Radiant Logistics Inc (NYSE: RLGT): A Bull Case Theory

A fleet of trucks on a highway transporting goods for the company.

Radiant Logistics Inc (NYSE American: RLGT), founded in 2005 by Bohn Crain, is a logistics company that provides technology-enabled transportation and value-added services in the United States, Canada and worldwide through wholly owned subsidiaries and partners. About 80% of RLGT's business is freight forwarding services, with the remainder consisting of value-added offerings such as consulting and truck brokerage, which are asset-light businesses with minimal capital expenditures. While value-added services account for 5% of RLGT's revenue, the company's core competency remains domestic air transportation of goods requiring special handling, such as transporting vaccines, aircraft parts or food to hotel chains. The company's expertise in domestic air transportation has insulated it from the wild price swings seen in other modes of transportation, particularly ocean freight, in the new decade. RLGT's share price has remained muted over the past seven years, despite earnings doubling mid-cycle and the balance sheet turning from $60 million in debt and preferred stock to $33 million in net cash. Here we summarized a bullish thesis from May, published by xds68 in Value Investors Club.

The thesis highlighted that RLGT's earnings may bottom out amid the ongoing recession in the freight sector and the stock remains a value buy. The share price may finally start to rise again as the effects of the recession in the freight sector continue to fade since the pandemic. RLGT is also capable of generating FCF of nearly $20 million at an enterprise value of over $200 million, with FCF expected to be over $30 million at mid-cycle. In addition, management could supplement earnings through share buybacks and acquisitions, possibly through network consolidation of franchise partners. The bullish thesis also highlighted that RLGT could become an acquisition target for a larger logistics company. Third-party logistics operations are based on trust and mutual understanding, and logistics partners are available 24/7 to arrange high-priority shipments. As a result, suppliers are price competitive and mostly take prices based on freight rates, resulting in significant revenue and profit cycles. At the same time, RLGT's profitability and cash generation potential improved in each cycle thanks to a strong balance sheet, as the currently low operating income is almost at the same level as before 2020.

In addition, RLGT's fulfillment is 50% through partners, most of whom have been in the business for decades and are nearing retirement. RLGT leverages its expertise in the logistics sector and complete visibility into operations and customers to generally acquire partners for single-digit multiples of EBITDA, which equates to a mid-double-digit ROI due to the low capital requirements post-acquisition. In addition, RLGT's partner acquisitions reduce “partner commission” costs while increasing SG&A expenses by a smaller amount. In the future, Radiant may consolidate several locations to further reduce operating costs. Elsewhere, there are signs of a reversal of the years-long slump in M&A, as RLGT completed three acquisitions last year and promoted partner agreements and internal company expansion. At this pace of acquisitions, the logistics company could improve inorganic growth for several years. There is also room for RLGT to supplement this potential growth opportunity with frequent non-partner acquisitions to expand its presence in different geographies and add more core competencies. The thesis values ​​the company's liquidity at $80 million, which would account for nearly $15 million in incremental EBITDA. This would require RLGT to grow FCF inorganically to $30 million, which would put the price of FCF at single digits at a cyclical low. Although RLGT is not currently exploring options for an acquisition, it could become a target of private equity or mid-sized freight companies such as ArcBest, Maersk and Expeditors. Despite several missteps, such as overpaying for trucking broker Wheels, expensive SAP EM integration and cyber incidents, management execution has been relatively stable over the past few years.

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RLGT is not on our list of the 31 most popular stocks among hedge funds. According to our database, 13 hedge fund portfolios held RLGT at the end of the first quarter, compared to 11 in the previous quarter. While we recognize RLGT's potential as an investment, we believe AI stocks promise higher returns and do so in a shorter time frame. If you are looking for an AI stock that is as promising as RLGT but trades at less than 5 times its earnings, read our report on the cheapest AI stock.

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Disclosure: This article was originally published on Insider Monkey.