What's Good and Not-So-Good About Pacer International

Supply chains like Barbie’s are a direct result of the changes wrought by the rise of container shipping. They were unheard-of back in 1956… and in 1976 when oil prices brought sky-high freight costs that stifled the flow of world trade. Until then, vertical integration was the norm in manufacturing; a company would obtain raw materials, sometimes from its own mines or oil wells, move them to its factories, sometimes with its own trucks or ships or railroad; and put them through a series of processes to turn them into finished products. As freight costs plummeted starting in the late 1970s and as the rapid exchange of cargo from one transportation carrier to another became routine, manufacturers discovered that they no longer needed to do everything themselves. They would contract with other companies for raw materials and components, locking in supplies, and then sign transportation contracts to assure that their inputs would arrive when needed. Integrated production yielded to disintegrated production. Each supplier, specializing in a narrow range of products, would take advantage of the latest technological developments in its industry and gain economies of scale in its particular product lines. Low transport costs helped make it economically sensible for a factory in China to produce Barbie dolls with Japanese hair, Taiwanese plastics, and American colorants, and ship them off to eager girls all over the world.

-Marc Levinson, The Box

Background

Pacer International (PACR) is a transportation logistics and brokerage business focusing on inter-modal railroad traffic. I touched on many of the fundamental drivers of this industry in my report on Trinity Industries. (TRN). I believe Pacer is more immune to system-wide pricing shocks than TRN. As an asset-light operator, Pacer generally avoids owning property or equipment that needs to be kept in productive use. Operating leverage should be low, allowing CoGS to vary with revenue. On a quarter-to-quarter basis, Pacer could have some trouble perfectly matching leasing obligations to client needs, but in the long run they should only take business that earns a spread.