A disclosure: In an early September article on the Canadian trucking industry, I omitted Vitran Corp. Inc.
It made sense at the time: Vitran was the smallest of the truckers. The bulk of the company's revenue came from a money-losing U.S. business. It was in a perpetual turnaround. Analyst Thomas Albrecht of BB&T Capital Markets said "only deep contrarian investors should consider the stock now."
Well. Vitran is up more than 20 per cent since then, handily beating the larger, more valuable names profiled. It's been quite a busy couple of months at the company, as it's dumped the money-losing U.S. operations and now finds itself an acquisition target of TransForce Inc., one of those bigger players.
The shares, analysts say, may not have much near-term upside from here. And indeed, if no sale were to occur, they might tumble.
I think, however, there's now enough good news around Vitran that the stock might be an intriguing option for investors interested – forgive me – in the long haul.
Let's review the news. In late September, the company announced it was selling its U.S. business, believed to have generated more than $500-million (U.S.) in annual sales, for just $2-million, with a new owner taking on $34-million in obligations. The sale price represented "a fraction of the capital invested in the U.S. business over the years," says analyst Damir Gunja of TD Securities.
"It could be argued that selling the assets crystalizes the destruction of shareholder value in recent years and removes the potential upside benefit from an eventual turnaround story," Mr. Gunja added in a note accompanying the day's news. But, he added, it also could clear the way for an acquisition, notably by TransForce, which already owned nearly 10 per cent of the company.
It took just two days for TransForce to step forward, publicly announcing it proposed to buy the remainder of Vitran for $4.50 per share – an amount a few pennies below the price of the shares the day before. While Vitran's board considered the offer, TransForce acted – it swung a deal, announced last Friday, to acquire another 1.7 million Vitran shares at $4.77 apiece, giving it 19.95 per cent of the company. (Vitran adopted a "shareholder rights" plan, better known as a poison pill, as a result.)
In the meantime, Vitran announced its first Canada-only results, revealing that the U.S. operations were dragging down a perfectly good domestic business. Sales increased 3.9 per cent year-over-year, the company's operating margins increased, and the business showed a small profit.
Now, here's the problem: Vitran trades for $5.40 per share on the U.S. exchanges ($5.62 Canadian on the TSX). Mr. Gunja and analyst David Ross of Stifel Nicolaus & Co. both have "hold" ratings on the shares, saying the prospect of a sale of the company is driving Vitran's earnings multiple above its peers in the North American trucking business.
Mr. Ross, however, says that while Vitran "should sell" for between $5 and $6 per share, "it is always possible a strategic buyer could be willing to pay more."
Mr. Gunja, who forecasts 2014 EBITDA, or earnings before interest, taxes, depreciation and amortization, of $15.7-million, allows that a high acquisition multiple and significant cost-saving synergies could push a sales price beyond $7 per share.
And a new U.S.-based Vitran shareholder, Engine Capital LP, has written the company's board to say "it is not difficult to envision a sale of the company north of $6.50 per share," given an estimate of $85-million worth of real estate that could be sold, eliminating the company's debt and giving it a cash balance of $60-million.
If the company doesn't get sold? It's not hard to imagine a retreat, for now, back to $4.50 or so. But consider: Since Vitran's EBITDA is roughly $15-million, and its share count is so low, another $1-million in profits can add 30 to 40 cents to the share price at industry-average multiples. TransForce, at least, believes in Vitran's management, saying it "is very keen" that they remain with the company "to continue to execute their business plan."
It seems TransForce is also very keen to capture the upside in a small Canadian trucking business that has been overshadowed by its troubled U.S. counterpart. To do it, they will probably have to pay more than the shares' price today. And if they do not, it seems Vitran is capable of getting there, and beyond, on its own. Down the road.
David Milstead