ADW Capital Partners LP led by Adam Wyden, son of U.S. Senator Ron Wyden, started in the basement of his father's home. The fund seeks to produce high risk-adjusted returns through "conservative equity investments" in small underfollowed companies in the United States, Canada, and Europe. Adam Wyden modeled his fund after the philosophy and structure of Waren Buffett's old investement partnership Buffett Partnership Ltd. The fund charges the standard fee of 2% to manage funds and a 20% profit fee.
Currently Adam Wyden's ADW Capital Partners LP has a three percent stake in USA Truck (USAK, Financial), he believes the company is undervalued and if the company at peer margins, the company would a earnings per share of $4.00 to $5.00. If earnings per share at $4.00 to $5.00 should be at peer gorup multiples then USA Truck would sell for $60 to $100 per share.
Letter Summary
He talks about Knight Transporation (KNX, Financial) unsolicited bid for the company is the reason for share price appreciation, not an operational turnaround for USA Truck. He goes on to say that USA Truck's truckload division has underperformed its peer at about every measure. He explains that Pam Transportion (PTSI, Financial) has a similar tracker count, and similar average length of haul as USA Truck and has an operating ratio of 11% while in the recent reported quarter USA Truck had -2% operating ratio. The company has an extremely profitable brokerage division (SCS) that should completement its trucking division, but only around 5% of SCS volume is being satified on USA Truck's tractors.
SCS division earned about $6 million in the last quarter and $11 million in the previous six months. If the company could sustain $20 million a year in its SCS division, then that division alone could be worth more then the whole company.
He explains what the division would be worth against of non-asset-based trucking brokerage that have historically traded at between 10x to 15x EBITDA. That would value USA Truck SCS division alone at $20.00 to $30.00. He believe that the company should sell or spin off the SCS division, or liquidate or sell its trucking division. Adam Wyden believes that all options on how to restructurer the company to close the gap between value and its current price should be open to the board.
Full Letter
”‹August 25, 2014
USA Truck Inc.
3200 Industrial Park Road
Van Buren, AR 72956
ADW Capital Partners, L.P. Seeks Company Review of Strategic Alternatives:
New York, New York – 8/25/2014
Dear Members of the Board of Directors,
As shareholders of almost 3% of USA Truck, Inc. we are very concerned about USA Truck’s current direction. We acknowledge USA Truck has seen appreciation in its shares from late 2012 when USA Truck commenced a search for a new CEO and restructured its Board. That being said, we believe most of this appreciation can be credited to Knight Transportation’s (“KNX”) unsolicited hostile bid for USA Truck and is not evidence of a substantial turnaround in USA Truck’s operations. We continued to buy shares after KNX launched its bid for USA Truck at the appreciated price because we believe that USA Truck’s share price is still undervalued.
We believe USA Truck’s current disappointing market valuation continues to reflect shared investor concern over the long-term viability of USA Truck’s companywide profitability, senior management’s inability to manage a truckload business of this size and the workings of a “ho-hum” corporate culture with most Company officers having very little invested in USA Truck. Those who do have an equity stake in USA Truck also seem to sell at every opportunity possible. Why should these people be running USA Truck if they don’t believe or care about its future?
We believe today is an extraordinary time to be involved in the trucking industry with most senior management teams net buyers of their shares and not sellers. PAM Transportation (“PTSI”) recently commenced a Dutch-tender offer for their shares and continues to repurchase in the open market. We believe this bullish behavior reflects the confluence of factors (regulation, driver shortage, shifts in consumer behavior, etc.) which industry pundits believe will produce multi-year increases in truckload rates and industrywide margins, which will in turn usher in what some are calling a “trucking renaissance”.
While we recognize that times are good and getting better today for the trucking industry, they have not always been. We believe that any serious actions that need to be taken to rectify profitability and/or monetize its asset base should be done in robust end markets and not weak ones. We believe if USA Truck continues to wait until the economy turns or industry dynamics change, their inaction could result in further permanent impairment to shareholder capital.
We have spent a great deal of time analyzing the truckload business and the industry USA Truck competes in. In Exhibit A below, you will find that USA Truck’s truckload division has greatly underperformed its peer group on just about every measure. We would ask you to take specific notice to the results of PTSI. PTSI is also headquartered in Arkansas, has a similar tractor count and a comparable average length of haul as USA Truck. Yet PTSI earned over an 11 % Operating Ratio in its most recent reported quarter and USA Truck earned -2%. We do not believe PTSI and USA Truck have such disparity in their truckload operating model to warrant this divergence in profitability across the two entities. In fact, USA Truck has an extremely profitable brokerage division (“SCS”) that should in theory serve to complement the truckload division’s value proposition. But, according to our research, only around 5 percent of SCS’s volumes are being satisfied on USA Truck’s tractors. If these businesses do not complement each other why are they together?
