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Pacer International (PACR) |
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WIKI ANALYSIS
Pacer International (PACR) is a shipping company that transports goods such as consumer products, building materials, automotive parts, and electronics. PACR does not own transportation assets (i.e. trucks, railcars, planes) but instead contracts with third-party carriers like Union Pacific (UNP) and CSX to move goods. Pacer buys container-hauling space in bulk from these carriers, and then sells the space to clients at rates cheaper than what they could negotiate independently. The company’s core business is its intermodal operations (when goods are shipped using a combination of transportation modes, usually rail and truck), which accounted for ~80% of total revenues in 2007[1]. The remainder of PACR’s revenue comes from its logistics segment, which provides international freight forwarding, supply chain management, and warehousing and distribution services.
Intermodal shipping is generally cheaper (although also slower and less flexible) than trucking alone because railroads are about three times more fuel-efficient than long-haul trucks[2]. In the short term, rising fuel prices lead to greater demand for PACR's services. Moreover, as of 2008, the company's contracts with two of its biggest suppliers, Union Pacific (UNP) and CSX, gave it advantageous pricing because rates were established at a time when the railroads had excess capacity to fill. These contracts are set to expire in 2011 and 2015[3]. If demand for rail transportation remains high, PACR will have to pay more for its rail services in future.
Business Financials
Pacer International is comprised of two business segments: intermodal (80% of revenue) [4] and logistics (20% of revenue)[4]. Total revenue in 2007 amounted to $1.97B, a 4.3% increase over 2006[5]. Although both segments posted higher revenues, operating income increased only in the logistics division, while falling by 15.5% in the intermodal division[6]. This decrease is the primary reason net income fell by 20.5% in 2007[7]. Part of the reduction reflects a more competitive environment that put downward pressure on rates, and lower pricing to maintain equipment flow[8]. The firm also incurred $9M in expenses related to severance payments, facility closures, and employee bonuses[7]. Furthermore, operating costs in 2006 benefited from the favorable settlements of several arbitration cases and other rate disputes which did not occur in 2007[6].
Intermodal Segment (80% of revenue)
Pacer’s intermodal segment comprises three operations: Stacktrain, rail brokerage, and local cartage. The Stacktrain and rail brokerage units work in tandem to ship goods using a combination of truck and rail transport.
- Stacktrain: This unit contracts with third-party carriers for the use of vehicles, rail network, etc. to move cargo, since PACR does not have its own transportation assets. Through contracts with Union Pacific (UNP), Burlington Northern Santa Fe (BNI), CSX, Kansas City Southern (KSU) in Mexico, and Canadian National Railway Company (CNI), Pacer has access to over 52,000 miles of North American rail network[9]. The company’s equipment fleet in 2007 consisted of 1,850 doublestack railcars, 28,025 containers, and 30,423 chassis (steel frames with tires used to transport containers over highways), substantially all of which are leased[6].
- Rail Brokerage: This service arranges for the optimal movement of a customer’s goods. In a typical example, cargo is picked up at the point of origin by truck, transported to a loading site onto a train and shipped the majority of the distance by rail, and then unloaded and transported by truck to the final destination.
- Local Cartage: Through agreements with independent trucking contractors, Pacer offers local motor transportation in and around the rail ramps and ports of large U.S. cities like L.A., Miami, and Portland.
Logistics Segment (20% of revenue)
Pacer’s logistics division comprises four separate services: highway brokerage and truck services, international freight forwarding, warehousing and distribution, and supply chain management.
- Highway Brokerage and Truck Services: PACR arranges for the shipment of freight by truck using a network of over 3,000 independent trucking companies[10]. This was the only unit in the logistics segment to post negative revenue growth in 2007, as the trucking industry continues to face soft demand from the 2007 economic downturn and a shortage of drivers that is pushing up costs[6].
- International Freight Forwarding: Through its subsidiary, RF International, PACR moves goods in and out of the U.S. by contracting with third-party air and ocean carriers[10]. PACR also provides customs brokerage services to direct domestic importers.
- Warehousing and Distribution: This unit serves importers looking to move their goods directly to a retailer or to an inland distribution point. To this end, PACR operates a number of facilities in the Los Angeles area where inventory is received, labeled, transferred from ocean containers to domestic equipment, and consolidated into shipments.
