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Patriot Transportation: Another Massively Underfollowed Spin-off

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May 01, 2015
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Patriot Transportation Holdings (PATI) was spun-off of FRP Holdings (FRPH) on January 30, 2015. Serving as a bulk tank carrier since 1962, Patriot is focused on the southeastern United States, transporting petroleum and other liquid and dry bulk commodities. Yahoo! Finance currently lists zero analysts covering the stock.

Since the spin, shares have been fairly volatile, but have largely tracked its former parent, with both companies outpacing the market. Over the long-term however, how attractive are the shares to potential investors?

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The Business

Patriot primarily hauls petroleum and other liquid and dry bulk commodities. The company operates 21 terminals with 482 tractors/588 trailers and 685 drivers.

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In an overall fragmented market, Patriot ranks as the #12 tank truck carrier in the United States by revenues, generating 66% of sales in markets where they rank as one of the top three tank truck haulers.

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Approximately 82% of the company’s transportation business consists of hauling petroleum related products used in transportation. Clients include major convenience store and hypermarket accounts, fuel wholesalers and major oil companies.

The remaining 18% of the business consists of hauling dry bulk commodities such as cement, lime, and various industrial powder products and chemicals such as sulfuric acid, caustic soda, methanol, water treatment materials and other industrial chemicals. These customers include large industrial companies, industrial accounts and products distribution companies.

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Growth Opportunities

After the spin off, management believes they have gained a tremendous advantage in the acquisition markets as they are now one of only a few publicly traded tank truck companies.

The tank truck segment of the transportation business is very fragmented with many well”run privately owned businesses and the company feels they can strategically use their public company stock as acquisition currency.

Patriot recently acquired an unsecured $25M revolver with Wells Fargo and a signed commitment from BB&T for a secured revolving credit facility for up to $25M to be used for growth initiatives.

Valuation

The company has actually performed very well in recent years for such a competitive business. Revenues have grown at a 9.6% CAGR over the past five years, increasing in every consecutive year.

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Operating profits, while dipping in the recent full year, look fairly stable. While the company has experience rising depreciation charges, they have been able to reduce their average fleet age commensurately, alleviating most concerns.

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Impressively, the company has been able to increase its driver count in an otherwise difficult hiring environment.

The trucking industry is experiencing one of the worst driver shortages in history. Patriot meanwhile, has been able to successfully hire drivers over the past five years, growing its average driver count from 540 in 2010 to 707 in 2014. Patriot is implementing several new programs specifically related to hiring and retention and employees.

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Three large national carriers, JB Hunt (JBHT), Swift Transportation (SWFT), and Landstar (LSTR), are currently trading between 11-17x EV/EBIT.

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At Patriot’s current EV ($90.5 million) and full-year depressed EBIT levels ($5.3 million), the company currently trades at roughly 17x EV/EBIT. Should EBIT levels revert closer to historical levels (2011-2013 average of $7.4 million), Patriot would only trade at 12x EV/EBIT.

Conclusion

With ample growth opportunities in a fragmented market, Patriot is primed to roll-up the market through acquisitions. Should the company get EBIT levels back on track, it looks to be relatively undervalued compared to its more followed, larger peers.

For more ideas like this one, check out GuruFocus’ Spin-Off List or the rest of R. Vanzo’s Articles.

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