Truck-trailer manufacturer Wabash National (NYSE: WNC ) reported that first-quarter earnings plummeted 78%, dropping to $4.3 million from $18.5 million the year before because of rising raw material costs. It was like a jackknifed 18-wheeler on the company's road to recovery.
The company's efforts were hurt this quarter, it says, not because of problems with its program but because customers delayed picking up their inventory and because of greater competitive pricing, which hurt margins. It expects the rest of 2006 to bring incremental improvement. Let's hope it's more than just an incremental improvement in sales, which climbed only 2% to $262.1 million this past quarter. Admittedly, 2005 was a good year, and its second quarter was one of its best ever with sales of $323 million, or 28% greater than in 2004.
Wabash is the largest publicly traded manufacturer of truck trailers, having built more than 51,800 trailers, but is second to privately held Great Dane, which has an estimated 55,000 trailers, according to industry trade magazine Trailer/Body Builders. However, in March, Wabash acquired No. 10 manufacturer Transcraft in a $71 million all-cash deal that should vault the company to the top spot. Wabash has industry-leading brands like DuraPlate and RoadRailer, along with its eponymous serving customers like JB Hunt (Nasdaq: JBHT ) , Swift Transportation (Nasdaq: SWFT ) , and Heartland Express (Nasdaq: HTLD ) .
The market crash of 2000 signaled the end not only of the tech stock boom but also of more mundane, less glamorous companies such as those in the trailer-manufacturing industry. Wabash itself was a financial train wreck, realizing net losses in 2001 and 2002, while triggering defaults on its debt covenants. A new management team was brought in to make a U-turn for Wabash, and new debt covenants were written in 2003.
By 2004, the industry was turning around and Wabash's trailer production grew 32% over the previous year, while No. 3 manufacturer Utility Trailer produced 30% more. Wabash, Great Dane, and Utility account for 56% of all trailers produced in the United States. Last year, Wabash initiated a cost-reduction program that included greater automation and product standardization.
While analysts haven't updated their revenue forecasts, they've started to scale back their earnings predictions, dropping them 30% from the year down to $1.74, but giving a forward P/E ratio of just nine. This makes the stock intriguing to me, particularly since I bought shares in Wabash last year because of its growth potential. Trucking companies have an aging fleet of trailers that will need to be replaced. Moreover, with new fuel efficiency standards coming due, trucking companies have been placing orders for more tractors, which has reduced the ratio of tractors to trailers from 1.5:1 to 1:1, according to industry research firm ACT Research. While even Wabash says the ratio won't return to historical levels, it could result in pent-up demand for trailers.
The company says that orders for 85% of its production goals for the year are already in hand, and it plans to hire more employees. Wabash also plans to add a second and third shift to meet demand, a situation that should last until at least October. So even though it's a red flag for me when earnings growth drops more than 50% from one quarter to the next, I'll be looking hard at second-quarter numbers to see whether this quarter was a one-time event or a sign that Wabash is running off the road.