Third-Party Logistics (3PL) Company Valuations – June 2022 Update
Following strong demand and performance in 2021, valuations corrected towards the end of June 2022. Undoubtedly, the decline in valuations was tied in part to a broad deterioration in investor sentiment. However, as discussed in this article, investors appeared to shift their attention away from growth and toward risk mitigation.
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 not always 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 not touch on every observation 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, which are consistent with those discussed in our December 2021 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 June 26, 2022).
Despite continued growth in revenue and EBITDA, valuations declined significantly (over 20%) between the end of 2021 and June 2022. This decline in market value can be linked to the broad downturn seen in the equity markets in June. However, the 3PL industry faces a “host of critical and pressing issues” that will challenge the industry’s ability to continue to meet growing global demand. Karen E. Thuermer discusses these challenges in her article, “Top 50 Third Party Logistics (3PL) Providers 2022: 3PLs face big challenges and huge rewards,” in the June 2022 edition of Logistics Management. This article very nicely summarizes the challenges facing 3PLs in June 2022.
As discussed in the article referenced above, some of the most significant challenges facing the industry include “capacity constraints, shipping delays, port congestion, labor and equipment shortages, and continued disruption to operations due to a myriad of factors, and most recently, the Russia-Ukraine war, COVID-19 outbreaks, and local travel restrictions.” Rising fuel costs and shipping rates amid elevated consumer demand, container shortages, and limited shipping capacity will further strain 3PLs’ ability to meet the needs of their customers while managing their profitability and capacity constraints. 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 into 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.
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 June 26, 2022, while “prior year” means June 30, 2021.
In Figure 4, the orange line represents data as of June 30, 2021, and reflects optimism regarding revenue growth in 2021 and 2022. While actual 2021 growth met expectations, expectations have since changed with expected revenue growth continuing to increase in 2022 but declining in 2023.
The EBITDA growth patterns in Figure 5 show a similar trend as revenues above. As of June 30, 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 sharp 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 analysis of the industry 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.
See also: Need to prepare financial statement projections? See A Practical Guide to Financial Statement Forecasts for Business Valuations.
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 a possible correlation between size (measured by market capitalization) and LTM revenue multiples.
The data in Figure 8 suggests that larger companies trade at higher valuation multiples.
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 8 below.
In this case, there appears to be some weak correlation between revenue multiples and EBITDA margins. This observation would suggest that while profitability is likely influencing the magnitude of revenue multiples, other factors are 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. The data points in Figure 10 indicate financial leverage to be an essential consideration in the valuation of the public 3PL companies.
The most highly levered companies within the public 3PLs tend to trade at the lowest multiples, while those with less debt appear to trade at the highest multiples.
Tying it All Together
As of June 26, 2022, we noticed some correlation between valuation multiples and size, profitability, and leverage. A summary of these observations is presented below and compared to observations in December 2021.
As discussed earlier, the industry faces significant uncertainty, and this has likely provoked a shift in investor orientation from growth to risk-focused factors, such as size, profitability, and leverage.
I hope you found this analysis helpful. Any input, feedback, suggestions, and questions (including disagreements with our high-level analysis) are welcome! Thanks for reading.
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