3PL Company Valuations – December 2022

The third-party logistics industry experienced strong demand for its services in 2021 and 2022. Valuations increased dramatically in 2021 but corrected in 2022. This article will discuss the factors that may have impacted valuations at the end of 2022.

Important notes: This article examines potential driving factors for 3PL company valuations from a financial statement perspective. An actual business valuation requires an in-depth analysis of the business operations and associated risk factors that are only sometimes evident from the data on financial statements. Also, to keep the length manageable, this article will focus on what the author interpreted as the primary value drivers. It will only touch on some observations in the data. For a quick read on the basic concepts of risk and return and how they apply in the context of this article, please visit: What is Value? and Risk and Return in the Market Approach.

The industry constituents for this analysis are listed below. One company was added since our June 2022 update (GXO Logistics, Inc.), which now has enough trading history to include in this analysis.

Figure 1 summarizes three items for the 3PL companies:

Total enterprise value calculated as the sum of market capitalization and interest-bearing debt less cash;
Median revenues; and
Median earnings before interest, taxes, depreciation, and amortization (“EBITDA”).

The latest fiscal year is notated “LFY” (2021), while the latest 12 months is labeled “LTM” (latest available information as of December 28, 2022).

Despite continued growth in revenue and EBITDA, valuations declined significantly (just under 20%) between December 2021 and December 2022. This decline in market value can be linked to the broad downturn seen in the equity markets in December. However, the 3PL industry faced unique challenges in 2022 that are sure to evolve in 2023 and beyond. Brooks A. Bentz discusses these challenges in her article, “2022 in Review: Who’s most responsive to change,” in the December 2022 edition of Logistics Management. This article touches on some rapidly changing dynamics in the logistics industry.

As discussed in the article referenced above, some of the industry’s most significant challenges include capacity constraints, shipping delays, port congestion, labor and equipment shortages, inadequate infrastructure, and rising fuel costs. These factors tend to increase the risk to an investor, particularly as the possibility of a contraction in economic growth comes into focus.

Valuation Multiples

Figures 2 and 3 provide a view of the historical trend in valuation multiples (revenue and EBITDA). In this case, revenue and EBITDA multiples generally follow the same trend observed in the 3PL companies’ historical enterprise values.

Fig. 2 - Trend of historical median revenue multiples.

Fig. 3 – Trend of historical median EBITDA multiples

Declines in valuation multiples were drastic over the last few years, as seen in Figures 2 and 3. However, trends in median multiples only tell us so much. Let’s dive into what is impacting valuations.

The Growth Story

Growth often has a strong influence on how companies are valued. We present a summary of the consensus forecasts for each group in Figures 4 and 5 below (note that “NFY” means next fiscal year; NFY = calendar 2022 for most companies). “Current year” means December 2022, while “prior year” means December 2021.

Fig. 4 – Comparison of historical and projected revenue growth: prior year vs. current year

Fig. 5 - Comparison of historical and projected EBITDA growth: prior year vs. current year

In Figure 4, the orange line represents data as of December 31, 2021, and reflects optimism regarding revenue growth in 2021 and 2022. While actual 2021 growth met expectations, expectations have shifted, with expected revenue growth continuing to increase through 2022 but declining in 2023.

The EBITDA growth patterns in Figure 5 show a similar trend as revenues above. As of December 31, 2021, the publicly-traded 3PL companies were expected to generate a sharp increase in revenue in 2021 and less growth in 2022. Actual 2021 EBITDA performance fell in line with expectations, and the public 3PLs are expected to continue to generate a significant increase in EBITDA through 2022. However, EBITDA is expected to decline in 2023.

We also attempted to identify a meaningful correlation between growth and observed revenue and EBITDA multiples. However, unlike our industry analysis in December 2021, we could not discern a meaningful trend. LTM revenue and EBITDA multiples are plotted against projected NFY growth rates in Figures 6 and 7.

Fig. 6 – Chart plotting revenue multiples against projected revenue growth rates

Fig. 7 – Chart plotting EBITDA multiples against projected EBITDA growth rates

The lack of correlation between projected growth and valuation multiples may indicate a shift in how investors value the public 3PL companies.

The Size Story

Larger companies are generally perceived to have lower levels of risk relative to smaller companies. This dynamic can be due to several factors, including improved product or geographic diversification, deeper management teams, access to various distribution channels, and better availability of capital.

Figure 8 presents the public 3PL companies’ size (measured by market capitalization) and LTM revenue multiples.

We did not observe a meaningful relationship between size and valuation multiples based on the data shown in Figure 8.

The Profitability Story

Revenue multiples are typically heavily influenced by profitability. We usually observe higher revenue multiples in companies with higher levels of profitability. This relationship appears to hold for the 3PL industry, as shown in Figure 9 below.

In this case, there appears to be some correlation between revenue multiples and EBITDA margins. However, there is undoubtedly inconsistency in some of the data points, which would suggest that other factors are currently impacting the valuations of the public 3PL companies.

The Leverage Story

We also considered the impact of financial leverage (or the companies’ use of debt) on the valuation multiples. Financial leverage is critical in measuring the risk of an equity investment in any company. Debt usage tends to increase financial risk to equity holders. Debt holders have a senior position within a company’s capital structure, and debt servicing occurs before any cash flow benefits (i.e., dividends) are issued to equity holders. Greater levels of perceived financial risk to equity holders tend to reduce valuation multiples.

Figure 10 plots the public 3PL companies’ debt-to-total capital ratios against their revenue multiples.

In Figure 10, although the most highly levered companies tended to trade at the lowest multiples, the companies with the lowest leverage ratios were observed to trade at a wide range of revenue multiples. This would suggest that investors consider other factors when pricing companies in this industry.

Tying it All Together

As of December 28, 2022, we noticed some correlation between valuation multiples and profitability. Growth, size, and leverage were noted to have little observed correlation to the magnitude of valuation multiples. These observations are summarized below and compared to our observations in December 2021.

As discussed earlier, the industry faces significant uncertainty, which has likely provoked a shift in investor orientation from growth to other factors, such as profitability. Other factors impacting valuations are operational issues, such as investment in automation and other process improvements, customer concentration risks, exposure to the Russia-Ukraine war, and capacity issues that cannot be addressed directly by financial performance.

I hope this analysis is helpful to you. Any input, feedback, suggestions, and questions (including disagreements with our high-level analysis) are welcome! Thanks for reading.