While Heartland Express (HTLD) doesn’t have quarterly earnings calls, they did present at the annual JP Morgan Industrials Conference on March 14th. Their last reported quarter ended on December 31st 2024, so we get a bit of insight as to how the next quarterly earnings report will look.
You can find my previous writeup from last October here:
Picking my spots for the End of Destocking: Heartland Express $HTLD
Hello and Welcome to another small cap value idea. For those of you who have been following for a while, my largest logistics holding, Forward Air (FWRD), has been pressured by activist investors to go private and I will not be able to enjoy the stock returning to full value. While still a double from the price when I first wrote about it, it easily c…
Tariffs:
CEO Michael Gerdin doesn’t know how tariffs will affect tractor trailer prices, but he suspects that the effect will be less than the upcoming emissions standards rules that are set to be implemented in January of 2027. Those emissions standards rule changes are set to drive up the cost of a tractor trailer by 15% to 20%, which is a stunning amount. What are the odds that the Trump administration rolls back those requirements? Probably pretty decent. If tariffs were to put another 5% to 15% cost increase on top of the emissions standards rule change, those would be some expensive trucks. If the price increase is only due to tariffs, then the market will probably absorb the price increases without too much of a shock.
Heartland Express tries to be the quality leader in freight hauling, aiming for the lowest number of late deliveries, and charging a premium because of it. Due to this emphasis on quality, they keep a very young fleet of trucks. The fleet age has crept up from 1.8 years in 2019 to 2.5 years today, and management is guiding that number to stay mostly flat from here. This means the company is in a much stronger position than I had feared. I was worried about pent up capex from this three year freight recession, but it looks like my fears were overblown. The average age of the trailers, however, has crept up from 3.6 years to 7.4 years since 2019. This is due to the acquisitions, which has left Heartland Express with an abundance of trailers.
Since prices are low, HTLD is not selling their surplus trailers into this market. But when freight recovers further, there will be an inventory release, and that money should go a long way toward paying for the trailer fleet refresh. Capex shouldn’t change dramatically, unless it is due to the upcoming tariffs or the emissions standards implementation.
Market Update:
Mike Gerdin claims that this is the best that trucking has felt in three years, and conversations with customers are positive for the first time in a long while. He says that last year, Heartland Express was rejecting 100 loads a week. By the end of 2024, that was 700 to 800 per week, and today they are at 1,100 a week. Under a normalized market, HTLD would be rejecting 5,000 loads a week, and in the boom times of 2021, they were rejecting 9,000 loads a week. So the trucking market has come a long way toward healing after the post Covid durable goods boom and bust, but there is still a lot of room to go.
January and February were crippled by abnormal snowstorms in the sunbelt. Snowstorms aren’t typically an impediment to the trucking business, except for when they occur in states that don’t usually see snow. Getting 9 inches of snow in Pensacola shuts down transportation in a way that getting 9 inches in Buffalo doesn’t. Going forward into 2025, not only does the market stand to improve further as bankruptcies of competitors have taken supply out of the market, but the negative impacts of weather should be behind us. Management is surprised that it has taken so long for supply to come out of the market, typically booms and busts in freight only last 18 to 24 months. But in this instance, 2021 left competitors flush with cash, and this has slowed down the path to bankruptcy of HTLD’s competitors.
On top of that, last quarter, Q4 2024, HTLD was almost at breakeven, posting $1 million of operating income, but a GAAP $1.9 million net loss for the quarter. That was a significant improvement over the $9.2 million loss for Q3. Extrapolating from Heartland’s increased tender rejections, there is a decent chance that HTLD flips to net income positive on the Q2 2025 quarterly earnings announcement. CEO Mike Gerdin said that January and February were comparable to 2024 due to the effects of the weather, but March is a significant improvement. In Q1 of 2024, HTLD had a net loss of $15 million, and if those numbers are comparable to Q1 2025, then the stock price might fall on the next earnings call, despite already being at such a historically low valuation.
With 60% of active traders operating algorithmically, a decrease in earnings per share from Q4 2024 to Q1 2025 due to the weather could drive a further selloff from these already historic lows. I don’t typically try to time earnings calls, and often the market reaction is the opposite of what I might expect it to be, but with the recent market sell off, it would be hard for me to imagine HTLD’s stock price dropping further on a flip to GAAP net income positive in Q2 of 2025. If the stock price does behave this way, down on Q1 earnings, and up on Q2 earnings, then the upcoming price action should be a very buyable dip.
In the meantime, even while operating at a small loss during a three-year freight depression, HTLD has had enough depreciation to pay down significant debt from their two acquisitions. Since 2022, HTLD has paid down about $295 million of debt, and there is only $193 million of that long term debt remaining, which at the current pace of repayment would take two years. When the debt is gone, that is a chance for an increase in return of capital of shareholders of over $100 million a year. Free cash flow is about to increase by 15 percentage points, not by 15%, but by 15 percentage points starting in 2027 at the current pace.
But even without a large shift in payout policy, just a flip to GAAP net income positive could lead to a dramatic multiple re-rating. Heartland Express has traded at a price to sales metric that consistently stayed above 2.0x, and occasionally spikes up to 3.0x. Today it trades at 0.63x, and revenues are still depressed. A return to the revenues that HTLD achieved in 2023 after the two acquisitions would be over $1.2 billion in sales from their current $1.05 billion. A return to a 2.0x price to sales multiple and $1.2 billion in revenue would imply a share price of $30.56. Either a revenue run rate higher than what Heartland achieved in 2023, or a temporary spike in multiples could drive the share price even beyond that target within the next two years.
Company Strategy:
But HTLD has a very strange history with acquisitions, CEO Mike Gerdin’s father and grandfather made a business of buying struggling trucking companies, fixing them up, and selling them. It is only because the family was convinced to go public instead of selling HTLD that the company even exists. The two 2022 acquisitions, CFI and Smith Transport, are still being measured in HTLD’s earnings calls separately to keep track of efficiency metrics. It is unclear if these business units are being held for integration, or for future sale.
Some HTLD freight volume is even being transferred to the two other brands to start building up relationships and to enhance the brand quality awareness of Smith and CFI. Why is Mike Gerdin building up those two brands instead of replacing them and fully integrating them with Heartland’s brand? Does he plan to eventually sell one or both of the businesses? If he did plan to sell them, then why is he aggressively paying down the debt from the acquisitions, instead of relying on the funds from the future sale? That $295 million could have done a lot of share buybacks over the last three years. Suddenly having an extra half billion in cash after the market has recovered and multiples are back to their peaks would be less effective than buying back the company’s stock at depressed multiples.
As for now, my guess is that HTLD intends to keep Smith and CFI rather than sell them due to the increased national footprint that the acquisitions brought and the rapid effort to pay down the debt from the acquisitions. But I could be wrong, because I can’t wrap my head around building up three brand names within the same company, especially when HTLD is known for very high quality.
Conclusion:
Heartland Express is in a much stronger position than I had previously believed, I knew that the fleet age was creeping up, but I didn't know that they had excess trailers to sell off to help pay for the fleet refresh. These last three years have been the worst freight recession in modern history, significantly worse than the global financial crisis in 2008. But the cycle in turning, and the market is healing. A return to past multiples and past revenues would be about a 4x return from Heartland Express, and that could take place in a relatively short time frame on a return to solid profitability and strong forward earnings guidance.
Heartland Express (HTLD): $8.43: $30.56 by mid 2027
https://x.com/freightalley/status/1913035787634901263?s=61
What in the world is going on with New Fortress Energy ??? Is this a buying opportunity 🤔?