Daseke: A Value and Growth Story for the Long Term

Daseke Inc. (DSKE, Financial) is part of the trucking industry, specializing in wide load and multi-trailer transportation.

The industry is highly fragmented, with dozens of small, family-run operations throughout the country. Daseke is by far the largest player with about 1% of the $150 billion industry. It is the only publicly traded player consolidating right now, cherry-picking the best of the best companies in the sector and deriving a massive amount of value from bringing these well-run companies into its fold.

History

Don Daseke is a Dallas-area investor who sold his residential real estate investment trust for $1.7 billion in 2000 and dabbled throughout the 2000s with his newfound wealth. He had a failed mall kiosk business (with the unfortunate name of BigFatWow!) and bought a teak importer to satisfy his wife's teak obsession (they live in what is likely the only all-teak house).

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Then, in 2008, an investment banker friend asked him if he wanted to buy a trucking company.

The company was Smokey Point Distribution, which specialized in transporting large aerospace parts. Daseke loved the company and its leadership (which he kept in place), and says he immediately saw the potential of finding similar companies all over the country and unlocking their value potential.

Since then, Daseke has acquired 16 additional companies as well as a few smaller tuck-ins. Despite the large number of purchases, the company is not going about this willy-nilly, but rather acquiring companies with long histories of success, often being multi-generational family operations going back to the 1930s. Except for the tuck-ins, management has largely stayed in place.

The most recent acquisitions, which were made in 2018, are a good example of the company's strategy, which is to expand its flatbed footprint (Builders Transport) while also picking up choice specialized companies. In general, their revenue streams are moving from flatbed/asset-heavy to more of a balance with specialized and asset-light operations.

Merger and acquisition strategy

Daseke starts by picking companies that do not need leadership changes. They see several advantages here:

• Longtime family-run operations have regional cache with customers and drivers.
• They can test out pilot programs and then roll them out to all the companies if successful.

Other concrete advantages for acquisitions:

• These already successful companies now have increased operating leverage with lower fuel, tire and equipment costs with Daseke-negotiated contracts.
• Now part of a North American freight management system that helps even out capacity across the continent.
• North American network of terminals.
• More pricing power.
• Consolidation of back office operations in Dallas.
• Drivers' incomes are less volatile and retention is higher in a tight labor market.

Management

• Don Daseke, CEO and chairman. He is a sharp, spry and energetic 78-year-old.
• Scott Wheeler, chief operating officer. Wheeler came to Daseke in 2012 as chief financial officer and transitioned into operations. He has a consulting background with high-growth companies.
• Bharat Mahajan, CFO. Mahajan is a recent addition, who came with the Aveda acquisition. Daseke and Wheeler seemed quite excited about this addition to the team.

In total, insiders own 30% of the company, led by Daseke, who owns about 27%. The largest institutional holder is the Man Group at 3.1%.

Valuation

This stock is mystifyingly cheap, trading recently in the $8 range. Let's look at some numbers.

Determining the earnings here required a little arithmetic, due to the torrid pace of acquisitions in 2017 and 2018. I have broken out the numbers two ways. First are organic numbers, which exclude the acquisitions, and the second are adjusted numbers, which include the acquisitions as if they were part of the company for the entire year. Looking at the straight numbers is just eye-popping (holy smokes, 91% growth!) but belies what is going on under the hood.

Also, I am going to look at earnings before taxes, depreciation and amortization as well as earnings before interest, taxes, depreciation and amortization. As will be discussed below, Daseke does carry a sizable debt load. (For what it's worth, adjusted EBTDA is my preferred measure here.)

Earnings growth:

Forward guidance from management

Why is the stock so cheap?

In the last conference call, two different analysts asked different versions of: "Why the heck is this stock so cheap?"

• For starters, as the only open-cargo trucking company on public markets, investors are perhaps unsure what the proper multiple is for them. Unlike regular container shipping, the business is cyclical, slowing down in the winter in northern climates. But as you can see, the annual numbers are strong, not just the second quarter.
• Secondly, they carry a lot of debt, which is a genuine cause for concern.
• Lastly, they issued shares this year that increased the float to 71 million shares, causing the stock to plummet. The shares were issued to help fund acquisitions. But the numbers above are fully diluted, and remain impressive.

Financials

The biggest concern with Daseke is the debt. As you can see in the numbers above, subtracting the "I" from EBITDA changes the picture greatly, eating up about a quarter of EBITDA. Net long-term debt is $635 million (3.6 times leverage and declining), with cash of only $25 million and revolving credit of $82 million. This is obviously not ideal, but earnings growth trajectory should be enough to cover it comfortably.

Outlook

The outlook for Daseke is bright.

• Quarter after quarter, Daseke is demonstrating earnings growth both organically and through immediately accretive acquisitions.
• It continues to be the only player consolidating this highly fragmented business.
• Transportation markets in North America remain tight, with other trucking companies trading near 20 times earnings.
• Rates continue to rise as a result of the tight market.
• The company has been highly successful in driver retention, with under 50 openings for over 1,500 tractors.
• The company's slow, case-by-case approach to consolidation will benefit it in the future as it pulls levers for economies of scale.
• At current prices, Daseke makes an attractive buyout for a large trucking company with some cash.

Risks

Like with any micro-cap, there are many risks associated with the stock.

• The company's CEO is 78 years old. He looks and sounds like a much younger man, but that can change quickly at his age. He seems to understand that, and looks to be ceding control to Wheeler, who is likely the next CEO.
• The debt situation is of obvious concern. A sudden downturn in the economy would make these numbers look very different, and the debt load could become unsustainable.
• Rising rates. As the long end of U.S. Treasuries rise, this will limit the company's future ability to access long-term credit markets.
• Competition. Should the company continue to be successful, it will attract the attention of traditional trucking companies, or private equity may become interested.

Disclosures: I am long DSKE at $8.70, then more at $7.95. My medium-term target is $14 and beyond that long term, depending on developments.