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By mklein9
March 10, 2009

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Pacer International is an inter-modal transportation and logistics service provider with low fixed assets. The stock has been utterly hammered in the last few weeks from about $7 to $1.59 since their Q4 earnings announcement which, given the general and specific transportation environment, was IMHO pretty good.

Market cap is now below tangible book value, yet they are generating cash and expect to do so for 2009. There is a quarter or two of "headwind" of fuel surcharge deficits where what they can charge and what they're paying for fuel are out of sync, a temporary problem. They lease the containers, contract with third party trucking, etc., so have relatively low fixed costs (one of the things I look for in this environment). Auto manufacturers have previously accounted for 20% of their revenues; clearly there is at least a temporary void here but even with a big drop in Q4, PACR generated cash.

Q4 included a goodwill write-down for an acquisition made some years ago before current management came in. Without this write-down, Q4 GAAP earnings would have been about $7.8 million or $0.22/share.

To be cash conservative, they suspended their dividend, which is one factor I can understand in reducing the share price, but not to this extent. At $10/share (12/31/08), the dividend yield was 6%, so maybe a bunch of people bought the stock for the dividend??? But to knock it down to $1.50 and change???

Is anyone familiar with this company? What am I missing?

Current market cap (today): $56 million; EV $110 million
Tangible common equity, 12/31/08: $70 million
Debt structure: $59 million total, $15 million current and $44 million on revolver, none due in the next 3 years
2008 operating cash flow: $60 million ($9.7 million in Q4)
Cash savings vs. 2008: dividend suspended ($21 million), cap ex reduction ($8 million reduction vs. 2008)

The majority of the 2009 cap ex is implementation of a big SAP system to unify the different parts of the company. This also goes away in a year or two.

There seems almost no risk of default or bankruptcy here and a relatively low operating leverage business model that scales reasonably well with revenue. However, margins are fairly low; gross margins range from 12% - 16% and net profit margins in the 3-4% range, although fairly consistently (until Q4 where net margin was 1.5% after adding back goodwill impairment).

I am looking at PACR as a basically pretty reliable cash-generating business, with no practical risk of bankruptcy or serious exposure to credit markets.

Reasonable projection (??): take 3x Q4's ops cash flow of $10 million to get $30 million for all of 2009. Subtract $13 million cap ex budget for $17 million. This is pretty seriously worst case, I think (cap ex would likely be cut if this scenario unfolds). That's a EV/FCF ratio of 6.5 for 2009; any bit of an upturn and this falls to 3 or 2, I think. If the question is whether PACR will survive 2009, I just don't see where that concern is coming from.

yeah, long PACR... and unfortunately not the only company I own that is well below book value and generating cash...

-Mike