Analysts ReactionsTook advantage of yesterday's decline to initiate a position this morning. GLTA
While investors were not impressed by the fourth-quarter results from Mullen Group Ltd. ), National Bank Financial analyst Cameron Doerksen focused on a “more positive tone” to the start of 2024.
The Alberta-based transportation company fell 4.9 per cent on Thursday after it reported adjusted earnings of 34 cents per share, exceeding the Street’s expectation by 2 cents but down 41.4 per cent (from 58 cents) during the same period a year ago due to weaker demand.
“Mullen Group reported Q4 results [Thursday] morning that were slightly below (although still roughly in line with) the preliminary expectation that management provided in mid-December as volumes slowed toward the end of the year due to the timing of holidays,” said Mr. Doerksen.
‘In 2023, Mullen faced headwinds as demand for freight slowed and pricing came under pressure. Despite this, EBITDA in 2023 was essentially flat year-over-year, which is a materially better performance than most other North American trucking companies. Despite this financial outperformance, Mullen shares have underperformed its trucking peers.”
Mr. Doerksen emphasized a change in tone with management’s commentary, seeing it “more optimistic entering 2024 than was the case a year ago” and believing there’s upside from current fiscal projections.
“For one, management believes that the inventory rebalancing cycle is essentially complete, implying that shipper inventory will be more balanced in 2024 as opposed to a drag on freight volumes in 2023,” he said. “In addition, management believes that many smaller trucking competitors are struggling financially, which will lead to additional M&A opportunities for Mullen or the exit of competitive capacity, which will be positive for industry pricing.”
“Mullen continues to target 2024 revenue of $2,025 million and EBITDA of $325 million. We note that the company’s assumptions appear to be conservative as they do not incorporate any material improvement in end-market demand or the competitive environment, both of which we think could be tailwinds in the latter half of 2024. In addition, the acquisition of ContainerWorld Forwarding announced in January represents upside to the 2024 targets.”
Seeing its valuation as “compelling,” the analyst raised his target to $19.50 from $19, reiterating an “outperform” recommendation. The average is $18.25.
“Valuation for Mullen shares continues to be well below the peer group averages,” he said. “On our updated 2024 estimates, Mullen trades at 5.9 times EV/EBITDA versus its five-year forward average of 7.2x (weighted average peers currently at 10.9 times). On P/E, the stock currently trades at 10.2 times next year estimates versus its historical forward average of 14.8 times (peers at 24.0 times). Based on 2023 results that were impacted by softer market conditions, Mullen’s free cash flow was $188 million for an attractive FCF yield of 14 per cent.”
Elsewhere, CIBC’s Kevin Chiang upgraded Mullen to “outperformer” from “neutral” with a $17 target, up from $16.50.
Other changes include:
* Scotia’s Konark Gupta to $20 from $19.50 with a “sector outperform” rating.
“We think the market likely reacted negatively (stock down 5 per cent) to the headline miss (including one-time costs) and the company’s cautious tone on 1H (prudent), while not giving any credit to the improved LTL [less-than truckload] margin guidance,” he said. “Although we raised our EBITDA estimates to reflect the updated LTL guidance and our revised timing assumption for the ContainerWorld acquisition, we believe our estimates could prove conservative, especially if MTL executes on more M&A this year. While its competitors are struggling due to pricing pressure and stretched balance sheets, the company remains well-positioned to make accretive acquisitions with a solid FCF yield of mid-teens, a reasonable leverage ratio of 2.3x and access to more than $300-million liquidity. Valuation was already depressed and has now become even more attractive at 6.1 times EV/EBITDA on our 2024 estimated, near its pre-pandemic trough of 6.0x and well below Canadian trucking & logistics peers at 8 times. We expect MTL to remain quite active on share buybacks.”
* Raymond James’ Michael Barth to $17 from $16.75 with a “market perform” rating.
“Forward-looking commentary suggests that organic growth in 2024 is likely to be nonexistent, but that demand should hold up well across each business segment,” he said. “Overall, our thesis remains unchanged: we expect demand for MTL’s services to remain relatively healthy through our forecast period, but see very little opportunity for notable organic growth in the aggregate; and, we expect that MTL will continue to pursue acquisitions that should be modestly accretive and help drive margin expansion, particularly around LTL. In our view, these expectations are largely priced in, and we don’t appear to have a meaningfully differentiated view relative to the market. We therefore maintain our Market Perform rating, and see better risk-adjusted returns elsewhere (our return-to-target at the time of writing is 17 per cent, which is considerably lower than other businesses in our coverage universe).”
* TD Securities’ Tim James to $22 from $21 with a “buy” rating.
* Acumen Capital’s Trevor Reynolds to $19 from $19.50 with a “buy” rating.