- Supply Chain Management: The final service in the logistics segment lets companies focus on their core business by outsourcing the management of their materials and inventory to PACR.
PACR earned ~12% of its revenues outside of the U.S. in 2007[11].
Trends and Forces
Pacer’s Business is Susceptible to Economic Conditions
As a shipper of consumer products, building materials, and automotive parts among other things, PACR relies on a healthy economy to keep goods moving about the country. By contracting with third-party carriers instead of buying its own transportation fleet, Pacer is able to save money and adjust shipping capacity by controlling the number of third-party contracts that it enters. This shields it in part from fluctuations in consumer demand. However, a slowing economy and low consumer demand will cause a total volume drop in shipments that can hurt PACR’s profits. The subprime mortgage crisis and subsequent economic downturn left the U.S. Housing Market in a turmoil. Demand for building materials decreased accordingly, negatively impacting revenues from PACR’s highway brokerage and truck services unit by $1.7M in 2007[12].
PACR’s Profits Depend on Being Able to Secure Favorable Rates From Suppliers
As a non-asset based transportation firm, Pacer has to secure third-party services for its business, and secure them at a favorable cost. Present contracts with two of its biggest suppliers, Union Pacific (UNP) and CSX, give Pacer advantageous pricing because rates were established at a time when the railroads had excess capacity to fill. However, demand for the more fuel-efficient railroads has grown thanks in part to rising oil prices. When PACR’s contracts expire in 2011 and 2015, rail prices will likely increase because of higher demand and tighter capacity[3].
PACR is Subject to Government Trade Policy and Regulation
The transportation industry is subject to a number of state and federal rules on issues such as insurance requirements, environmental standards, safety requirements, etc. Although the intermodal segment has essentially been deregulated, PACR’s trucking operations are regulated by the U.S. Department of Transportation (DOT)[13]. In 2004, the DOT reduced the amount of time that drivers can spend behind the wheel, thus increasing the rates charged by the trucking companies PACR contracts with[13]. And in 2006, the DOT issued new regulations that will make intermodal equipment providers like Pacer’s Stacktrain unit subject to the Federal Motor Carrier Safety Regulations for the first time)[14]. Under the new regulations, scheduled to take effect in July 2008, Stacktrain operations will be required to establish a systematic inspection, repair and maintenance program on chassis[13]. Pacer estimates that the annual impact of the chassis maintenance and repair costs will be between $3M and $7M[13].
Pacer’s Intermodal Operations Offer Hedge Against Increasing Fuel Prices
PACR is relatively shielded from changes in fuel prices because the majority of its business comes from its intermodal operations, which are more fuel-efficient than trucking alone. In addition, like most of its competitors in the transportation industry, PACR determines shipping rates by charging a base rate plus or minus a change in diesel prices. However, this fuel surcharge is not always fully and immediately transferable to the customer. And if diesel prices continue to increase, it may be harder for transportation companies to continue this practice. Since 2004, diesel prices have more than tripled from $1.50 per gallon to $4.72 per gallon in May 2008 [15].
Increased Global Outsourcing of Production Will Benefit Pacer
More businesses today are expanding to foreign markets, increasing the volume of international shipments. PACR earned ~12% of its revenues outside of the U.S. in 2007, and demand for its international shipping services is tied to the growth of the global economy[11]. Additionally, as more companies go global and businesses become more complex, firms are increasingly outsourcing their non-core operations, such as supply chain management, to specialists like Pacer.
PACR Faces Customer Concentration Risks
The company’s top 10 customers generated ~42% of PACR’s revenues in 2007[16]. The firm’s largest client, Union Pacific (UNP) and its affiliates, accounted for ~10% of total sales in the same year[16]. Since some of Pacer’s larger customers may be able to exert higher bargaining power than its smaller clients, the loss of one of these clients will significantly impair the company's financial performance.
