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Kseniya Demchenko

UACL AT A GLANCE

P/E ► 44.7 AVG EV/EBITDA ► 31.9 VERY HIGH ROA ► 2.9% AVG ROE ► 3.6% AVG Debt to Equity ► 0.295 LOW Current Ratio ► 2.22 HIGH Interest Coverage Ratio ► 1.83 AVG

 

 

 

 

 

 

Headquartered in Michigan, Universal Truckload Services, Inc. (Nasdaq: UACL) is a trucking company that provides dry van and flatbed operations, which are on-the-road shipping services, as well as shipping by steamship and rail, to shippers in the U.S., Ontario and Quebec.^[1]

From 2008 into 2009, the firm has faced rising costs in some of its primary inputs, along with a decrease in demand for its services due to lower retail and industrial production. The largest development impacting the company is the economic downturn that started in late 2007; for example, since exports to the US have declined, this directly translates to lower shipping volume.^[2] In part due to the 2008 Financial Crisis, the company reported an 8.8% lower EBITDA in March 2009, compared with the prior twelve months. This is the lowest it has been in the last two years.^[3] Company costs are highly dependent on volatile oil prices, which spiked to $150/barrel for crude oil last summer before plummeting below $50, and back up to over $65 in June 2009. ^[4] Competition has increased significantly due to lower demanded shipping volume. However, this has forced many companies to exit, with over 3,000 trucking companies filing for bankruptcy in 2008.^[5] This has been a driving force in a market consolidation trend for the trucking industry.

Business Overview

Business and Financial Analysis

Universal Truckload Services uses a non-asset based business model, which means it's more oriented towards providing services and doesn't hold a lot of assets, such as tractors and tailors, on its books. Most of the tractors and two-thirds of the trailers are owned by others.^[6] As of March 2009, over 80% of the operating expenses incurred were variable expenses.^[7] This is an advantage, as the firm doesn't have to own a lot of facilities and spends a lot less on capital expenditures compared to its competitors. On the other hand, since they don't own a lot of their facilities, this limits their growth potential in good economic climates because they can't dictate how fast to expand.^[8] The firm does offer some assets, such as its intermodal depot facilities and management information systems, and so it greatly reduces the need for large cash outlays in order to expand. This also increases their average return on assets ratio compared with rivals who use an asset-based model. In the last fiscal year, the company had a 7.1% return on average assets.^[9]

Revenues are earned through the shipment of goods, loading and unloading services and container storage. They charge their clients on a per mile basis.^[10] The company earned $759.517 million in operating revenues in 2008, up from $680.359 million in 2007 and $641.627 million in 2006.^[11] As of the end of December, 2008, the company had 649 employees ^[12] and 690 agents^[13] The firm's primary costs are payments and commissions to agents and owners-operators, insurance costs, and purchase and depreciation and amortization on equipment.^[14] UACL provides services in the United States and two Canadian provinces - Quebec and Ontario - and any given customer accounts for less than 5% of operating revenues for the last three years. The primary customers come largely from the automotive and steel sectors.^[15] The Truck Brokerage Services portion of the business is to provide customers with freight services that owners-operators don't cover.^[16]

Universal relies heavily on its contractor network of agents and owners-operators, who provide the link to customers and are responsible for delivering the services and equipment. The former is responsible for attracting and doing business with shippers, as well as locating freight. Agents focus on a particular market segment and are able to better serve that specific sector's needs compared to a company that targets a wider segment. These agent networks also provide services to owners-operators, including dispatch and terminal services, as well as aid in their recruitment.^[17] There are no formal long-term guarantees for future business, however, between agents and Universal.^[18] The latter, owners-operators, provide the transportation services to the clients and provide and finance the necessary equipment, such as the majority of the trailers and most of the tractors. They also pay for other costs they incur, like fuel.^[19] The firm is divided into several subsidiaries: NYP of Michigan, Inc., Universal Am-Can, Louisiana Transportation, Mason & Dixon Lines, Economy Transport, Great American Lines, CrossRoad Carriers and Mason Dixon Intermodal.

Segment Breakdown

Revenue Breakdown by Segment for 2008: ^[20]

• Truckload (57.7% of sales) - represents over half of the revenues for the past fiscal year. Universal provides on-the-road shipping services to clients in a variety of segments, from food products to steel and building materials.

• Brokerage (27.4% of sales) - this segment accounted for almost a third of the revenues.^[21] If there is more shipping volume than owners-operators can handle, then shipping is arranged through agents to third party transportation operators, such as competing freight carriers.

