PAM Transportation: Providing Fundamental Stability

matsilvan/iStock via Getty Images

PAM Transportation Services, Inc. (NASDAQ: PTSI) is an Arkansas-based transportation and logistics company. It operates through its subsidiaries in the United States, Mexico and Canada. It transports general cargo in dry van carriers. These include consumer goods, general retail goods, manufactured goods and car parts. Since its foundation, it has expanded to more than 2,000 trucks.

Today, it has already rebounded and even surpassed pre-pandemic levels. Headwinds are intensifying amid sustained inflation and slowly improving port congestion. However, its positioning on the market allows it to cushion the impact and sustain its rebound. It has the adequate financial capacity to expand and cover its financial leverage. Likewise, the stock price remains reasonable and adheres to its fundamentals as the uptrend continues.

Business performance

The lifting of restrictions facilitates the internal movement of goods. For PAM Transportation Services, Inc., this is an opportunity to rebound and grow. This can still be difficult as it also operates in some neighboring countries like Canada and Mexico. Disruptions are still evident in changes in the trucking market. Customer downtime and labor shortages are more of a problem. Even so, it appears to be bouncing back to pre-pandemic levels. Its fundamentals are more stable amid these market headwinds.

Its operating revenue is $237.17 million, a 44% year-over-year growth. Note that it has already been recovering since 2021. Thus, we can see that the company has maintained its rebound amid market challenges. Moreover, it is still higher than pre-pandemic levels. Rising prices for goods and energy do not stop its growth and expansion. Despite crippling inflation, the company knows how to balance the trade-offs. Its fuel surcharges are more than double the value of Q2 2021. This is a good move to offset the impact of fuel price increases. Even better, the demand for its transportation services continues to rise thanks to the increase in domestic travel. There are market opportunities as pent-up demand and the rise of e-commerce continues. Its growth is also above the market average of 36%. In addition, its market share fell from 1.3% to 1.5%.

Operating revenue

Operating revenue (Market watch)

Market share

Market share (Market watch)

It continues to do a solid job of navigating its global operations with ease and caution. The thing is, he remains unfazed while accelerating his organic growth. It was recently able to close its M&A deal with Metropolitan Trucking, Inc, which is a timely move amid the growing demand for door-to-door freight transportation. It now has more carriers, matching its increased drivers. During this time, it uses more capital, labor and fuel. Also, it has to keep up with rising prices, which also increases costs and expenses. However, it maintains solid and prudent asset management. Its operating margin is 15% compared to 12.4% in 2Q 2021. It is also higher than that of 1Q at 14.2%. Note that the operating margin from 3Q 2021 to 1Q 2022 is on a downward trend. This could be attributed to the substantial increase in operating costs and expenses. We can say that he has a better understanding of the evolution of the market this quarter.

Operating margin

Operating margin (Market watch)

Potential risks and opportunities

PAM Transportation Services, Inc. continues to show attractive growth prospects. It is geared towards expansion and efficiency with greater network capacity. It pays off with steady returns despite market headwinds. But of course, you have to be more careful. Improving supply chains and inventory levels remains a challenge for businesses. Port congestion is improving but remains slow. It needs to monitor price and demand trends more closely to optimize its production capacity.

Retail giants also pose challenges in the industry. They influence the number of bookings, orders and shipments through their responsive supply chains. They quickly retract their orders, which affects the efficiency of trailers and logistics. Due to their supply chain networks, they are more flexible in managing inventory levels, but at the expense of carriers. They also compete with air and sea freight carriers. As such, they are more susceptible to the risks associated with port congestion and declining orders.

Fortunately, PTSI is well positioned in the face of these market challenges. Its excellent liquidity position allows it to cover its operating capacity and its borrowings. Its greater operating capacity allows it to meet greater demand while remaining efficient. Cash and borrowings are stable even after completing its acquisition of Metropolitan Trucking, Inc. Its accounts receivable are higher, given its increased capacity and customer base. Thus, the percentage of cash and debt receivables is 87% against 57% previously. Even better, cash and receivables make up 32% of total assets. If we only use cash, the percentage is stable at 21-22%. So, despite the massive changes in operations, the liquidity remains almost the same. Additionally, its Net Debt/EBITDA is 3.72x, which is still within the max value of 3.5-4x. He earns enough to cover his loans. It’s safe to say that the company maintains its rebound from my previous article. Its fundamentals are also more solid and intact.

Cash and receivables and borrowings

Cash and receivables and borrowings (Market watch)

We can even confirm its liquidity using the cash flow statement. Cash inflows from its operations amount to $32.78 million. Meanwhile, its CapEx is much higher than the comparative time series. It reflects the impact of the recent acquisition. Its FCF is $20.45 million. Thus, it proves the stability of its cash levels amid its expansion. Today, PTSI has over 2,000 trailers with 2,400 drivers. It remains strong despite the shortage of pilots in the United States.

Operating Cash Flow and CapEx

Operating Cash Flow and CapEx (Market watch)

Number of trucks and drivers

Number of trucks and drivers (PAM Transportation)

Another opportunity in the market could come from the e-commerce boom. The e-commerce industry continues to evolve as it reaches its peak. It provides more market demand. Indeed, it is a good thing that PTSI is expanding its operations to increase its national presence. It should be noted that many SMEs are present on the market. Unlike many giant retailers, their supply chains are less responsive. They have fewer distribution networks to collect their orders. Also, they do not have a transportation service provider. Thus, they still depend on third-party transportation service providers. Their presence is favorable to trailers and logistics. This is evident in the United States and Canada, as they are two of the largest e-commerce markets. With the evolution of the market, e-commerce accounts for 20% of total retail sales and can reach 26%.

Percentage of e-commerce

Percentage of e-commerce (Statist)

Stock price valuation

PAM Transportation Services, Inc.’s stock price has already rebounded from its steep decline. But, it has been in a slight downward trend over the past month. At $32, it’s still 11% below the starting price but 33% above the drop. PE ratio, price/cash flow ratio and EV/EBITDA show that the stock price is correctly valued. If you check my previous writings, the company has one of the best EV/EBITDA ratios in the industry. Meanwhile, the PTBV ratio shows potential overvaluation. Investors need to watch it more closely. To better assess the stock price, we can use the DCF model and the EV/EBITDA.

Price reports

Price reports (Looking for Alpha)

DCF model

FCFF $45,000,000

Cash $54,000,000

Outstanding borrowings $251,000,000

Growth rate to infinity 4.8%

WACC 9.8%

Common shares outstanding 22,269,000

Stock price $32

Derived value $33.16

EV/EBITDA

EV 910 $390,000

Net debt $196,000,000

Common shares outstanding 22,269,000

Stock price $32

Derived value $30.38

The value derived from the two models shows two different things. But, we can infer that the stock price is still within the acceptable range. The motivation for a raise seems weaker than expected. There may be a potential upside of 4% and a downside of 8%. Investors must observe the movement of the stock price to find the target price.

Conclusion

PAM Transportation Services, Inc. continues to grow amid inflationary pressures. Its fundamentals are solid and intact, making it an ideal investment. Growth prospects are also attractive with its fundamental strength and market opportunities. The stock price appears to be in the upper range, so investors should wait to find a better entry point. The recommendation, at this time, is that PAM Transportation Services, Inc. is on hold.

Comments are closed.