In the transportation and logistics industry, the big boys are more expensive than their smaller competitors on a P/E basis, despite weaker growth prospects. This make them less attractive investment candidates. In contrast, Universal Truckload Services (NASDAQ: UACL), a leading asset-light provider of transportation and logistics solutions throughout the U.S., Mexico and Canada, is just the right size.
On one hand, Universal is not too small to lose its cost advantages derived from economies of scale. On the other hand, it's large enough to either take market share from its smaller peers or buy them out.
The strongest may not get stronger
Many small and mid-sized companies compete with each other in the fragmented trucking industry. Most of the potential acquisition targets will be bite-sized players with revenues below $100 million, which are not going to be meaningful for the big boys like C.H. Robinson Worldwide (CHRW 0.21%) and Expeditors International (EXPD +0.46%), which are generating revenues in the range of $5-10 billion. Universal occupies a prime position to capitalize on industry consolidation, precisely because its size is in the sweet spot, at $1 billion in revenues and an $800 million market capitalization.
More importantly for Universal, it's targeting companies with more than $20 million in revenue -- a group that tends to sell at bargain valuations because of their size (or the lack of). This allows Universal to make the best of such acquisition opportunities, creating greater shareholder value.
Size of assets matters, too
While it's great to have a larger revenue base across which to spread fixed costs, it is not wise to load up on more assets than you actually need.
For example, some of Universal's asset-heavy peers own tractor fleets and trailers, and hire a lot of permanent staff. In contrast, Universal relies heavily on agents and owner-operators, who are paid on a commission basis. In addition, these owner-operators provide Universal with 50% of the trailers and 82% of the tractors its business uses. As a result, Universal's profit & loss statement is less affected by staff expenses and depreciation.
Universal has the best of both worlds. When business volumes drop, Universal's costs go down as well, because it pays out less in commissions, and records less depreciation from its smaller asset base. On the other hand, when faced with opportunities for growth, Universal needs little in terms of new investments to expand its operations.
To hire or not to hire
Size isn't the only reason why C.H. Robinson and Expeditors look like inferior investments when compared to Universal.
While C.H. Robinson and Universal are both considered asset-light players, there is one key difference: Universal depends heavily on commission-based agents to generate sales, while C.H. Robinson puts its faith with brokers who are on the company's payroll. Although some investors are worried that agents are more likely to join a competitor, the hassle of switching will likely deter most of them from making that leap.
Looking ahead, C.H. Robinson's August 2013 announcement of an increase in its share buyback authorization by 15 million shares seems like a tacit admission of slower growth ahead. Share buybacks are usually carried out either when a company's shares are undervalued, or when it does not see better ways to use its cash for growth. C.H. Robinson seems to be facing the latter case.
Size is also about geographic reach
While both Universal and C.H Robinson generated more than 90% of their fiscal 2012 revenues from U.S. customers, Expeditors boasts of diversified revenue streams from customers based in Europe, Africa, Latin America, Asia Pacific, and the Middle East. Expeditors' diversification efforts have not gone unnoticed, with the market rewarding it with a forward P/E of 21, the highest among the peer group.
But Expeditor's CEO Peter Rose's retirement, announced on Oct. 7, could be a big negative for the stock. While Rose will stay on as chairman until May 2015, finding a replacement to match his quality will be an uphill task. Rose has more than three decades of experience with Expeditors, commanding deep respect from his employees after his "no layoffs" policy during the 2009 economic downturn. With Expeditors' top line staying flat for the past three years, and future growth prospects looking challenging, Expeditors may suffer without Rose's steady leadership.
Conclusion
Universal has caught my eye with its asset-light model and its ability to take advantage of its size to gobble up weaker competitors. At 14 times forward earnings -- compared to its peers' forward P/Es of 19-22 -- Universal looks reasonably cheap for such an impressive opportunity.