• Intermodal Support Services (14.9% of sales) - The smallest division is the intermodal support services, accounting for $113.0 million in revenues. More specifically, these are shipments by steamship and rail. ^[22]

Trends and Forces

Costs Are Affected by Oil Prices

Since Universal Truckload Services is a shipping company, gas prices are one of the greatest contributors to cost, especially when fuel prices are not as stable. Even the smallest increase in the price of diesel fuel has a large impact on the trucking industry; the American Trucking Association estimates that expenses on fuel increase by $391 million annually if fuel increases by just one cent.^[23] Oil prices have been extremely unstable in the past two years. Just last summer prices for crude oil skyrocketed to $150 per barrel and then crashed to $33 per barrel before the end of the year. For mid-June 2009, crude oil was rising and hit $69. For the first quarter of 2009, gasoline prices, for which oil is the primary input, were around $2.50 per gallon, which affects those trucks that run on gasoline. ^[24] For the large portion of trucks that run on diesel fuel, prices were at $2.616 per gallon mid-June 2009, which actually decreased from the rate of over $4.5 at that time the year before.^[25] It's clear that unpredictable fluctuations in fuel prices can cause costs - and therefore earnings - to be volatile. A large portion of the fleet is owned by owners-operators and not by the company directly, which means United itself isn't taking on large debt; however, if fuel prices are too high, these high costs will significantly cut into the profits of owner-operators, and they will be forced into bankruptcy, as has already happened to some firms. This will hurt United because it will then be harder to find new owner-operators to replace them.^[26] Some owners-operators have already chosen to leave the sector, causing Universal and its rivals to compete for these scarcer resources. Universal is forced to constantly search for and hire new owners-operators.^[27]

Market Consolidation

Due to the 2008 Financial Crisis, the truckload sector is moving towards consolidation, meaning a few larger companies will dominate the sector, squeezing out smaller firms. It's likely that this will continue because some smaller firms are forced out by competition by larger firms or combine with others. In 2008, over 3,000 firms in this sector filed for bankruptcy, which translated into about 7% of trucks carrying freight. 480 trucking companies went bankrupt in the first quarter of 2009 alone, which, while fewer than just 1 percent of the trucking industry carrying capacity, still leaves fierce competition for the remaining companies. The reasons include the instability of inputs like fuel prices, tougher government environmental regulation and the fact that it is harder to obtain financing during a down economic cycle. Also, large firms are able to provide customers with all necessary services, a one-stop solution, with which smaller firms are finding it hard to compete. If this continues to happen, this trend will be advantageous to Universal Truckload Services, as it is a large provider and has the opportunity to capture more market share and customers as smaller competitors continue exit.^[28]

Shortage of Truck Drivers

In the years leading up to the Financial Crisis of 2008 there has been a significant shortage of truck drivers, which are an important input in the trucking industry. The shortage is caused by changes in demographics and labor market participation, lower wages and a significant number of current drivers retiring. The labor market for this segment is overwhelmingly male, about 60% white; the majority of truck tends to be less educated and is mostly between ages 35 and 54. The American Trucking Association predicts this age group will decrease by over 3 million people by the year 2014. Many current truck drivers will retire in the next 10 to 15 years, which will shrink this labor market. In addition, there are many regulatory hurdles candidates have to overcome to be certified as truck drivers, including the English language requirement, training, more thorough background checks, and immigration laws. As the economy recovers and begins to grow again, there will be an increased demand for more truck drivers. Wages have fallen and many firms, already under pressure from the recession, cannot afford to raise pay for truck drivers, exacerbating the problem.^[29] In January 2008, 2,800 trucking jobs were lost.^[30] As freight companies compete for a smaller pool of workers, the American Trucking Association predicts wages will begin to increase in order to close the supply and demand gap in the labor force.^[31]

