COTD Bullet Points:
- ArcBest (ARCB) is a small trucking company with an attractive backdrop.
- High operating leverage and inflection towards stronger top-line growth suggest the name can run much further.
- Gains from multiple expansion would also be a reasonable catalyst for further price appreciation.
Chart of the Day:
ArcBest (ARCB) is a ~$1bn market cap trucking company that ranks highly in our Bespoke Stock Scores list of stocks that are most attractive on a fundamental, technical, and sentiment basis. Trucking companies have a long history of seeing big runs and reversals depending on the idiosyncratic backdrop within the industry and the overall economic cycle. Over the last 10 years, ARCB has seen two major rallies that fully reversed over the subsequent year and a half. As shown below, since the COVID lows ARCB has gotten halfway back to highs. Riding this trend higher should see material further gains for ARCB.
Trucking companies operate under very high fixed cost conditions. For ARCB, operating returns on assets are rarely above the low single-digits. That doesn’t preclude strong returns on equity during cycle peaks, but it does mean that returns on capital are rarely high on a sustained basis. As demand grows and pricing power rises, unit economics improve. Lower unit fixed costs mean higher margins, a process referred to as operating leverage.
As shown below, revenue growth has inflected, suggesting the stock is on its way through another cycle of positive operating leverage. On a structural basis, EBITDA margins have steadily risen over the past decade, suggesting that revenue growth in the current environment is bringing even higher incremental cash flows than in the past.
Finally, it does not appear to us that the market has identified the upside of a full cycle of trucking tightness. As shown in the chart below, neither EPS nor EBITDA multiples suggest that the market is getting ahead of inflecting revenues and therefore operating leverage for ARCB. Multiple expansion alone would justify a doubling of shares from these levels; the added leverage of further EPS acceleration would only compound that effect.