Forward Air Corporation (FWRD) is a North American provider of definite-time truck transportation services to air freight forwarders, through a network of terminals located in, or near, major airports in 85 cities in the U.S. and Canada. The company is the leading player in the $3 billion deferred airfreight market. It also serves several cargo airlines, as well as integrators such as DHL, operated by Deutsche Post World Net (DPW-EUR), and FedEx Corporation (FDX). Its time-definite shipping of deferred airfreight represents a lower-cost alternative to overnight air shipping.
The firm also provides pool distribution services through a network of terminals and service locations in 19 North American cities throughout the Mid-Atlantic, Southeast, Midwest and Southwest. Moreover, it offers expedited truckload brokerage, warehousing and terminal handling. Its core business is airport-to-airport transportation, which accounts for 67% of total sales, followed by logistics and pool services representing 14% each.
A Convenient Operating Model
Forward Air hires independent-owner operators for its airport-to-airport cargo transportation. Thus, the company employs an asset-light business model, which helps support profitability when freight demand softens. In addition, its immense terminal network generates economies of scale that create high barriers to entry, since any competitor would have to reach huge volume density in order to profit from terminal and scheduled routes utilization.
Furthermore, its vast network poses an advantage over competitors, given its capacity to efficiently reach customers’ desired shipping points throughout the continent. Together with high-quality operational execution, these traits are allowing the firm to gain more market share from smaller providers.
Forward Air is the leading player in the industry with roughly 13% of the market share. Apart from over-the-road transportation services, the firm has expanded onto highway brokerage, mainly focused on expedited truckload shipments. Also, the company acquired high-touch temperature-controlled carrier Total Quality Inc. in 2012, which enlarged its customer base through the inclusion of pharmaceutical shippers. It also acquired drayage and intermodal transportation provider Central State Trucking in early 2014, further diversifying its service offering.
Forward Air has generated an average return on invested capital of almost 20% over the last decade, well above its approximate 10% cost of capital. This reflects the company’s ability to consolidate its position in the market. Its operating revenues increased by 11.7% in 2013, and the company expects substantial top-line growth to support double-digit operating margins for 2014, partly driven by its new businesses. Moreover, the firm will implement a general rate increase plan, which is expected to generate 2.75% net benefit, supported by a tight capacity in the broader truckload industry, which will create an upward pricing trend this year.
A Stock on the Rise
Given the encouraging growth prospects for the company, its stock recently rose from $38 to nearly $45 per share. Forward Air’s stock trades at 24.50 its trailing earnings compared to its peers’ average of 16.60. However, its earnings per share grew by 17.20% compared to the industry median of 8.50%, and this upward trend is expected to continue, thus delivering better multiples. In order to increase shareholders’ value, on Feb. 7, the company anticipated total annual dividends of $0.48 per share of common stock, which represents a 20% increase in relation to the prior year. On the same date, the board of directors approved a stock repurchase authorization for 2 million shares of the company’s common stock.
Therefore, even though investment guru Joel Greenblatt (Trades, Portfolio) recently sold out his holding in the company, I feel confident that Forward Air is a solid investment that will fly high in the coming years.
Disclosure: Vanina Egea holds no position in any stocks mentioned.
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