What happened

Wabash National Corp. (NYSE:WNC) stock was holding up well this year until it broke its winning streak last month and gave up all of its gains from April. Wabash ended May down 12.6%, its worst month so far in 2017. 

So what

Interestingly, there was no news from Wabash's end in May. The last big announcement that the trailer manufacturer made was its first-quarter earnings release in the last week of April which sent the stock soaring, and for good reasons.

Wabash's Q1 sales and earnings were down substantially from the year-ago quarter, which wasn't surprising given the sluggishness in the energy and chemical markets, both of which are critical markets for the company. Wabash is North America's leading manufacturer of liquid transportation systems.

Trailers on a highway

Image source: Getty Images

Two factors appear to have gotten the market excited: Wabash beat earnings estimates and raised its full-year shipment as well as earnings per share outlook, albeit only marginally, by around 2% each. Nonetheless, Wabash reported operating income of $30.3 million -- its second-best Q1 ever on that metric -- and grew its free cash flow by 60%. That second number was particularly noteworthy as the company had just reinstated its dividend last December after a hiatus of six years.

Furthermore, Wabash's backlog also improved 8% sequentially to $863 million as at the end of the first quarter, reflecting an improvement in demand for trailers backed by stronger freight fundamentals.

Now what

End-market demand is nowhere close to where it was in 2014 and 2015, but Wabash is striving hard to boost margins by deleveraging and cutting costs while it waits for demand to improve. That is why management is confident of returning  to its historic gross margin norms in the range of 21% to 25% by the latter half of the year. For perspective, Wabash's gross profit margin in  Q1 was just around 16.4%.

I believe the drop in Wabash's shares in May was simply a case of profit booking. For long-term investors, though, this could just be the opportunity you've waiting for. Wabash boasts an incredible customer list that includes top trucking companies like FedEx, J B Hunt, and Navistar International, consumer companies like Nestle, and oil majors like BP to name a few. Also, Wabash serves several industries beyond its key chemical and energy clientele, among them pharma, food, and consumer. It's only a matter of time before these industries start spending more, and drive Wabash back onto the growth track. With its stock trading at less than 12 times trailing earnings, you may well want to hop on Wabash before the cycle turns.