Third-Party Logistics (3PL) Company Valuations – December 2021 Update
2021 was an interesting year for the broad logistics industry marked by supply chain disruptions, shifting consumer demand, and robust demand for logistics service providers. These factors contributed to an overall rise in valuations among publicly-traded third-party logistics (“3PL”) companies in 2021. This article will analyze some of the factors that appear to have impacted valuations in the industry.
This article updates our June 30, 2021 analysis.
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. We focused on U.S. companies traded on major exchanges for at least a year with a stock price equivalent of $1 or more. We included companies that function in a 3PL capacity (i.e., eliminating carriers, equipment rental companies, and last-mile delivery companies). The effective date of this analysis is December 23, 2021. Echo Global Logistics was included in prior iterations of this analysis but was taken private in November 2021 and, therefore, could not be included in the current update.
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” (2020), while the latest 12 months is labeled “LTM” (latest available information as of December 23, 2021).
The trend in enterprise values is not surprising, considering that the freight industry goes through a complete business cycle every four years. This cycle does not always track broader trends for the U.S. or global economies. A few great articles summarizing this phenomenon can be found at this blog and at this blog (source: Convoy, Inc.). Although these articles are older, the commentary is still relevant.
Generally, the business cycle of the logistics industry correlates to changes in freight supply and demand. 3PL companies are ultimately tied to the broad changes in the freight industry and follow much of the same trend when it comes to market values. However, it remains to be seen whether we are reaching the end of the business cycle or if the COVID recovery and continued strong demand will fuel additional increases in 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 align with investor sentiment toward the broad logistics industry. Because of this, we will occasionally see disconnects in the behavior of revenue or profitability (or both) relative to their market values. In Figure 1, LFY-1 and LFY median enterprise values increased despite declining revenue or EBITDA.
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.
Historical changes in revenue and EBITDA multiples followed similar trends over the last several years. As shown in Figures 2 and 3, the median revenue and EBITDA multiples declined from the LFY to LTM period. 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 2021 for most companies). “Current year” means December 23, 2021, while “prior year” means December 31, 2020.
In Figure 4, the orange line represents data as of December 31, 2020 and reflects continued uncertainty for the industry’s growth prospects. Projections for the industry suggested a minor decline in revenue in 2020 and a recovery in 2021. Actual results for 2020 modestly exceeded expectations for the year (blue line), but analysts currently expect the publicly-traded 3PL companies to have fully recovered (and then some) in 2021. This growth is likely to continue into 2022.
The EBITDA growth patterns in Figure 5 are much more erratic but tell a similar story. As of December 31, 2020, the publicly-traded 3PL companies expected a sharp decline in EBITDA. As the blue line indicates, while the EBITDA predictions ultimately came to pass, current analyst projections suggest a more robust recovery in EBITDA to levels greater than seen pre-pandemic.
We noted an apparent correlation between 2-year projected EBITDA growth and LTM EBITDA multiples (though we recognize that the population of data points is limited). Figure 6 presents this relationship.
For the most part, companies with higher projected growth rates appear to trade at higher valuation multiples.
We did not observe a meaningful relationship between revenue growth rates and LTM revenue multiples.
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 7 presents a possible correlation between size (measured by market capitalization) and NFY EBITDA multiples.
The data in Figure 7 would suggest that larger companies tend to trade at higher valuation multiples. Forward Air Corporation has the highest projected growth rates, which is likely a contributing factor to its lofty valuation multiple (despite its relatively small size).
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 correlation between revenue multiples and EBITDA margins. This observation would suggest that profitability is likely an important consideration in how investors are valuing companies in the 3PL industry.
The Leverage Story (***New***)
New to this update, we consider the impact of financial leverage (or the companies’ use of debt) and their impact on the valuation multiples. In the last year, we have noticed an increasing trend of risk mitigation among investors, both in the private and public markets. Therefore, we have included financial leverage among the considerations we analyze to explain the observed valuation multiples.
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, which Figure 9 seems to indicate.
The most highly levered companies within the public 3PL companies tend to trade at the lowest multiples, while those with less debt appear to change hands at the highest multiples.
Tying it All Together
The trends observed in this article suggest that the valuations of publicly-traded 3PL companies appear to have been influenced by the cyclicality in the broader logistics industry. However, as of December 23, 2021, we did notice some correlation between valuation multiples and growth, size, profitability, and leverage. A summary of these observations is presented below and compared to observations as of December 31, 2020.
Notably, valuations in the industry grew over the last year, and analysts expect the industry to continue to grow. However, the sector certainly faces challenges. The logistics industry faces labor shortages, supply chain disruptions, and rising gasoline prices, all of which constrain capacity and squeeze profit margins. However, consumer shifts to online purchases and rising expectations for fast and free or inexpensive shipping will require companies to innovate and evolve operations to remain competitive. These factors create a degree of uncertainty around projected growth rates and margins for industry constituents and are likely also factored into current valuations.
I hope you found this analysis helpful. Any input, feedback, suggestions, and questions (including disagreements with my high-level analysis) are welcome! Thanks for reading.
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