Competition
Pacer International’s intermodal division competes chiefly with truckload carriers, railroads, and other intermodal service providers. Peer competitors in this category include Union Pacific (UNP), CSX Intermodal, J.B. Hunt Transport Services (JBHT), and Hub Group (HUBG). The firm’s logistics unit competes primarily against non-asset and asset based transportation and logistic firms, third party freight brokers, and freight forwarders. Non-asset logistics firms like PACR include C.H. Robinson Worldwide (CHRW) and Expeditors International of Washington (EXPD).
| Company | Revenue (millions USD) | Net Income (millions USD) | 1-Yr Sales Growth | Operating Margin | # of Containers |
|---|---|---|---|---|---|
| Pacer International | $1,969[4] | $54[4] | 4.3%[4] | 4.8%[4] | 28,025[9] |
| J.B. Hunt Transport Services (JBHT) | $3,490[17] | $213[17] | 4.9%[17] | 10.6%[17] | 34,019[18] |
| Hub Group (HUBG) | $1,658[19] | $60[19] | 3.0%[19] | 5.5%[19] | 13,510[20] |
| C.H. Robinson Worldwide (CHRW) | $7,316[21] | $324[21] | 11.6%[21] | 7.0%[21] | |
| Union Pacific (UNP) | $16,283[22] | $1,855[22] | 4.5%[22] | 20.7%[22] | |
| CSX | $10,030[23] | $1,226[23] | 4.9%[23] | 22.5%[23] | 12,503[24] |
| Burlington Northern Santa Fe (BNI) | $15,802[25] | $1,829[25] | 5.5%[25] | 22.1%[25] | 3,253[26] |
Market Share
The following chart shows 2006 domestic rail intermodal market share by gross revenue. Total gross revenue in that year was ~$6B for the industry as a whole[27]. PACR touches ~20% of all U.S. intermodal rail container shipments[28]. As the graph shows, the major railroads dominate a majority of the U.S. intermodal market. However, many of the railroads actually rely on non-asset based transportation firms like Pacer for their intermodal business because these third-party firms can offer large, consolidated shipping volumes.
References
- ↑ PACR 2007 10-K pg. 5
- ↑ Market Watch: Railroad Fuel Efficiency Sets New Record. Retrieved on June 27, 2008.
- ↑ 3.0 3.1 PACR 2007 10-K pg. 17
- ↑ 4.0 4.1 4.2 4.3 4.4 4.5 4.6 PACR 2007 10-K pg. 35
- ↑ 5.0 5.1 5.2 PACR 2007 10-K pg. 43
- ↑ 6.0 6.1 6.2 6.3 PACR 2007 10-K pg. 36
- ↑ 7.0 7.1 PACR 2007 10-K pg. 47
- ↑ PACR 2007 10-K pg. 45
- ↑ 9.0 9.1 PACR 2007 10-K pg. 6
- ↑ 10.0 10.1 PACR 2007 10-K pg. 7
- ↑ 11.0 11.1 11.2 PACR 2007 10-K pg. F-22
- ↑ PACR 2007 10-K pg. 46
- ↑ 13.0 13.1 13.2 13.3 PACR 2007 10-K pg. 22
- ↑ PACR 2007 10-K pg. 15
- ↑ U.S. Energy Information Administration: U.S. No.2 Diesel Retail Sales By All Sellers. Retrieved on June 27, 2008.
- ↑ 16.0 16.1 PACR 2007 10-K pg. 20
- ↑ 17.0 17.1 17.2 17.3 JBHT 2007 10-K pg. 15
- ↑ JBHT 2007 10-K pg. 5
- ↑ 19.0 19.1 19.2 19.3 HUBG 2007 10-K pg. 13
- ↑ HUBG 2007 10-K pg. 4
- ↑ 21.0 21.1 21.2 21.3 CHRW 2007 10-K pg. 23
- ↑ 22.0 22.1 22.2 22.3 UNP 2007 10-K pg. 19
- ↑ 23.0 23.1 23.2 23.3 CSX 2007 10-K pg. 24
- ↑ CSX 2007 10-K pg. 16
- ↑ 25.0 25.1 25.2 25.3 BNI 2007 10-K pg. 13
- ↑ BNI 2007 10-K pg. 5
- ↑ 27.0 27.1 Merge Global: The New Supply Chain. Retrieved on June 27, 2008.
- ↑ Pacer International: North American Transport. Retrieved on July 1, 2008.
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