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Shares of Proficient Auto Logistics (NASDAQ:PAL) have not really moved following its public offering. The IPO is somewhat of a strange animal, as the IPO proceeds allow the company to combine five automotive logistics companies into one large player, which makes that the pro forma implications are hard to evaluate.
Given this situation, which involves above-average uncertainty, I am taking a cautious stance here, although I look forward to updating this stance after the release of upcoming quarterly results, after which the tie-up is really effectuated, and hopefully more insights are seen into the business and its potential performance.
Specialized Freight
Proficient Auto Logistics is a leading, non-union, specialized freight company which focuses on providing auto transportation and related logistics. The company is the outcome of a combination of a merger between 5 leading companies, following the public offering. As a result, Proficient operates one of the largest auto transportation fleets in North America.
The company operates over 1,100 auto transport vehicles and trailers, including over 600 owned vehicles, while employing nearly 650 workers. The company mostly focused on the transportation of finished vehicles from automotive production facilities, marine ports, or rail yards towards dealerships across the country.
Customers include well-known brand names like General Motors, BMW, Stellantis, Mercedes-Benz, Tesla, as well as auto dealers, auto auctions, and auto rental companies.
Note that the results are really based on a pro forma basis, as the company has no working history together. This comes as Delta, Deluxe, Sierra, Proficient Transport and Tribeca combined their operations, also known as the “founding companies”.
The automotive transportation market in which the company operates has seen a few tough years with industry volumes of newly built cars down from about 17 million units to about 15 million units coming out of the pandemic, at the time hurt by supply chain issues as well. This is a key component in an $11 billion auto transportation and logistics market, of which $4 billion comes from the delivery of new cars, which seems to be the focus area of the company, with the remainder of the market generated from used cars.
Valuation & IPO Thoughts
Proficient Auto Logistics aimed to sell 14.3 million shares in a preliminary offering range between $14 and $16 per share, with pricing finally set at the midpoint of the preliminary range at $15 per share.
This makes that the company generated gross proceeds of $215 million in connection to the public offering. The offering was really large, as the company has 24.1 million shares outstanding, which now grant the company a market value of $361 million. Pro forma net debt is seen at around $28 million, for an enterprise valuation of around $390 million.
The historical financials are somewhat complicated, as the pro forma revenue base came in at $415 million in 2023. The pro forma operating income was reported at nearly $22 million. With no real interest expenses due, and statutory tax rates applied, net earnings could come in around $0.70 per share.
That suggests that the company trades at 20 times earnings, but the reality is that the results are terribly hard to read into, as this really is a combination of five companies being added together here. This is not even the case of an acquisition, which might be easy to evaluate, but this is really a spur of M&A action here, creating another layer of uncertainty.
Amidst tougher conditions in the automotive market, the company reported preliminary first quarter revenues to be down around 8% to $90.7 million (at the midpoint of the guidance). Income before taxes is seen at a midpoint of $5.1 million, largely at par compared to the results reported a year ago.
Concluding Thoughts
There are many moving parts in this deal, and amidst the great uncertainty given the fact that this IPO is really a combination of five firms, there are quite some question marks on the pro forma earnings implications.
That said, the IPO proceeds are used to execute on the tie-up of the underlying businesses, and while this has succeeded, it conforms that there are many moving parts here, with the integration really only starting from now onwards.
Other risks include the fact that the top 5 customers combined make up some 60% of sales for the company, but given the nature of the automotive industry, that is not a surprise either. Other risks include general factors such as volatile and high fuel prices, lack of drivers, and prospects for unionization.
Taking away some of that discomfort, CEO Richard O’Dell indicated his desire to buy $3 million worth of stock in the IPO. While the uncertainty on the pro forma implications raises concerns, the pro forma business is much stronger and powerful as well, giving it a greater market positioning in this market here.
This might leave the door open for margins to expand, in what currently is a more difficult automotive market. That said, a pro forma revenue base of around $400 million gives the company a market share near 4% of sales, as that might not be enough to grant the company sufficient market power, although the positioning in new cars is stronger.
Given the unusual situation and many moving parts, I am taking a cautious stance here, as I am not yet carried away by the potential of the company. Therefore, I take a neutral stance here, as Proficient first has some to prove.
