A Sound Trucking Play

 | Jan 16, 2013 | 12:00 PM EST  | Comments
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Royce & Associates just made a big purchase of Marten Transport (MRTN), according to a recent SEC filing -- 1.1 million shares, putting its stake in the trucking company at 5.1% of total shares outstanding. Royce focuses on investments in small-cap and mid-cap companies. The company has $420 in market capitalization, and it has about $1 million in daily trading volume, so investors should be able to take at least small positions and not have too many concerns about liquidity.

Marten's stock has climbed 52% in the last five years, though it is about flat from year-earlier levels. The company specifically focuses on time- or temperature-sensitive transportation, which can be a useful value-add in the case of some foods or chemicals. The company's third-quarter revenue rose 5% vs. the prior year, though earnings climbed only 3% amid higher costs, notably in salaries, wages and employee benefits.

This was lower growth than what Marten had experienced in the first half of the year: For the first nine months of the year, sales rose 6% and EPS came in at $0.88, up $0.13 from the same period in 2011. Revenue and operating income have risen in both logistics and trucking -- the latter of which is the larger business segment, comprising 76% of sales and 80% of operating income.

Also in the first nine months of 2012, Marten saw a slight uptick in cash flow from operations -- most of which comes from adding back depreciation, which is a non-cash expense. The stock's trailing-earnings multiple is 15x, which would have us expect modest and sustainable earnings growth, while 2013 EPS targets ($1.34) point to a price-to-earnings ratio of 14x. Since such a considerable amount of Marten's expenses is depreciation -- and since these expenses may overestimate the cost of operating a truck fleet -- for trucking companies we believe it's important to also look at the multiples for earnings before interest, taxes, depreciation and amortization. In Marten's case, the enterprise value is only 4.1x trailing EBITDA.

That number seems on the low end for a transportation company, though not by much. The company also has no long-term debt, and the stock's beta is 0.8 -- perhaps because of the more reliable nature of the food-transport business, whose demand is not very dependent on economic activity. While that's not particularly low, many transportation stocks have betas higher than 1. Further, when we look at similarly sized trucking companies by market capitalization, we tend to see EBITDA multiples more in the neighborhood of 5x or 6x. We're not sure if Marten deserves to have a premium due to its line of business, but it does seem to be less exposed to the broader economy and cheaper than its peers.

In any case, we can see why Royce likes the stock. In terms of EBITDA, Marten seems competitively priced. Between the (relatively) low beta and the lack of debt, the company would seem to have less downside risk than do other trucking companies. The company is not growing very quickly, and we're not particularly excited about its business line. However, in the context of the trucking industry, it appears Martin may be a good value.

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