Getting Caught in a Nearshoring Surge: ArcBest Corporation (ARCB)

The Economy

Since I have been following equities, we have been in a perpetual late expansion phase, characterized by persistent inflation amidst an expanding economy. When will it end? Is there potential for a no-landing scenario? And how will the Federal Reserve react to a recession? We have been regularly assured that the Fed will save us if the ship goes down. However, after learning about the early 1980s, I fear that the Fed might allow the economy to contract without meaningful monetary stimulus, especially given President Trump’s promises that will inevitably expand our fiscal deficit. Alternatively, will the Federal Reserve be obliged to relinquish its hold over the economy due to political pressures? ArcBest could get caught in a nearshoring surge brought on by conflicting fiscal and monetary policy.

I found ArcBest in early 2022 as I prepared my first Industrials pitch for IMA. My team ended up pitching HUBG, but ArcBest ended up being the bigger winner. The stock has come back down to Earth in recent months and would benefit in any positive economic acceleration.

Post Formats Going Forward Pt. 2

Thanks to some helpful feedback, I realized the Redwire post could have been better designed for general audiences. Moving forward, I will begin each post with a section called “The Pitch,” summarizing the business model, history, management, and critical factors in an easy-to-absorb way. I will maintain the core information as usual. Additionally, a glossary at the end will explain any financial jargon used and its relevance.

Hopefully, this will make Achaion.com content more informative, helpful, and worthwhile.

ArcBest Corporation (ARCB)

Key Financials (as of 7/3/2024)

• Market Cap: $2,545 mm
• Enterprise Value: $2,723 mm
• Forward EV/EBITDA: 6.4x
• Current Stock Price: $108.53
• HQ: Fort Smith, AR

The Pitch

ArcBest Corporation is a key player in the logistics and transportation sector, primarily focusing on less-than-truckload (LTL) services. It has leveraged the pandemic’s supply chain challenges to invest heavily in technology, setting it apart from competitors. The business is divided into Asset-Based and Asset-Light segments, providing diverse services such as truckload brokerage, expedited shipping, and international logistics.

Despite facing squeezed margins as supply chains stabilize, ArcBest’s innovative tech developments aim to enhance efficiency and long-term profitability. However, the company’s success is closely tied to economic conditions and policy shifts, making it a cyclical investment with potential high rewards.

ArcBest must navigate economic fluctuations, such as potential recessions and shifts in monetary policy. The company’s performance is influenced by broader economic health and transportation demand. While the tech investments position ArcBest for future growth, it needs to consistently optimize operations to stay competitive.

Nearshoring trends present potential opportunities for growth, especially with increasing manufacturing in Mexico, requiring more land-based transportation solutions. ArcBest’s barriers to entry in the LTL market make it a compelling choice compared to traditional trucking companies, but it remains critical to monitor economic conditions and competitive dynamics.

Business Model: Less-than-Truckload

ArcBest Model Overview

ArcBest Corporation (“ARCB,” “ArcBest,” or “the Company”) is a comprehensive logistics and transportation provider for commercial clients, with a primary focus on less-than-truckload (LTL) freight.

• Value Proposition: Full-suite of logistics solutions that support primary LTL services
• Markets: Extremely diversified commercial customer base across the North American region
• Sales: Base LTL tariffs, dynamic and space-based pricing
• Execution: Differentiated focus on technological development and implementation
• Financing: Cash cow and strong financial health

Value Proposition

Asset Based

In 2023, 63% of ARCB’s revenues were generated from LTL services. These services transport smaller freight shipments that don’t need a full truckload, allowing several shippers to share space on the same truck. This approach improves efficiency and lowers costs by combining multiple shipments into one vehicle.

ArcBest’s asset-based segment transport a variety of general commodities, including food, textiles, apparel, furniture, appliances, chemicals, non-bulk petroleum products, rubber, plastics, metals and metal products, wood, glass, automotive parts, machinery, and various manufactured goods. The commodities vary, but like most transportation services, ArcBest’s performance will be susceptible to macro forces.

