5/04/2015

Wide Moat, Historically/Relatively Cheap, Overlooked Opportunity, Discount to Replacement Value

Rand Logistics:

Rand Logistics (RLOG) is a bulk carrier shipping company on the Great Lakes. Construction materials , grain, iron ore, coal,salt, and other products are shipped. They operate a fleet of 16 including the new addition announced on 04/22. This addition is the first new Canadian flagged river class self unloader to be introduced into service on the Great Lakes in over 40 years.  Rand’s current fleet count is 16, 10 Canadian flagged and 6 U.S. flagged vessels. “The new vessel is fully booked with long-term contractual business. It’s expected to be the most efficient river class vessel on the Great Lakes. The introduction of this vessel into service is one of the elements of their strategic plan to improve our return on invested capital.”

The CEO spoke in depth on improving ROIC during the recent earning call.  A project was implemented to identify, modify or eliminate customer contracts that are yielding an unacceptable return on invested capital. “Formalizing return on invested capital parameters for setting contract terms and pricing; continuing to improve the reliability and operating efficiency metrics to increase the percentage of time our vessels are in revenue-loaded condition. Rationalizing costs; increasing our sales efficiency relating to ship repair, maintenance and capital expenditures; and finally, introducing their newest vessel into service in the second half of 2015.”

Wide Moat:
Rand Logistics wide moat /barriers to entry are supported by several. The 1920 U.S. Jones act dictates only ships built, crewed and owned by U.S. citizens can operate between U.S. ports. Further the Canada Marine Act requires Canadian commissioned ships to operate between Canadian ports. Jones act legislation creates additional barrier to entry. Additionally, Rand has long term contacts with clients like Cargill, ADM,Kraft food, Morton Salt  and others. Customer relationships and focus to expand existing great lake region business creates advantages. Controlling the largest shipping fleet provides economies of scale.

Shipping is a capital intensive industry. It’s expensive to build a ship coupled with related costs adding another advantage over potential future competition. Executive management has deep logistics experience. Executive chairman, Laurence Levey served as chairman of of Detroit and Canada Tunnel Corporation, CEO of High Voltage Engineering Corporation, national logistics services company Ozburn-Hessey, director; Derby Industries LLC, and many other investment banking achievements. Lawrence Levey is a Baker Scholar from Harvard University.

Mean reversion attributes:

Stock's price is near its 5 year low coupled with P/B, P/S all near 5 year low. The high F score of 7 is driven by positive scores for NI, great than PY, hence current ROA positive and versus last year, Cash flow greater than NI, current ratio greater than PY, improvement in gross margins, improved efficiency as measured by the asset turnover versus PY. All these attributes contribute to a F score of 7. The F score was dragged down by a 2 tests, YOY increase in share count, increased leverage measuring Long Term Debt / Average Total Assets increased versus PY.RLOG has a history of poor execution with buybacks at attractive prices. Current F score of 7 is a positive sign. The median F score is 5 over the past 10 years. The only other time RLOG had an F score of 7 was 2012.RLOG had a 2012 high stock or price of 8.79 and low of 5.79.  Further, EV/GP is at historically cheap valuations. Current RLOG price is $3.36. Further, 52 price change was -44.10%. Temporary but significant foreign exchange rates challenges over the prior fiscal year. Lastly, anormal Great Lake ice conditions had a negative impact in prior quarterly results.

Summary Financial Statistics:
Price = $3.36
Market Cap: 61.43M , Enterprise Value: 247.90
Price/Sales (ttm):    0.40 , Price/Book (mrq):    1.09
Revenue (ttm):  153.61M , Revenue Per Share (ttm):      8.55
Qtrly Revenue Growth (yoy):     -1.70% , Gross Profit (ttm):     45.81M
EBITDA (ttm):  32.12M

Total Cash (mrq):  7.66M , Total Cash Per Share (mrq):   0.43
Total Debt (mrq):   177.40M , Total Debt/Equity (mrq):  249.35
Current Ratio (mrq):    1.53 , Book Value Per Share (mrq):     3.12
Operating Cash Flow (ttm): 21.27M , Levered Free Cash Flow (ttm):   -23.34M
52-Week Change:   -44.10%
52-Week High (Jun 12, 2014):   6.73 , 52-Week Low (Mar 10, 2015):    2.96
Shares Outstanding:   18.02M , Float:  15.16M
% Held by Insiders:    21.85% , % Held by Institutions:        69.40%
Short % of Float: 3.20%

No  position in RLOG. But, I  believe the stock will achieve market out performing returns over the next 12 months.

2 comments:

johnheider1 said...

With a ten year ROE that appears to be below zero I am struggling to understand how this can be a "wide moat" business. Any thoughts?

ShadowStock said...

Hi johnheider1
Barriers to entry hence wide moat are,
Legislative with “Jones act”, capital intensive to build a new ship in the Great Lakes, long term contracts creates additional barrier to entry, Cargill, ADM,Kraft food, Morton Salt.


For example, “the first new canadian flagged river class self unloader to be INTRODUCED INTO SERVICE ON THE GREAT LAKES IN OVER 40 YEARS. “THE NEW VESSEL IS FULLY BOOKED WITH LONG-TERM CONTRACTUAL BUSINESS. It’s expected to be the most efficient river class vessel on the Great Lakes. THE INTRODUCTION OF THIS VESSEL INTO SERVICE IS ONE OF THE ELEMENTS OF THEIR STRATEGIC PLAN TO IMPROVE OUR RETURN ON INVESTED CAPITAL.”

Management addressed the need to focus on ROIC. They have done a horrible job buying back shares, eliminating low ROIC contracts.

ROE% needs and likely to see improvement. Recently, currency losses have had a significant negative impact.


ROE% for the quarterly period ending
Dec 14 = 24.44%, Sep 14 = 35.30%, Jun 14 = 13.21%, Mar 14 = -59.45%, Dec 13 = 9.11%, Sep 13 = 6.61%, Jun 13 = 14.19%