Forward Air has carved itself a niche in time-definite air transportation.They operate an airport-to-airport trucking network through which they send shipments that would otherwise have been shipped via air transport. Their efficiency (near 98%) and speed allows them to use trucks to transport these goods that needs expedited shipping.
They are different from other less-than-truckload carriers because:
1. Their customers are freight forwarders, integrated shippers, and airlines, and not the shippers themselves.
2. The warehouses are located close to airports, so they have easy access to shipments that would otherwise move through air.
3. Forward Air does not own any trucks, they contract owner-operators of trucks to provide that service. This allows the management to not worry about having to a keep a fleet of trucks full all the time, nevermind the maintenance.
This asset-light models throws off tons off free cash flow with free cash flow yields over 10%. With healthy operating margins averaging in the high teens and returns on equity north of 20%, these guys clearly have a good thing going.
Management certainly knows what its doing as several competitors exited the field after unsuccessfully trying to go head to head with FWRD. Kitty Hawk has been trying the same recently, but they do not really seem to have any pricing power unlike FWRD, and their airline business is bleeding them dry. Another great thing to note about management is that, Forward Air does not compete on price as they have successfully pushed through price increases and Kitty Hawk discounting only hurts itself (check their margins, ha!). Management is also good at allocating capital by snapping up smaller acquisitions when they become available but also by refusing to pay too much unlike the private equity players are doing.
There's a concern that their contracts with owner operators could hurt them if economy takes a downturn. There's another concern that they may experience a capacity crunch during an upturn by not having enough contracts in place. FWRD addresses both by having long terms contracts with enough owner operators to account for about 50% of their normal volume. This gives them flexibility to adjust up or down as necessary.
There's another concern that trucking market is going to experience a decline. Which is quite true considering that fuel prices are soaring and much more efficient means of transportation like Rail is available. But I do not believe this affects Forward Air for the following reasons.
1. Forward Air competes in niche market of time-definite air transport which cannot be served by railroads due to time constraints. Railroads may be run more efficiently than they were before, but they are nowhere near fast as needed for this market segment.
2. Trucking industry is not going to disappear, as the weaker players fall off, this creates further opportunity for the stronger ones that get left behind.
This is a great business to own for the long term considering that it grows with the US economy. I would snap up shares below $34.
$33.5 (08/29/07)