The LTL transportation industry requires extensive infrastructure, including networks of local pickup and delivery centers and large distribution facilities, creating high barriers to entry. Most costs associated with maintaining this network, such as real estate and labor for local pickups, deliveries, and cross-docking, are fixed unless there are major changes in service levels.

Asset Light

In 2023, 37% of ARCB’s revenues were generated from the asset-light segment (services that require less investment in equipment or real estate). This segment is designed to satisfy complex supply chains and unique shipping requirements. Asset-light services include:

• Truckload and Dedicated: Acts as a transportation broker, linking customers with various transport options such as dry van, temperature-controlled, flatbed, intermodal, and specialized equipment through a network of over 105,000 approved carriers
• Expedite: Leverages the Panther fleet to offer expedited freight transportation services to government and commercial customers. ARCB provides specialized equipment, such as temperature-controlled trailers, to meet specific requirements
• Managed Transportation: “Logistics consulting” – partners with a customer to develop strategies aimed at increasing efficiencies while utilizing ArcBest’s network solutions
• International: Offers ocean and air shipping capabilities through partnerships with ocean shipping lines and air freight carriers, along with warehousing and distribution services to and from major global ports
• Moving and other: Moving, final mile, time-critical, product launch, warehousing and distribution, retail logistics, supply chain optimization, brokered LTL, and trade show shipping

Summary: Full-suite of logistics solutions that support primary LTL services

ArcBest Markets

According to market studies by Armstrong & Associates, the study concluded that the total transportation market was $494 billion in 2023. In 2022, researchers estimated the US LTL market to be $59 billion (ARCB FY 2022 Rev ~$5 B).

ArcBest operates its LTL business in over 98% of U.S. cities with populations of 30,000 or more. With 240 service centers across all 50 states, Canada, Mexico, and Puerto Rico, ArcBest serves a diverse client base ranging from Fortune 100 companies to small businesses and government entities.

Customer statistics (for year end 2023)

• Asset Based: No single customer accounted for more than 4% of segment revenue (2.5% of total), while the ten largest customers collectively accounted for 14% of segment revenue (8.8% of total)
• Asset Light: No single customer accounted for more than 2% of segment revenue (0.7% of total), while the ten largest customers collectively accounted for 13% of segment revenue (4.8% of total)

Summary: Extremely diversified commercial customer base across the North American region

Sales

Pricing

About 20% of ArcBest’s Asset-Based business uses standard LTL shipping rates, which can change with general rate increases and are adjusted with specific discounts for individual customers.

The rest of the business has customized pricing, either through deals made at different times of the year or on a shipment-by-shipment basis. For larger customers, ARCB usually negotiates prices once a year. For other shipments, it sets prices based on factors like the shipment’s details, the value provided, available space in its network, and the current market.

• Dynamic pricing: Allows customers to instantly get LTL rates online, by phone, or through API technology for shipments within the US, and to Canada, Mexico, and Puerto Rico. By using the available capacity in our network at the time of the quote, it gives customers a price for each shipment
• Space-based pricing: Utilizes current shipping trends, like the growth in bulkier shipments, the rise of e-commerce, and unique shipping needs. Traditional LTL pricing is based on weight, but ARCB’s costs are influenced by the space each shipment requires. Freight dimensions (length, width, height) are used to set cubic minimum charges (CMC). If you look at the Company’s earnings calls, weight statistics concern the analysts.

Summary: Base LTL tariffs, dynamic and space-based pricing

Execution – Focus on Technology

When it comes to overall execution, it is an intuitive process. It is like mailing a package to a friend, but instead, you are a company sending a certain number of units of a product to a customer. For some companies, it is a single transaction; for others, it involves a series of movements.

Technology Edge

Out of the United States-based LTL competitors listed in ArcBest’s FY 2023 10-K (ODFL, KNX, SAIA, XPO), the Company highlights its technological advancement the most. Since ARCB implies that this technological focus is a key differentiator in a competitive market, it is important for us to fact-check this claim. After reviewing its competitors’ filings, this appears to be true.

