Marten Transport Q4: Beneficial Management Words, Operating Ratio Increases, & Undervalued

Marten Transport, Ltd. (NASDAQ:MRTN) recently delivered beneficial words with respect to the current state of the industry, and noted average miles per trip increases and quarterly operating ratio increases. Additionally, I think that the recent installation of solar panels in the company’s facilities could bring stock demand from ESG investors. For these reasons, I believe that Marten does look like a buy right now. Yes, I saw some risks with respect to the price of crude oil or changes in the environmental regulations, however, MRTN does look significantly undervalued at 6x EBITDA and without financial debt.

Marten Transport

Marten Transport is one of the leading freight carriers in the U.S., specializing in the transportation and distribution of food and packaged goods with temperature-controlled requirements. It offers nationwide services in the USA, Mexico, and Canada. Its regional operations span diverse areas, and its key traffic lanes connect the Midwest, West Coast, Southwest, Southeast, East Coast, and Pacific Northwest.

The company generates revenue primarily through per-mile rates on Truckload and Dedicated services, with additional revenue from fuel surcharges, loading and unloading activities, equipment retention, and ancillary services. Key factors affecting revenue include rates, percentage of miles compensated, miles generated, and variations in fuel prices. Monitoring is carried out through average income per truck and dedicated, net of fuel surcharges, per tractor per week.

With that about the business model, in my view, given the words about management with respect to new growth opportunities and fair compensation for premium services, Marten is today a good read.

We remain focused on both minimizing the freight market’s impact on our operations, and investing in and positioning our operations to capitalize on profitable organic growth opportunities as the market moves toward equilibrium from its current recessionary late stages – with fair compensation for our premium services. Accordingly, we have not agreed to any rate reductions since last August. Source: Quarterly Report

Market Expectations Include Net Sales Growth, EBITDA Growth, And Net Income Growth

Marten did not report better-than-expected EPS in 2024, and quarterly revenue was also lower than expected. EPS GAAP Actual stood at $0.15, and quarterly revenue was close to $268 million.

Even considering the EPS reported, I believe that Marten currently trades undervalued at close to 6x-7x EBITDA. The current stock price is significantly lower than what traders saw in 2022 and 2023. In 2022, shareholders saw the company trading at $22-$23 per share.

Besides, in my view, considering the beneficial expectations of other market analysts, having a look at Marten makes a lot of sense. Analysts expect net sales growth, EBITDA growth, and net income growth in 2024 and 2025. In particular, 2025 net sales are expected to be close to $1329 million, with 2025 EBITDA of $266.6 million, 2025 EBIT worth $138.9 million, and 2025 net income of about $105.7 million.

More Loading Capacity And Volumes Offered On Preferred Routes Will Most Likely Bring Net Sales Growth

I believe that providing carriers with a high level of service and significant loading capacity will bring further net sales growth in the coming years. Offering target carriers with consistent volumes on preferred routes and receiving compensation for exceptional services could bring new long-lasting relationships and more consistent revenue growth. Looking at the past to foresee the future does not seem that accurate. With that, it is worth noting that by looking at previous net revenue growth, Marten appears to be offering what clients require.

Further Increase In The Number Of Products Transported May Bring More Clients And Lower Net Sales Growth Volatility

Marten went from being a long-haul refrigerated carrier to a multi-faceted business, with five commercial platforms spanning dry and refrigerated trucking. Right now, the company appears to be a leader in temperature-sensitive freight transportation in the US. I believe that further options given to clients will most likely bring more demand.

Average Miles Per Trip Increased, And Operating Ratio Increased

In 2023, Marten reported a reduction in the number of trucks operating in all segments, and the quarterly operating segment also decreased. According to the last quarterly report, salaries paid also decreased. With that, it is worth noting that the average miles per trip increased to close to 533, and the net revenue miles percentage also increased as compared to that in 2022. I believe that management recently reduced the number of trips, and selected those that are more profitable. With this in mind, I believe that we could expect an increase in the FCF margin in the coming quarters.

ESG Investments

In the last quarterly presentation, Marten noted that solar systems were installed in all the company’s facilities. I cannot really see whether the new energy systems will offer a significant change in the FCF margin. However, I think that the efforts may receive the attention of investors interested in renewable energy and ESG investments.

