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It has been nearly a decade ago since I last looked at Heartland Express (NASDAQ:HTLD) which acquired Gordon Trucking at the time. That deal created a business set to generate a billion in revenues a year, as a jump in response to the news announcement made shares not appealing in my view.
Back To 2013
Nearly a decade ago, Heartland reached a $300 million deal to acquire Gordon trucking, adding some 2,000 tractors and more than triple the number of trailers to its fleet, serving customers like General Mills, Pepsi, Walmart and Unilever. It should be said that the deal came with significant tax advantages, pegged at with a net present value of $60 million.
Following the deal, shares rose 25% to $18 per share, valuing equity of the company at $1.5 billion, as that included a net cash position (ahead of the Gordon deal) and a modest net debt load after completion of the deal, which partially would be paid in debt. Ahead of the deal, shares of the company were trading around 2.5 times sales and a market valuation in terms of earnings multiples, in their high-teens.
The deal looked very compelling as the $300 million purchase was executed at a mere 0.7 times sales multiple and while Gordon posted lower margins, the earnings multiple applied to that deal was lower, even ahead of tax and costs synergies, hence the positive reaction of investors. Nonetheless, it seemed to me that a 25% jump in response to the deal, adding an amount to the market valuation which was equivalent to the deal tag, was a bit opportunistic.
What Happened?
The momentum run in the share price following the deal announcement continued into 2014 as shares rose to the mid-twenties at the time. In the years which followed, shares largely traded around the $20 mark or high-teens, as they have actually retracted further to $15 at the moment of writing. This marks minus 20% returns over the period of a decade, a dismal result considering that the dividend yield comes in at just half a percent.
The reason for the shortfall in the performance is easy and more than fair. After revenues peaked at $871 million in 2014 following the Gordon deal, revenues have slipped to the $600 million mark now, and actually already in recent years. The company managed to keep operating margins in the low double digits and has been able to buy back a tenth of the shares over this period of time, but the overall topline results are very disappointing.
In January of this year, the company posted its 2021 results. Revenues fell from $645 million to $607 million, which is not an encouraging result as the fight for drivers is intense, yet the business is very profitable as it posted a $105 million operating profit last year, albeit aided by $37 million in gains on equipment sales. Including these gains, net earnings came in at $79 million, or a dollar per share, indicating that the multiple at 15 times seems reasonable.
However, this comes amidst the fact that one-time gains are realised (leaving the question of how sustainable this is) as the longer term performance has not been that great (quite an understatement). Net cash has risen to $157 million, nearly two dollar per share, the only bright factor in this valuation discussion.
With 79 million shares trading at $15, the market value of $1.2 billion implies that operating assets are valued at just around a billion. This is equivalent to roughly 1.6 times sales and about 13 times earnings, albeit that earnings include some equipment gains.
Following first quarter results which were roughly in line with last year, the company announced a deal in June. Heartland has reached a $170 million deal to acquire dry van truckload carrier Smith transport. A 5 times EBITDA multiple and 8 times operating income multiple looked pretty reasonable. This deal was pretty substantial, as net cash would be pretty much depleted following the deal.
More Big News
Towards the end of July, Heartland announced its second quarter results with growth accelerated on the back of the acquisition of Smith at the end of May. This resulted in revenues growing 21% on an annual basis to $187 million. Operating earnings exploded to $105 million on the back of $82 million in equipment sale gains, but otherwise operating earnings would be up a bit as well. Net cash came in above $160 million despite the Smith deal as the company has seen huge equipment gains.
In August, Heartland announced a much larger deal as it has reached an agreement to acquire the Contract Freighters non-dedicated US dry van temperature-controlled business from TFI International (TFII) in a $525 million deal, equivalent to roughly 40% of its own valuation here!
Despite the large deal, shares hardly reacted to the announcement, as Heartland will add roughly $575 million in sales with the deal, increasing its exposure to transborder US – Mexican trade as the deal comes at a 5.0 times EBITDA multiple. Nonetheless, leverage ratios are expected to remain very modest as the questions is how profitability will evolve.
Of course the company posted 2021 earnings at a dollar per share, yet this was partially the result of gains on equipment sales which are a typical source of income to the company, at least, so it appears, as the question is how long this will last. The Smith deal seems to contribute nicely to the second quarter results, as the question is how leverage and accretion will evolve following the latest deal, which is a huge transaction of course.
Needless to say, it seems that multiples are non-demanding, yet there is huge uncertainty on the earnings power of the business here as the long-term track record has been dismal (which is even an understatement). I am happy to stay on the sidelines for now, looking to perhaps get involved after more information becomes clear in the coming quarters.
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