There are several ways to play the economic reopening theme from airliners to restaurants to casinos. Then there is the cargo transportation space which may be one of the more underappreciated comeback stories.
Forward Air (NASDAQ:FWRD) is one of the stronger players in the transportation space on account of its extensive network and value proposition for bargain shopping businesses.
The mid-cap stock was grounded with the rest of the market in the spring of last year. But since dipping below $40, Forward Air climbed to an all-time high of $78.95. Now trading just shy of this record and with growth opportunities on the horizon, investors should pay attention to this unique ‘highflier’.
What Does Forward Air Do?
Tennessee-based Forward Air sounds like it would be an airborne transportation company, but it actually takes over once air freight touches ground. Considered an “air freight forwarder”, it serves as an alternative to expensive air transportation by providing lower cost ground transportation and logistics services for air, rail, and sea freight via expedited less-than truckload (LTL) transportation. These loads tend to be on the smaller side in contrast with full truckload or parcel carriers which tend to transport large freight.
The company’s positioning in the ground transportation industry as an asset-light freight operator comes with competitive advantages. First, it allows it to employ a low capital expenditure strategy that involves lesser investment in equipment and facilities compared to larger-scale freight companies.
Second, it opens it to a very broad customer base that includes a range of large, medium, and small businesses across many industries. Over its 25-year plus history, Forward Air has evolved to meet its customers’ changing needs by offering the cheaper, on-time transportation of air freight on the ground. Today it transports anything from consumer goods to industrial parts day and night.
Forward Air’s network is comprised of 92 facilities that are strategically located near major U.S. and Canadian airports plus an additional 300 centers situated around smaller airports. Its roughly 1,600 tractors and 4,300 trailers ship 9.7 million pounds of goods daily. But each load is relatively light (think less wear and tear on its trucks, lower costs, and reduced carbon emissions versus air freight and larger cargo shippers). This gives it one of the most comprehensive ground transportation networks in North America.
What are Forward Air’s Growth Drivers?
Forward Air started out serving only the air cargo industry but has diversified its business over the years. Growth has been achieved through both organic and inorganic means with the latter the result of 15 acquisitions since 1994.
Last year, the company bought out Linn Star, a provider of appliance home delivery and final-mile logistics services for $57.2 million. The move was part of Forward Air’s aggressive growth plan for its expedited LTL business.
Aside from the likelihood of further acquisitions to support growth, Forward Air has substantial room to expand within its market. It estimates that over 90% of its addressable market is available for market share gains. Including the Linn Star acquisition, it holds approximately a 6% share of its $26 billion North American ground transport market.
As an economically sensitive business, Forward Air’s fortunes will largely depend on the generally health of the North American economy. Greater shipping demand and volumes translate to greater revenue. If the economy continues to heal as anticipated, Forward Air should be in a good position to benefit.
Forward Air’s ability to capture a bigger slice of the pie will be a key determinant of growth. To do this, it will have to continue to convince prospective customers that its services are cost-effective and yet still dependable from a timeliness standpoint. With many businesses small and large looking to reduce expenses in the pandemic economy, Forward Air is likely to get more looks.
How are Forward Air’s Financials?
Forward Air generated record revenue and free cash flow in 2019, which grew 7% and 14%, respectively. Then, after posting record sales in the first quarter of 2020, its second quarter financial performance was impacted by the onset of COVID-19.
But as the U.S. and Canadian economies reopened, things picked up last summer. The company is coming off a stellar third quarter report that topped the consensus earnings per share (EPS) expectation by more than 40%. Although this sparked a sharp rally in the stock, Forward Air appears to have the momentum to travel higher for a longer distance.
Forward Air has a healthy balance sheet that contains a low level of debt. The shareholder friendly company pays a modest 1% dividend and has consistently repurchased stock. Despite the challenging 2020, management chose to increase its dividend late last year. This should be viewed as a vote of confidence in the company’s growth outlook—and is one more reason investors should move forward with a position in Forward Air.