Risk-Reward With Wabash National

Big truck manufacturer worth taking a small position on

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Feb 20, 2019
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The trucking industry is having a challenging year, with reports earlier this month that orders fell by 68% year-over-year on Class 8 heavy-duty trucks. These are the big rig, semi, 18-wheeler, 33,000-pound trucks used to transport all sorts of goods, which is exactly where Wabash National (WNC, Financial) makes the majority of its money.

Business is good for Wabash. The company reported Ebita of $187 million on record revenue of $2.3 billion in 2018, including a backlog of $1.8 billion and capital spending of just $34 million. Over the last decade, Wabash has gone from red to black. After posting years of heavy losses following the housing crisis, it has been on a tear since 2011. Earnings are up from 22 cents per share and book value has risen from $2.03 to $8.59 per share. In 2019, it expects earnings per share between $1.50 and $1.70, which would price the stock between $18 and $21 a share. The discount is staring investors right in the face, regardless of the industry-wide decline.

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Technology is going to change the industry for logistics companies, but few companies are going to want to buy a new Tesla self-driving truck, which are expected to cost upward of $180,000 and give 300 to 500 miles per trip. Most Class 8 trucks cost around $125,000 for a sleeper cab, and you definitely want one of those for long hauls. The cradle-to-grave cycle is roughly 15 years, where costs for maintenance and fuel place the total cost north of $500,000.

Trucks can carry anywhere from 200 to 400 gallons of fuel and get on average 7 miles per gallon, making the non-stop range much greater than Tesla’s estimate. The difference is that today’s trucks are a reality, not some hyped-up possibility. Also, self-driving won’t mean completely new vehicles for most. And, Wabash has all of the big-name shipping companies as clients. Few if any will switch right away, and that will give Wabash time to adjust.

In the meantime, investors can expect solid financial results for years to come. Management looks for strong trailer volumes in 2019, which should allow sales to come in between $2.25 billion and $2.35 billion. Net income will be down slightly, but still in a range that makes its stock look discounted.

U.S. tariffs on aluminum and steel will pressure important components in Wabash’s supply chain; however, as the Trump Administration starts to focus on the 2020 election cycle, the trade war with China may see its end quickly. Given the 2.2% dividend yield with shares trading on the lower end of their 52-week range and lower than historical multiples, investors are getting a solid buying opportunity right now.

Disclosure: I am not long or short Wabash National.