Ultimately, the question is whether this focus on technology will impact profitability and if investing in ArcBest is essentially betting on its technological advancements. In other words, does it really matter? Here are its offerings:

• Vaux: Modernizes the processes of loading, unloading, and transferring freight in warehouse and dock operations with hardware and software solutions
• Vaux Smart Autonomy: Integrates autonomous mobile robot forklifts and reach trucks, advanced software, and remote teleoperation to independently manage material movements in warehouses, distribution centers, and manufacturing facilities, with human oversight (launched February 2024)
  
  See more below:

• Phantom Auto: Remote-operated forklift software platform
• ArcBest Virtual Agent: ARCB’s utilization of artificial intelligence
• City Route Optimization: Improves efficiencies and lowers costs at ArcBest’s service centers (successful implementation in 2023)

Most of its technology applications have been developed by its ArcBest Technologies team.

Summary: Differentiated focus on technological development and implementation

Financially Healthy

This section will be far simpler than RDW. For relevance, we will only go back to financials beginning in 2013. The Company funds a majority of is operations with free cash flow and has not issued meaningful debt since 2022.

Positive Free Cash Flow

Since 2013, the Company has generated positive free cash flow each year. This FCF has been used to dispense dividends each of those years. Since 2015, the Company has bought back shares.

As a capital intensive business, the ability to consistently generate cash from from operations that is greater than capital expenditures allows the Company to healthily reinvest in the business, investigate new technologies, and acquire other businesses.

Debt

Financial health (from Q1 2024):

• 1.2x Current Ratio (Current Assets/Current Liabilities)
• 1.1x Quick Ratio (Cash and Receivables/Current Liabilities)
• 34.2% Debt/Equity
• 0.5x Net Debt/EBITDA (Total Debt – Cash/EBITDA)

The bear case should not include bankruptcy for this Company in the near term.

Equity

Share count has been on the decline since 2021. Equity issuance would only become a consideration if the Company makes an irresponsibly large acquisition, which is unlikely.

Summary: Cash cow and strong financial health

ArcBest History

ArcBest’s core freight operations have been ongoing since 1923. The company was public from 1966 to 1988 until it was taken private in a leveraged buyout. In 1992, the company became public again.

After becoming public again, “Arkansas Best Corporation” operated as a diversified holdings company. It bought and sold subsidiaries as it entered and exited transportation markets. However, ABF, the Company’s freight business, consistently contributed the vast majority of revenue.

More specifics can be found here: https://arcb.com/about/discover-arcbest/history

The Asset-Light segment originated in July 2013 with the formation of ABF Logistics, aligning the sales and operations functions of its organically developed logistics businesses. Leading up to 2013 and after, ArcBest completed several acquisitions to support ABF Logistics’ expansion.

In February 2023, the Company sold a wholly owned subsidiary, FleetNet America, as it exited the fleet roadside assistance and maintenance business.

Summary: Hopefully the trial-and-error approach to acquisitions has allowed the Company to refine and hone its current structure

ArcBest Management

CEO – Judy McReynolds CPA

Education and Early Career:

• Holds a Bachelor’s Degree in Accounting from the University of Oklahoma
• From December 1990 to June 1995, served as Senior Manager at Ernst & Young LLP
• From June 1995 to May 1997, served as Director of Financial Reporting and Taxation at P.A.M. Transportation Services, Inc

ArcBest Corporation:

• Joined ArcBest Corporation as Director of Corporate Accounting in June 1997
• Served as Controller from July 1998 to December 1999
• Served as Vice President from January 2000 to February 1, 2006
• Served as Chief Financial Officer, Senior Vice President, and Treasurer from February 1, 2006 to December 2009
• Became President and Chief Executive Officer of ArcBest Corporation on January 1, 2010
• Became Chairman of the Board on April 26, 2016

Other Positions and Directorships:

