a
while, so they removed roughly $35-40 million in annual expenses.
Part of the savings came from an increased use of automation on the
factory floor. When the cycle turns up, roughly half of that amount
will need to be put back into the business, but Wabash still has a
chance to post profit margins above levels seen in past peaks,
thanks to the cost cuts that will remain intact.
The move to cut costs has turned out to be a life-saver. Wabash
nearly went broke in 2009. The company quickly issued $35 million
that year and then raised another $75 million in a May 2010
. As a result, the
is now more stable, though at a cost of a rising share count.
Shares outstanding swelled from 30 million at the end of 2008 to a
recent 68 million. All other things being equal, the share price
peak in this cycle would naturally be diminished by the same
percentage that the share count has risen. As I'll soon note, this
cycle could be even better than past cycles.
reduces cycle risk
Management knows that a down leg of the cycle will emerge again
after the next upswing, so they are making tuck-in acquisitions
should smooth out operating results. For example, Wabash acquired
Walker Group Holdings in May 2012 to build market share in the
refrigerated trailer and energy transport markets. Those markets
are a lot less cyclical than the traditional tractor-trailer
Wabash is also developing other container-like products outside
of the core trailer market to help smooth out results. Broadly
speaking, Wabash's generic trailers generate 8% gross margins,
while customized products (including the business lines picked up
in the Walker deal) average in the low 20s. Analysts at Sterne Agee
predict that "with a greater focus on customized solutions,
sustainable pricing, and better supply buying practices, we believe
that Wabash will become significantly more profitable during this
cycle than past ones."
Second-quarter results establish a different approach to
sales and margins
Wabash reported second-quarter results in early August that
highlight a new strategy for management: Focus on profit margins
and don't wait for the economy to improve. Indeed, Second-quarter
sales of $362 million were more than 15% below forecasts -- in part
because management focused on higher-margin products in its
that take longer to build. Yet operating margins were solidly ahead
of forecasts, which explains why Wabash was able to meet consensus
earnings forecasts (prior to Walker-related charges), despite the
revenue miss. Another key metric: backlog stood at $713 million at
the end of June, which greatly reduces the chances of a revenue
miss in coming quarters.
Looking ahead to mid-decade
So what kind of results can Wabash generate as the economy starts
to rebound? Consider that in the last really solid upgrade cycle,
which occurred from 1998 until 2000, more than 500,000 trailers
were sold. That figure fell to just 162,000 in the period between
2008 and 2010. Since then, demand has begun to rebound as the
aging-fleet cycle kicks in, but a firmer economy could push
sharply higher, perhaps toward that rate we saw in the late
Analysts expect Wabash to earn close to $1 a share this year on
roughly $1.5 billion in sales. Looking into 2013, sales growth of
25% (to around $1.8 billion) should help earnings north of $1.25
per share. Assuming constant market share and typical trailer
volumes when the cycle has moved up before, Wabash appears capable
of $2.5 billion in sales by 2015 and earnings exceeding $2 per
share. If history is any guide, shares will start to move up in
advance of that trend. Assuming shares are valued at six times that
figure, then you're looking at a $12 stock price, or more than 80%
above the current level.
Frankly, both that forecast for peak earnings per share and the
could prove to be far too conservative, and there's no reason this
stock can't trade up toward the $20 mark. But it's prudent to keep
expectations in check -- until we really see the cycle kick in. As
noted earlier, shares could rise up well in advance of the peak of
the cycle as investors look ahead.
The Downside Protection -->
Demand for trailers has yet to materially rise, and a much deeper
slump in the U.S. economy would force Wabash to eat into backlog,
putting 2013 and 2014 forecasts at risks. You'll get a sense of any
deepening crisis if shares fall below $6, which will be a
reflection that industry-wide sales are falling to new lows. That
still seems unlikely in light of the aged industry fleet, but bears
Upside Triggers -->
for this stock is a pickup in trailer orders. That hasn't happened
yet, in part because freight companies have noted a slowdown in the
U.S. economy thus far in 2012. At some point -- soon -- the weak
economy will no longer be the driving factor and instead it will be
the badly-needed replacement cycle. Wabash intends to pursue firm
pricing and margins when that cycle kicks in, moving away from its
historical role of a company in search of market share at any cost.
That might cost the company a few percentage points in terms of
market share, but should help prove that the recent trend of
firming margins is here to stay.
Action to Take -->
I will buy 800 shares of Wabash (or roughly $5,000 worth) 48 hours
after you read this. I also suggest investors put in a stop loss at
$5.75, though I will not be deploying the stop-loss limits myself.
Shares can be bought under $9.
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.
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