USA Truck’s SCS division earned almost $6 MM of EBIT in its last reported quarter and $11 MM in the previous six months. If USA Truck were even to sustain $20 MM a year in its SCS business, we believe the value of this asset alone could exceed the value of the entire Company. This implies the market is ascribing negative value to USA Truck’s truckload operations even though it has substantial asset backing in property and equipment.
For illustration purposes, according to S&P Capital IQ1, non-asset based truck brokerage companies have historically traded between 10 and 15x EBITDA. At SCS’s current operating levels, these industry multiples would imply values for that segment alone of $20.00 to $30.00 a share. Because SCS requires very little capital, the vast majority of USA Truck’s roughly $10.00 a share of tangible book can be attributed to its truckload division. In addition to the fact that most publicly traded truckload companies are trading close to 2.0x BV, the book value metric, even if USA Truck were to be liquidated or sold, ascribed zero value to USA Truck’s drivers and/or the prevailing market prices for their tractors and real estate which may vary dramatically from historical cost.
We recognize our limitations in being able to pinpoint the exact issues that are keeping USA Truck from earning industry average margins. What we can tell you is that PTSI as recently as a year and a half ago was earning a negative margin in truckload and is now earning margins in line with its peer group – in excess of 10%.
We believe USA Truck’s Board of Directors should explore all available strategic alternatives which should include a complete replacement of management and divisional leadership, an operational restructuring plan to align segment fixed costs with segment revenues, a full and/or partial sale of its truckload division, a sale or spinoff of USA Truck’s SCS division and/or a sale of USA Truck in its entirety.
We also note that the board and management (pre-Mssr. Perleman and Glaser appointment) had very little ownership in USA Truck’s shares even after receiving ample compensation for its services over the years. This disparity raises serious concerns about the current board and management’s sense of urgency and its alignment of interests with shareholders.
We are asking the board and management to do what is right for USA Truck’s shareholders to whom the board and management has a fiduciary duty.
ADW Capital Partners, L.P. and its affiliates hold a sizable stake in USA Truck’s common shares and urge the board to take our recommendations seriously. We would appreciate the opportunity to meet with the Board to answer any questions about or otherwise discuss the points we raise in this letter. We look forward to hearing your response.
Sincerely yours,
Adam D. Wyden
Managing Member of ADW Capital Partners, L.P.
EXHIBIT A: 2
Run-Rate Operating Margin in Truckload
As defined as: Recent Quarter Adjusted Operating income / Recent Quarter Truckload Base Revenue
Ticker Jun-12 Dec-12 Jun-14 Average In-Service
Tractors at QE Jun-14 Average Length of
Haul at QE Jun-14
CGI 12.71% 10.82% N/A 3,191 2,086
HTLD 10.79% 22.84% 22.50% N/A N/A
KNX 18.90% 16.20% 20.80% 3,983 497
SWFT 15.05% 16.67% 15.16% 16,992 N/A
MRTN 11.66% 10.97% 11.59% 2,183 605
WERN 13.58% 12.13% 11.54% 7,055 466
CVTI 8.94% 6.86% 6.14% 2,566 932
PTSI 1.60% -0.74% 11.15% 1,778 N/A
Group Average: 11.65% 11.97% 14.13% 5,393 917
USAK -8.80% -6.55% -2.08% 2,196 614
2 All of the above figures were taken from company filings or Capital IQ.
SOURCE: ADW Capital Partners
1 S&P Capital IQ historical multiple data
Cautionary Statement Regarding Forward-Looking Statements:
The information herein contains "forward-looking statements." Specific forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts and include, without limitation, words such as "may," "will," "expects," "believes," "anticipates," "plans," "estimates," "projects," "targets," "forecasts," "seeks," "could" or the negative of such terms or other variations on such terms or comparable terminology. Similarly, statements that describe our objectives, plans or goals are forward-looking. Our forward-looking statements are based on our current intent, belief, expectations, estimates and projections regarding USA Truck and projections regarding the industry in which it operates. These statements are not guarantees of future performance and involve risks, uncertainties, assumptions and other factors that are difficult to predict and that could cause actual results to differ materially. Accordingly, you should not rely upon forward-looking statements as a prediction of actual results and actual results may vary materially from what is expressed in or indicated by the forward-looking statements
