Pacer International: Keeping pace
The transportation and logistics industries have tried to keep rolling along in 2007, even in a U.S. economy that continues to struggle at fending off the effects of the crumbling subprime mortgage market. Freight volumes are off, however, and many companies are operating with reduced expectations for 2007.
While the stocks of many companies in transportation and logistics have failed to gain much traction in recent months, including intermodal leader Pacer International (Nasdaq: PACR), it’s far from being a train wreck throughout the sector.
Based in Concord, Calif., Pacer International is a holding company that has dropped into the small-cap spectrum as its shares have lost value since February, pulling its market capitalization to around $665 million. With a gross revenue for 2006 of $1.9 billion, Pacer accounted for one-fifth of all intermodal container movement in North America and is also the largest provider of intermodal container services between the United States and Mexico.
Pacer operates in two segments: intermodal, which includes its double-decker Stacktrain and other rail services; and logistics, which provides services including warehousing and distribution. About 80% of its business comes from the intermodal segment, with the remainder coming from logistics.
For the past three years, Pacer was named to the Forbes Platinum 400 list, also called the “Best Big Companies in America.” Pacer, with a five-year total return of 15.6%, was among 17 transportation companies selected from the transportation sector for the list.
The company has announced several steps that it’s taking to reorganize and streamline operations, successfully refinance debt and complete a change of leadership. Mike Uremovich, formerly vice chairman, was named chairman and chief executive last November, upon the planned retirement of Don Orris in March. Orris led the management group that bought the former Pacific Motor Transport trucking operation from Union Pacific in 1997, which formed the cornerstone of Pacer’s rapid growth through acquisitions and innovation into the rail/truck continuum.
Shares of Pacer have remained near their 52-week low point for much of 2007. The stock sunk to an $18.20 close on Tuesday. That’s more than 40% off the 52-week high of $33.80 established on Feb. 7, before it reported its results for 2006 that raised some doubts among investors about future profitability.
Yet in recent weeks, many of the analysts who cover Pacer International have retained a fairly positive outlook, especially for the long term, as a “value buy.” Of the 13 analysts surveyed by Thomson Financial, four have had the equivalent of a “strong buy” rating on Pacer, three have had it at a “buy,” while six have had the stock at “hold.” The Thomson median price target is $29, compared with Wednesday’s close at $19.12.
On Aug. 7, Pacer reported that its net income in the quarter ended June 30 fell 2% to $12.5 million, or $0.34 a share, compared with $14.5 million, or $0.38 a share, in the 2006 quarter. However, revenue rose 3.6% to $474.9 million. The earnings beat the Thomson estimate that called for $0.33 a share.
“Balancing growth and profitability is always a challenge in this business,” Pacer CEO Uremovich told analysts on a conference call to discuss the quarter. “Frequently, when examining things in retrospect, the balance isn’t always perfect.”
Since spiking into the low $30s in early February, shares of Pacer International steadily declined and have held mostly around the $20 mark.
The company didn’t help things by missing the Thomson consensus earnings estimate in the quarter ended April 6. Net income was $7.8 million, or $0.21 a share, compared with $13.9 million, or $0.36 a share, in the 2006 period. The estimate called for $0.30 EPS.
Pacer International was upgraded to a “buy” rating from “hold” on Aug. 17 by Stifel Nicolaus, primarily on the current valuation. Analyst John Larkin wrote in a note to clients that the quarterly results were “encouraging as the company exhibited solid growth in intermodal volume, stable volume in logistics and effective cost control.”
Offering up a $27 price target, the Stifel analyst wrote “the recent sell-off of the company’s shares appears to have been overdone to us, and we consider the current valuation to be an attractive entry point.” Larkin pointed out that his price target on Pacer is 13 times his 2009 EPS estimate of 2009, “which provides 38% upside potential” relative to the Aug. 16 closing price of $19.57.
When William Blair & Company initiated coverage on Pacer in mid-August at market perform, associate analyst Nathan Brochmann and analyst Jeffrey Germanotta noted that the company is “well-positioned in the growing (7% annually) intermodal transportation niche,” and that there are signs that the company’s reorganization could be taking hold. They’re looking for full-year earnings per share of $1.64 this year, rising to $1.88 in 2008 at Pacer.
“The company produced better second-quarter 2007 operating results relative to recent periods, and provided early evidence it is beginning to execute its reorganization plan to drive greater revenue and earnings growth,” the Blair analysts wrote in their Aug. 16 research note. “However, given our belief there are several headwinds … that remain and the absence of a near-term catalyst, we view the stock as reasonably valued today.”
They are not alone. Just after the second-quarter results were posted, UBS analyst Rick Patterson raised his rating on Pacer to “buy” from “neutral,” while maintaining a $26 price target. After the company discussed its restructuring plan ahead of its earnings release, analyst Edward Wolfe of Bear, Stearns & Co. raised his rating to “peer perform” from “underperform.”
However, on Tuesday, JP Morgan analyst Brannon Cook trimmed his outlook on Pacer from overweight to neutral.
One issue facing Pacer are the rates it pays the railroads to move its cargo. Larkin and other analysts have suggested that investors are penalizing Pacer because it has two major contracts with Union Pacific and CSX, which expire in 2011 and 2014, respectively. Some observers apparently have concluded that those legacy contracts could prove detrimental to the company.
“Our relationships with the railroads are symbiotic, not parasitic, as some of you would suggest,” CEO Uremovich said on the August conference call. “We need each other and we provide value to each other, and we will continue to do so in the future....We know the economics will change, but we do not know how much, and we will not make public estimates while in the midst of discussions.”
For the September quarter, the Thomson survey calls for Pacer to put up 4% revenue growth of around $477 million, compared with the year-ago revenue of $458 million. However, earnings per share are expected to fall 4% to around $0.46, a drop of $0.02 from the 2006 period. Earnings are due out around Oct. 25.
For the year, the Thomson survey is looking for 3% revenue growth, and a 10% drop in EPS. Pacer affirmed its full-year guidance in reporting its midyear results, which puts earnings in the $1.50 to $1.60 per share range, even after taking an estimated $5 million in one-time and restructuring charges this year. The company does pay a dividend, currently $0.60 per share annually.
Pacer appears likely to at least keep pace with its peers as the economy works its way out of its blue funk, and being the biggest in its business could prove especially beneficial. Analysts generally seem to suggest that investors hopping on the train at this point could find some potential rewards down the line.