• Served as Chairman of the American Transportation Research Institute until November 2022
• Director of First Bank Corporation of Fort Smith
• Director of the University of Arkansas Fort Smith Foundation Board
• Member of the Dean’s Executive Advisory Board of the Sam M. Walton College of Business at the University of Arkansas
• Member of the American Transportation Research Institute Board
• Member of the American Trucking Association Board of Directors
• Member of the American Trucking Association Executive Committee

Summary: CEO has the proper resumé and been with ArcBest for over 20 years

Critical Factors

Outperformance

Tech and Margins

After fighting my inherent cynicism, ArcBest’s tech focus is interesting on two fronts.

1. Margin Expansion –
   
   The majority of ArcBest’s costs are related to labor, accounting for 48% of Asset-Based revenue. If the Vaux program scales effectively over the next five years, mid-cycle margins could expand beyond current analyst estimates.
   
   Even if benefits from Vaux are slow to materialize, the Company has other innovations underway. According to management, the City Route Optimization program is already saving one million dollars in costs per month, even without being fully scaled.
2. Overlooked by the Sell-side –
   
   During the most recent earnings call, sell-side analysts showed little interest in tech developments. Most questions focused on pricing during the trough and forecasts for the rest of the year.
   
   Given the cyclical nature of trucking and transportation stocks, sell-side clients might be investors-in-name-only, primarily concerned with quarterly assumptions. Additionally, analysts likely cover 25 to 30 other companies and just need to plug and chug specific numbers for their models.
   
   In contrast, the impact of tech developments on margins must be evaluated over a longer-term horizon. From an investor’s standpoint, having a longer-term investment horizon provides an edge if ArcBest’s tech proves scalable.
   
   However, the sell-side might dismiss this tech as mere fluff aimed at attracting interest from investors like me.

Inflation and Nearshoring

ARCB has been able to invest in technology due to supply chain and inflationary challenges from the pandemic, which created booming conditions and increased free cash flow. However, as supply chains stabilized, transportation margins have been squeezed.

In the near term (12-24 months), I anticipate inflation in the U.S. transportation sector due to rising geopolitical tensions, significant fiscal debt, and strict monetary policy associated with a boom in near-shoring efforts.

If the Federal Reserve remains independent:

I believe the Fed will adopt a Paul Volcker-like stance on interest rates. The Republican candidate has proposed shifts in tariff-based revenue and cuts in corporate tax rates. The government will need to borrow money due to reduced revenue sources, leading Jay Powell to keep interest rates higher for longer than anticipated.

Higher rates will make US-based manufacturing difficult, causing factory shutdowns, job losses, and benefiting Mexico and Japan. High tariffs may reduce trade with China, pushing cheap manufacturing to Mexico. While President Trump might want heavy tariffs on Japan, Japan’s status as our largest lender provides leverage to resist tariffs, making it more practical to foster better relations with Mexico.

If more manufacturing shifts to Mexico, land-based transportation demand will rise. Limited railroad capacity will benefit transportation companies like ArcBest. The barriers to entry for LTL services make ArcBest more attractive than traditional trucking.

On a forward multiple basis, ArcBest is the most attractive among its LTL competitors. While some competitors have stronger margins, they do not justify the premium. Typically, with cyclical stocks, you would prefer to pay higher forward multiples anticipating stronger earnings, but this hasn’t been the case for ArcBest since 2021.

If the Federal Reserve loses independence:

Loose fiscal and monetary policy will likely bring back inflation, benefiting transportation companies.