Recent Economic Downturn

It's harder to obtain financing, because of the 2008 Financial Crisis, so prices have increased on new and used equipment.^[32]. Likewise, insurance costs have risen, adding to the firm's expenses. Universal is open to market risk since its debt and many of its investments depend on floating market rates.^[33]. Shipping volume has significantly decreased due to the economic recession as demand for goods decreases. Exports have declined from May 2008 to May 2009, the period of time spanning the Financial Crisis of 2008. Most of the products Universal ships have seen a decline on a year-to-year basis: industrial supplies and materials exports have decreased by $11.0 billion; automotive vehicles, parts, and engines by $4.8 billion, foods, feeds, and beverages by $1.6 billion and consumer goods by $1.4 billion.^[34] The factors that impact freight volume are the Consumer Price Index, employment statistics, and manufacturing production. The yearly change in truck tonnage from 2008 to 2007 was -1.5%. The month-on-month change in January 2008 trucking tonnage increased by only 2.4%.^[35] The Bureau of Transportation Services estimates that From April to March of 2009 alone, the Freight Transportation Services Index fell 1.2%. From September 2008 to May 2009, statistics show that it has decreased by 10%. The index measures changes in freight services from month to month; it's also seasonally adjusted, so for example, increased shipping during holiday seasons is factored in, so an accurate month-to-month measure can be given. The TSI hasn't been so low since 2002. ^[36] Experts at FleetOwner Associates do not predict a recovery in freight volumes until first quarter of 2010.^[37] Business cycles have a strong impact on the trucking sector in general.^[38] Troubles in the car manufacturing sector in the time period of the 2008 Financial Crisis had a negative effect on the shipping business, since these are some of the largest clients for Universal.^[39] Overall, the trucking sector is highly sensitive to U.S. economic cycles. In the last recession back in 2001, the economy overall improved first, and only after about a year did the trucking industry see a recovery.

Competition and Market Share

In the trucking industry, prices charged for shipping services are influenced and determined by fuel rates, equipment availability - how many trucks are on hand for services, the overall economic climate, as well as competitors' prices.^[40] There are about a quarter of a million trucks that have excess capacity to deliver freight, which means increased competition and smaller profit margins.^[41] As of December 2008, there are many competitors in this industry: 110,000 for-hire carriers and approximately 350,000 independent owner-operators. Universal's key competitors are:

• J.B. Hunt Transport Services - J.B. Hunt is one of the ten largest freight shippers on the continent. It also services the automotive industry like Universal.
• Landstar System - With over $2.5 billion dollars of annual revenues, Landstar has a similar non-asset backed business model in the trucking segment.
• Arkansas Best Corporation - Arkansas Best is also a commodity shipping company with its largest freight subsidiary earning over 90% of its revenues. However, it has an asset-intensive business model.
• Old Dominion Freight Line - Old Dominion has a wide network of delivery and shipping centers and has widespread coverage over 39 states.
• Marten Transport Ltd. - Marten Transport provides freight and truckload services to general commodity companies. Its tractors and trailers, like Universal's, are also supplied by independent contractors.
• Hub Group Inc. - The Hub Group is a freight transportation company; it provides many services including shipping optimization, carrier management and long-haul services.
• Covenant Transportation Group - Covenant Transportation provides truckload transportation services in the same geographic region as Universal, mainly in United States and Canada. Their customers include various retailers and manufacturers, other transportation firms and truckload companies.

^[42]

Comparing Truckload and Less-than-Truckload Companies^[43]

^[44]

