Tailwinds and Technicals: Why Forward Air $FWRD is a fat pitch.

Bad management gone, new management untested.

In August of 2023, Forward Air (FWRD) announced the acquisition of Omni Logistics (Private), and FWRD’s share price subsequently fell from $110 to $70.  The market hated this acquisition, but both management teams liked it.  The CEO of the target was poised to become the president of the joint company, and the management team of the acquirer engaged in an orchestrated insider buying campaign to send a message.

FWRD has a lot of problems, but I have to take a moment and respect this cluster buy.  I am a generalist investor, so I have to be very cautious regarding my understanding of their business model.  I find that management teams are 50/50 at understanding the cyclicality of their own business, but that they are pretty darn good at understanding the operations of their business.  To me, this is a very strong indication that the merger was fundamentally not too bad.  

The execution of the merger, however, was an abomination.  The deal was structured to violate the spirit of Tennessee law which requires a shareholder vote for a merger with as much dilution as occurred here.  By a clever dick use of preferred shares, the leadership followed the letter of law while wiping their asses with their fiduciary obligation.  The subsequent lawsuits left a share price of between $11 and $19 at the lows, and both CEOs of Forward and Omni stepped down in well deserved shame.  Currently an activist investor, Irenic, is accumulating a stake in FWRD and allegedly seeks a board refresh.  I hope they get it, the people responsible should be sacked.  

But I am not convinced the merger was fundamentally terrible.  All mergers overpay, that’s just what it takes to buy something that someone already owns.  The merger took place at the bottom of a destocking cycle.  How many times have you heard a CEO say that they need to look through the cyclicality of the business?  FWRD is a quality leader in the less than truckload LTL freight business.  Omni is a total logistics solutions provider.  Omni occasionally used FWRD when their business clients needed LTL service.  With the merger, there is a possibility of cross selling to Omni’s customers and increasing LTL market share, although there is also the risk of abusing those customer relationships.  Prior to the merger, FWRD tried to build some of those full service logistics clients organically, they spent years having very little success.  It turns out those relationships are sticky.  It also means that the acquisition might be very valuable.  Also, how badly will the overpayment be in the long run as congress runs a 7% GDP deficit and debases the currency?  I am cautiously optimistic.

Now we have a new CEO, a price that my limited understanding of technicals tells me has bottomed, and a price to sales ratio of 0.29 compared to its long run average of 1.5.  I think FWRD is a fat pitch.  Heck, even if they split the debt and spun off Omni as a public company, I find it incredibly hard to believe that after four quarters of data, the combined share price wouldn’t be over $50.  That’s a conservative 2.5x.  A return to 1.5x sales would be closer to 6x from here but might take a couple years of debt repayment.

Beyond that, I believe logistics is facing three potential tailwinds.  The first is annual seasonality.  Summer is the busiest time of year in freight, the next two quarters should show some strength.  Second, we might finally be nearing the end of the destocking cycle.  The increase in interest rates, therefore the opportunity cost of holding inventory, and the unkinking of the supply chain caused a move back toward just in time delivery.  Freight has been dead for two years as companies ran down inventory.  When that ends, even if the economy isn’t growing, logistics has to pick up. If you look at pallet construction, destocking may have just ended.

Third and much more long term, reshoring has dramatically increased manufacturing construction.  When those factories are finished, and they need equipment moved, they will likely turn to the quality leader in the space, the one with the fewest damaged or lost cargoes in the LTL market, and that is FWRD.  Also, any rebound in the housing market would be a tailwind as well because FWRD handles a lot of luxury appliance special orders.

So call me crazy, but this looks to me like a medium-term six bagger with tailwinds for years and the technicals look like somebody smart is building a large position.   They might need two years to pay down debt, but this looks like the time to grab onto this conga line with both hands.  Boards who betray their fiduciary responsibility should be sacked, and activists are working on it

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