Risks

• Recession: A hard landing or prolonged economic turmoil would negatively impact demand. Conflicting monetary and fiscal policies could induce an extended recessionary period. For context, after the GFC, ARCB was not profitable for two years (2009-2010), but post-dotcom, ARCB contracted but remained cash flow positive. Transportation is like the blood vessels of the economy. If the economic heart stops beating or slows, transportation will be less frequent and widespread.
• Competition: ArcBest (ARCB) must continually compete to have any critical impact. There are many ways to transport goods in the U.S., and ARCB is just one option. This requires ARCB to consistently optimize pricing and operations, as any misstep could result in customer loss. Ideally, the Asset-Light side of the business will create a strong relationship moat with customers to fend off competitors. Within LTL, ArcBest has notably subdued margins. It’s likely ARCB’s customer base is primarily in the SMID category, which faces more challenges compared to the premium customers of competitors like Old Dominion.
• Labor: Transportation and logistics analysts are familiar with unions. Approximately 82% of ArcBest’s Asset-Based employees are part of a collective bargaining agreement with the Teamsters. Strikes were prominent last year, and Yellow, an LTL shipper in poor financial health, went under due to prolonged labor disputes. Although ARCB is in a better financial position to handle labor disagreements, these events pose a continuous risk for transportation companies.
• Tech Flops: Perhaps there is a reason why ArcBest is the only LTL company heavily focused on in-house advanced tech development. If this is the case, it might be wiser to pay the higher multiple for higher-margin competitors.

Investment Summary

ArcBest has a relatively straightforward story. It operates in a competitive industry with logistical barriers to entry. Currently, the sector is experiencing a contraction from inflationary highs, but we believe the upcycle will benefit from nearshoring or overpowering fiscal stimulus. Additionally, the Company’s focus on advanced technology sets it apart from its competitors. ARCB’s discounted multiple reflects its tighter margins but may overlook the long-term margin benefits from its additional tech investments.

Continue the Research

There may not be bankruptcy risk, but there is a significant opportunity cost with this stock. Given its wide range of competitors and competing industries, there might be better options to benefit from the nearshoring narrative.

Get started

• ARCB 2023 10-K
• ARCB 2002 10-K
• https://arcb.com/
• Dive deeper into the competitors

If you have more questions or want to talk all things ARCB, do not hesitate to reach out on X, instagram, or shoot me a text. 

Employ your curiosity.

-Maximus Beach

Learn more about Maximus Beach’s background here.

The opinions and statements contained in the writing in this post do not constitute an offer, a solicitation, or a recommendation to enact or decrease an investment or to make any other transaction. It should not be the cause for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs. This content has been produced by Achaion.com and has not had any outside input. Read more about Achiaon.com’s Disclosures and Privacy Policy.

Glossary

• Capital Intensive: A business that requires significant financial investment in physical assets like machinery, buildings, or equipment
• Collective Bargaining Agreement: A contract between an employer and a group of employees (often represented by a union) that determines the terms of employment
• Cyclical Stock: Stocks whose performance is closely tied to the economic cycle, often experiencing higher volatility
• Current Ratio: A liquidity ratio that measures a company’s ability to pay short-term obligations with its current assets
• Debt/Equity Ratio: A measure of a company’s financial leverage, calculated by dividing its total liabilities by stockholders’ equity
• Dynamic Pricing: A flexible pricing strategy that allows customers to get instant rates for shipments using various methods, adjusting based on current network capacity
• EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization; a measure of a company’s overall financial performance
• Forward Multiple: A valuation method that compares a company’s current share price to its expected earnings per share over the next year
• Free Cash Flow (FCF): The cash a company generates after accounting for cash outflows to support operations and maintain capital assets
• Leveraged Buyout: Acquisition of a company using a significant amount of borrowed money
• Net Debt/EBITDA: A leverage ratio that shows the company’s ability to pay off its debt with earnings before interest, taxes, depreciation, and amortization
• Quick Ratio: A measure of a company’s ability to meet its short-term obligations with its most liquid assets
• Share Buyback: A program by which a company repurchases its own shares from the marketplace, reducing the number of outstanding shares
• SMID (Small and Mid-Cap): Refers to companies with small to medium market capitalizations
• Space-Based Pricing: Pricing based on the physical dimensions of shipments rather than weight, using cubic minimum charges (CMC)
• Tariff-Based Revenue: Income generated from taxes imposed on imported goods