Third-Party (3PL) Logistics Company Valuations: Consistently Cyclical
The logistics industry is the cornerstone of the supply chain that connects vendors with customers. There are an enormous number of companies operating in this broad space, playing different roles in taking a product from point A to point Z. In this article, I will briefly analyze the trends that appear to be impacting publicly-traded third-party logistics (“3PL”) companies.
Important notes: This article examines potential driving factors for 3PL company valuations from a financial statement perspective. An actual valuation of a company requires an in-depth analysis of the business operations as well as associated risk factors that cannot always be directly considered through the data on financial statements. Also, in order to keep the length manageable, this article will focus on what I interpreted to be the primary value drivers and 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. I focused on U.S. companies that were traded on major exchanges for at least a year with a stock price equivalent of $1 or more. I included companies that function in a 3PL capacity (i.e., eliminating carriers and last-mile delivery companies). The effective date of this analysis is December 31, 2020.
The 3PL companies’ median enterprise value (“TEV”), median revenues, and median EBITDA are summarized in Figure 1. Latest fiscal year is notated “LFY” (2019), while latest 12 months is labeled “LTM” (latest available information as of December 31, 2020).
Figure 1 illustrates a cyclical trend in enterprise values and an erratic trend in revenue and EBITDA. The trend in enterprise values is not surprising, when considering that the freight industry goes through a full business cycle every four years and does not always track broader economic cycles for the U.S. or global economies. A few great articles summarizing this phenomenon can be found at this write and at this write (source: Convoy, Inc.). Although these articles are a bit dated, the commentary is still relevant. Generally, the business cycle can primarily be linked to changes in freight supply and demand. 3PL companies are ultimately tied to the broad changes that occur in the freight industry and, therefore, follow much of the same trend when it comes to market values.
Interestingly, the financial performance of 3PL companies does not always match market value changes in the public markets. Stock prices for these companies appear to be aligned with investor sentiment toward the broad logistics industry. Because of this, we will occasionally see a disconnect in how revenue and/or profitability behaves as market values in these companies fluctuate. This is evidenced by the trend of revenue and EBITDA in Figure 1 relative to the changes in median enterprise value.
The trend in valuation multiples based on revenue and EBITDA can be viewed in Figures 2 and 3 below. In this case, revenue and EBITDA multiples generally follow the same trend observed in the 3PL companies’ historical enterprise values.
The Growth Story
Growth often has a strong influence on how companies are valued. A summary of the consensus forecasts for each group is presented in Figures 4 and 5 below (note that “NFY” means next fiscal year; NFY = calendar 2020 for most companies).
It makes sense to focus on growth after the NFY (2020) period given the timing of this analysis. Based on the comparison of prior year to current year projected revenue in Figure 4, it appears that COVID may have temporarily extended a period of “revenue recession” within the 3PL logistics industry. Prior year revenue, which is denoted in orange, was expected to decline from LFY-1 to LFY-2. Looking at the blue line in the same figure, revenue did, in fact, decline from 2018 to 2019. However, as of December 31, 2018, revenues were expected to resume growth in NFY+1 and NFY+2. This was not the case, as projected revenue for 2020 is currently predicted to be lower than in 2019, and growth is expected to resume in 2021 and 2022.
When plotting the projected growth in revenue and EBITDA against the valuation multiples observed in the publicly-traded 3PL companies, no meaningful relationship was observed. This is not a surprise considering the disconnect between revenue and EBITDA growth patterns and the enterprise values presented in Figure 1.
The Size Story
Larger companies are generally perceived to have lower levels of risk relative to smaller companies. This can be due to a number of factors, including improved product or geographic diversification, deeper management teams, access to a variety of distribution channels, and better availability of capital. Figure 6 presents a possible correlation between size (measured by market capitalization) and LTM revenue multiples. However, given the small number of data points and wide spread of multiples and sizes, it is difficult to tell if the trend is due to size or a coincidental result of other factors driving the valuation multiples.
The Profitability Story
Revenue multiples are typically heavily influenced by profitability. Higher revenue multiples are usually observed in companies with higher levels of profitability. This relationship between LTM revenue multiples and LTM EBITDA margins can be observed in Figure 7 below.
In this case, there appears to be some correlation between revenue multiples and EBITDA margins, suggesting that profitability is likely an important consideration in how investors are valuing companies in the 3PL industry.
Tying it All Together
The trends observed in this article suggest that valuations of 3PL companies are impacted primarily by the cyclicality in the broader logistics industry’s size and profitability. Although the pandemic appears to have temporarily extended of the anticipated decline in the 3PL industry, valuations of these companies have continued to drive upward. This unique industry-specific disconnect is an important to consider in a valuation of a 3PL company.
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