ArcBest: The Wonderful Ride Has Come To An End For Now (NASDAQ:ARCB)

Back in April of 2023, I found myself taking a rather bullish stance on logistics business ArcBest Corporation (NASDAQ:ARCB). The company, which is known for offering freight transportation services and other logistics solutions to its customers throughout North America, had been outperforming the broader market since I had previously written about it in May of 2021. While the S&P 500 was down by 1.5%, shares of the company had seen upside of 10.9%. Even with that return disparity, I felt as though shares were attractively priced. This led me to keep the firm rated a ‘buy’ to reflect my view that the stock would likely continue outperforming the broader market for the foreseeable future.

Today, with almost a year having passed, I must say that shares have outperformed even my own expectations. Since the publication of that article, the S&P 500 has seen upside of 22%. By comparison, ArcBest has jumped by 54.7%. Interestingly, this has occurred at a time when some of the fundamental performance of the business has actually weakened. For 2023 in its entirety, revenue, profits, and cash flows, have all dropped year over year. On the other hand, there are still some positives that investors need to pay attention to. For starters, the company has a net cash position as opposed to a net debt position. In addition to this, while 2023 was weaker than 2022, some bright spots began showing on the bottom line in the final quarter of the year. And on top of this, the stock, while not anywhere near as cheap as it was previously, does not look outrageously priced. All things considered, this makes me feel as though there might be a little additional upside. But because of how little that additional upside might be relative to the broader market, I think that downgrading the firm to a ‘hold’ is prudent at this time.

Interesting results as of late

On February 6th, the management team at ArcBest announced financial results covering the final quarter of the 2023 fiscal year. But before we get into the results for that quarter specifically, let’s talk about 2023 in its entirety. Because if we look through the lens of the year as a whole, the picture looks rather unappealing at first glance. During 2023, revenue totaled $4.43 billion. That represents a decline of 12% compared to the $5.03 billion generated in 2022. To really understand this decline, we should touch on both of the company’s operating segments.

First and foremost, we have the Asset-Based portion of the business. This part of the business provides LTL (less-than-truckload) services to the company’s customers. It does this through ABF Freight’s motor carrier operations. In short, what this unit does is provide transportation services for general commodities that management considers to include basically all freight with the exception of hazardous waste, dangerous explosives, and a few other niche categories. Specific goods transported would also include food, textiles, chemicals, plastics, wood, machinery, and more.

During the year, revenue associated with this segment dropped to $2.87 billion compared to the $3.01 billion reported one year earlier. This decline can be chalked up to a couple of factors. For starters, build revenue per shipment dropped by 7.4%, with build revenue per hundred weight dropping 2.2% year over year. This decline came even as shipments rose by roughly 3%. When you consider that overall tonnage dropped by 2.6% per day, this means that the company was transporting less in the manner of overall goods but making more trips.

Even though revenue associated with this segment dipped slightly, the real pain came from the Asset-Light segment. This part of the company basically provides customers with a single source of integrated logistics solutions. In short, customers using these services might have transportation needs that would require multiple routes or multiple means of transporting their goods. ArcBest addresses this by handling those complexities for their customers, sometimes even resorting to third parties to facilitate said functionality. Unfortunately, things did not really go well with this segment for the year. Revenue for this unit dropped from $2.14 billion down to $1.68 billion. Even though the number of shipments per day under this segment rose by 5.3%, revenue per shipment fell a rather significant 25.9%. According to management, the pain that this segment experienced was the result of a change in business mix that was driven by weaker market conditions.

With revenue falling, profits for the business also took a hit. Net income went from $298.2 million in 2022 to $195.4 million in 2023. Other profitability metrics followed a similar trajectory. Operating cash flow went from $470.8 million down to $322.2 million. If we adjust for changes in working capital, we get a decline from $458 million down to $292.6 million. And lastly, EBITDA for the company fell from $564.6 million to $369.6 million.

Despite the problems that the business experienced for the year as a whole, the final quarter of the year has looked up to some extent. Revenue did continue dropping, falling from $1.16 billion to $1.09 billion. The first good news involves the Asset-Based segment. Revenue was still down year over year in the final quarter of 2023, but it was down by only 0.2%. Shipments were virtually flat and tonnage transported dropped by 6.4%. This led to tons per day dropping by 7.2%. But higher revenue per hundredweight ton jumped by 6.8%. Even when it comes to the Asset-Light segment, the company saw some glimmer of hope. While revenue per shipment was still down 23.9% year over year, shipments per day jumped by 12.4%. So clearly, there has been some increase in demand as of late.

Even more good news can be seen when looking at the bottom line for the business. Net profits went from $37.3 million to $48.8 million. Despite the drop in sales, ArcBest benefited from a decrease in its operating expenses from 95.7% of revenue to 94.1%. When spread across the amount of revenue the company generated during the final quarter of the year, this translates to an extra $17.4 million in pretax profits. The company also benefited from a jump in its interest and dividend income from $2.3 million to $4.1 million. Interestingly, when it comes to the operating expenses category, the improvement was in spite of the fact that salaries, wages, and benefits all rose rather materially. However, the company saw fuel, supplies, and expenses dropped from 13.7% of sales to 11.9%. Meanwhile, rents and purchased transportation dropped from 13.1% to 9.4%. As you can see in the chart above, other profitability metrics followed suit during the quarter relative to the same time one year earlier.

When it comes to 2024, management has cautioned investors that they are continuing to see weakness. This includes both sides of the company. Despite this, the firm still intends to allocate significant amounts of capital toward capital expenditures, with a range of between $325 million and $375 million. At one point last year, I wrote an article about the now defunct Yellow Corp, and I detailed how it could open up some opportunities for some players in the trucking industry to purchase assets on the cheap. Management does seem to be taking advantage of that. In January of this year, for instance, the firm purchased three facilities that were owned by the company for a combined $30 million. They also spent $8 million to acquire the lease for another facility that the business had been operating. I like seeing long-term moves like this, especially at a time of weakness in the industry.

In terms of valuing the company, I would like to point you to the chart above. Especially on an EV to EBITDA basis, aided by a net cash position of $101.1 million, ArcBest looks attractively priced on an absolute basis. I then compared the firm to five similar companies as shown in the table below. On a price to earnings basis, only one of the firms was cheaper than it. Four of the five were cheaper on a price to operating cash flow basis, while three of the five were cheaper when it came to the EV to EBITDA approach.

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Takeaway

Operationally speaking, ArcBest might be struggling to some extent, but the firm has been showing some improvement on the bottom line. The stock looks fairly attractive on an absolute basis, though relative to similar firms, it might be around fair value or slightly higher. I do like seeing the long-term moves that management is making such as asset purchases and the allocation of capital for organic means. When you combine all of these items together, the picture is rather mixed. And one thing I have learned about investing is that, if something is not a clearly attractive prospect, then taking a more cautious approach is probably best.