The solar market is expected to grow at close to 13% from 2023 to 2030. In addition, the global Environmental Social and Governance ESG Investing Market could grow at close to 9% from 2023 to 2032. I believe that market growth in these two segments may help Marten.

The U.S. solar PV market size was estimated at USD 29.68 billion in 2022 and is projected to grow at a compound annual growth rate of 13.7% from 2023 to 2030. Source: Grandviewresearch

The global Environmental Social and Governance ESG Investing Market size is expected to record a CAGR of 9.4% from 2023 to 2032. Source: ESG Market Expectations

Clean Balance Sheet

As of December 31, 2023, Marten reported cash and cash equivalents of about $53 million, with total current assets of about $196 million. The current ratio is larger than 1x, so I do not really see a liquidity issue here.

The largest asset is revenue equipment, buildings and land, office equipment, and others, which stands at $1.162 billion. Total assets stand at close to $990 million, and the asset/liability ratio is about 2x-3x. Hence, I do believe that the balance sheet appears quite healthy.

Accounts payable is close to $36 million, with insurance and claims accruals of about $47 million, accrued and other current liabilities worth $26 million, and total current liabilities worth $110 million. Finally, total liabilities stand at close to $232 million. It is quite convenient that Marten does not report financial debt. Clients and providers seem to finance the company’s operations.

I reviewed the debt agreements signed in the past. In August 2022, the company secured a $30 million unsecured committed line of credit, valid through August 2027, with no balance outstanding as of December 31, 2023. Standby letters of credit of $16.1 million supported self-insurance claims, with $13.9 million of debt availability.

My Financial Model Using Previous Assumptions

My cash flow statement expectations include 2031 net income of about $300 million, 2031 depreciation of close to $154 million, and tires in service amortization of about $6 million. Note that I did not include gain on disposition of revenue equipment or gain on disposition of facilities, because I think that they are not recurring events.

In addition, with deferred income taxes of about $71 million, share-based payment arrangement compensation expense of close to $6 million, changes in other current operating items like receivables of -$171 million, prepaid expenses and other of -$26 million, and accounts payable of $72 million, I obtained 2031 CFO close to $423 million. Finally, subtracting revenue equipment additions of -$102 million and buildings and land, office equipment, and other additions close to -$55 million, 2031 FCF would be close to $266 million.

Like other investors out there, I used a WACC close to 7.4%, which I believe is conservative. Sector median EV/EBITDA is close to 12x, and sector median price/cash flow stands at 13x. With these figures in mind, I assumed an exit multiple of 11x FCF, which I think is conservative.

Now, my results include a discounted FCF of close to $995 million and a discounted terminal value of $1.6 billion, which implies an enterprise value of $2.6 billion. Adding cash, the implied equity valuation would be $2.7 billion, and the fair price would be $33-$34 per share. Given the current valuation, I think that Marten is quite undervalued.

Risks, And Competitors

The company faces significant financial risks due to the continued need for capital to maintain and expand the fleet, which could adversely affect its financial condition and operating results. Volatility in credit markets and the economy could have adverse impacts, especially in the event of decreased consumer spending. Additionally, strict environmental regulations impose financial and operational risks for potential violations. Litigation arising from accidents and labor disputes also poses financial threats, with unpredictable costs that could negatively impact business and operating results.

In my opinion, Marten is a clear leader in the market, yet the company faces intense competition in the truckload and dry cargo markets. In a highly contested sector, it competes with full-load carriers of various sizes, less-than-truckload companies, railroads, and others in the transportation sector. Despite facing competitors with greater resources and advantages, the company stands out in key factors such as service, freight rates, capacity, technology, and financial stability. These strategic elements position it favorably in the competition for services of drivers, contractors, and administrative employees.

My Opinion

Marten Transport’s diversification of services offered in the transportation of temperature-sensitive cargo may bring further net sales growth in the coming future. In my view, its focus on punctuality and quality of service, backed by a modern fleet, stands out in a competitive market. In addition, recent words from management about potential new growth opportunities, investments in solar panels, quarterly operating margin growth, and larger trips could bring FCF growth. There are obvious risks with respect to dependence on key customers, new strict environmental regulations, or changes in the price of crude oil, however I believe that Marten does trade undervalued.