References

1. ↑ Universal Truckload Services (UACL) Form 10-K, Fiscal year 2008, "Overview", p. 3
2. ↑ "Universal Truckload Services, Inc.." Morgan Keegan & Co., Inc. (April 24, 2009): pg. 2.
3. ↑ ["Universal Truckload Services Inc - EBITDA for Universal Truckload Services Reaches Two Year Low ." Market News Publishing, Inc. 15 May 2009, sec. Stock Diagnostics: 1.]
4. ↑ Associated Press. "Anticipated demand helps oil to 8-month high - Oil & energy- msnbc.com." MSNBC.com. 11 June 2009 <http://www.msnbc.msn.com/id/12400801/>.
5. ↑ [Universal Truckload Services 2008 10K, Fiscal year 2008, Item 1, p. 4]
6. ↑ [Universal Truckload Services 2008 10K, Fiscal year 2008, Item 1, p. 4]
7. ↑ Universal Truckload Services (UACL) Form 10-Q, First quarter 2009, "MD&A", p. 15
8. ↑ [Universal Truckload Services 2008 10K, Fiscal year 2008, Item 1, p. 4]
9. ↑ [Universal Truckload Services 2008 10K, Fiscal year 2008, Item 7, p. 24]
10. ↑ [Universal Truckload Services 2008 10K, Fiscal year 2008, Item 7, p. 25]
11. ↑ [Universal Truckload Services 2008 10K, Fiscal year 2008, Item 8, p. 38]
12. ↑ [Universal Truckload Services 2008 10K, Fiscal year 2008, Item 1, p. 10]
13. ↑ [Universal Truckload Services 2008 10K, Fiscal year 2008, Item 1, p. 3]
14. ↑ [Universal Truckload Services 2008 10K, Fiscal year 2008, Item 7, p. 25]
15. ↑ [Universal Truckload Services 2008 10K, Fiscal year 2008, Item 1, p. 8]
16. ↑ [Universal Truckload Services 2008 10K, Fiscal year 2008, Item 1, p. 3]
17. ↑ [Universal Truckload Services 2008 10K, Fiscal year 2008, Item 1, p. 7]
18. ↑ [Universal Truckload Services 2008 10K, Fiscal year 2008, Item 1, p. 12]
19. ↑ [Universal Truckload Services 2008 10K, Fiscal year 2008, Item 1, p. 11]
20. ↑ [Universal Truckload Services 2008 10K, Fiscal year 2008, Item 1, p. 6]
21. ↑ Universal Truckload Services (UACL) Form 10-K, Fiscal year 2008, p. 6
22. ↑ [Universal Truckload Services 2008 10K, Fiscal year 2008, Item 1, p. 6]
23. ↑ ["American Trucking Associations." American Trucking Associations. 25 May 2009 <http://www.truckline.com/Pages/Home.aspx>.]
24. ↑ Associated Press. "Anticipated demand helps oil to 8-month high - Oil & energy- msnbc.com." MSNBC.com. 11 June 2009 <http://www.msnbc.msn.com/id/12400801/>.
25. ↑ "Gasoline and Diesel Fuel Update." Energy Information Administration. 23 June 2009 <http://tonto.eia.doe.gov/oog/info/gdu/gasdiesel.asp>.
26. ↑ [Universal Truckload Services 2008 10K, Fiscal year 2008, Item 7A, p. 35]
27. ↑ [Universal Truckload Services 2008 10K, Fiscal year 2008, Item 1, p. 11]
28. ↑ [Universal Truckload Services 2008 10K, Fiscal year 2008, Item 1, p. 4]
29. ↑ Global Insight, Inc.. "U.S. Truck Driver Shortages: Analysis and Forecasts." American Trucking Association. 12 June 2009 <www.truckline.com/StateIndustry/Documents/ATADriverShortageStudy05.pdf>.
30. ↑ "Monthly Truck Tonnage Report." American Trucking Association. 12 June 2009 <www.truckline.com/StateIndustry/Documents/Sample%20Monthly%20Truck%20Tonnage%20
31. ↑ Global Insight, Inc.. "U.S. Truck Driver Shortages: Analysis and Forecasts." American Trucking Association. 12 June 2009 <www.truckline.com/StateIndustry/Documents/ATADriverShortageStudy05.pdf>.
32. ↑ [Universal Truckload Services 2008 10K, Fiscal year 2008, Item 7A, p. 35]
33. ↑ [Universal Truckload Services 2008 10K, Fiscal year 2008, Item 7A, p. 35]
34. ↑ "News Release: U.S. International Trade in Goods and Services." U.S. Bureau of Economic Analysis (BEA) - bea.gov Home Page. 11 July 2009 <http://www.bea.gov/newsreleases/international/trade/tradnewsrelease.htm>.
35. ↑ "Monthly Truck Tonnage Report." American Trucking Association. 12 June 2009<www.truckline.com/StateIndustry/Documents/Sample%20Monthly%20Truck%20Tonnage%20
36. ↑ "BTS | Freight Transportation Services Index (TSI): Freight Index Fell 1.2 Percent in April from March." RITA | Bureau of Transportation Statistics (BTS). 13 June 2009 <http://www.bts.gov/press_releases/2009/bts028_09/html/bts028_09.html>.
37. ↑ Sean, Kilcarr. "Trucking freight volume down until 2010, FTR Associates says | Fleet Owner." Fleet Owner Magazine | Covering the Commercial Trucking Industry, Fleet Management, Equipment, Technology and Other Industry Trends. 11 June 2009 <http://fleetowner.com/management/freight-volume-projection-trucking-ftr-0602/?smte=wr>.
38. ↑ ["Universal Truckload Services." Columbine Capital Services, Inc. 24.3 (May 8, 2009): pg.1. Thomson Research.]
39. ↑ "Universal Truckload Services, Inc.." Morgan Keegan & Co., Inc. (April 24, 2009): pg. 2.
40. ↑ [Universal Truckload Services 2008 10K, Fiscal year 2008, Item 7, p. 25]
41. ↑ Sean, Kilcarr. "Trucking freight volume down until 2010, FTR Associates says | Fleet Owner." Fleet Owner Magazine | Covering the Commercial Trucking Industry, Fleet Management, Equipment, Technology and Other Industry Trends. 11 June 2009 <http://fleetowner.com/management/freight-volume-projection-trucking-ftr-0602/?smte=wr>.
42. ↑ "Universal Truckload Services." Columbine Capital Services, Inc. 24.3 (May 8, 2009): pg.2. Thomson Research.
43. ↑ Hoovers
44. ↑ J.B. Hunt Transport Services (JBHT)

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