DSKE: Daseke reports 3rd quarter results; revenues above expectations; earnings disappoint; stock weakness overdone

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By Steven Ralston, CFA

NASDAQ:DSKE

READ THE FULL DSKE RESEARCH REPORT

SUMMARY OF RECENT EVENTS

‣ On November 6th, Daseke (NASDAQ:DSKE) announced financial results for the third quarter ending Sept. 30, 2018.
     ◦ Total revenues increased 99.5%, primarily due to recent acquisitions. Excluding the effect of the acquisitions, total revenues increased 17.4% as fuel surcharge, freight and brokerage revenues increased 49.2%, 11.1% and 30.7%, respectively, as the company benefited from a favorable rate environment and the implementation of operational improvements.
     ◦ Revenues by segment: Flatbed Solutions +112%, Specialized Solutions+92.3%.
     ◦ Rates per mile remained strong YOY.


View Exhibit I

     ◦ Adjusted EBITDA increased 95.9% to $52.849 million compared to $26,977 million in the third quarter of 2017.
     ◦ Weighted average shares outstanding increased 65.9% YOY from 39,359,523 to 65,289,320 shares
     ◦ Management’s 2018 financial guidance was maintained.
          ∙ Management expects total revenues to grow to approximately $1.55 billion.
          ∙ Adjusted EBITDA is anticipated to increase to approximately $170 million.

‣ In order to receive the maximum incentive in 2018, the company must achieve pro forma Adjusted EBITDA of $170 million and a share price of $14. Daseke already achieved the Adjusted EBITDA goal with a $185 million run rate (2Q 2018 Earnings Presentation, page 24).

‣ Daseke is benefiting from initiatives aimed at improving operational effectiveness.
     ◦ In May 2018, created Fleet Services Department to focus on helping improve economies of scale in the areas of purchasing, equipment optimization and maintenance to reduce operating expenses and improve operating margins.
          ∙ In addition to seeking best pricing for the purchase of tractors and trailers, Daseke Fleet Services has launched an effort to find the best price to sell equipment directly to the next owner rather than the traditional method of trading-in the equipment to dealers. During the third quarter of 2018 alone, $1.4 million worth of dispositions were effectuated. Also, approximately 100 equipment transfers between operating companies have been completed allowing for the more efficient use of existing equipment. In addition, over the next 12 months, $3.5 million of savings are expected to be captured through centralized purchasing of tires, diesel fuel, batteries, insurance, etc.
          ∙ The company has developed a tool, Daseke Link, to generate organic growth by capturing business through strong customer service. Not only will Daseke Link facilitate national account coordination, but also it enables customers to manage their transportation needs through an online portal.

‣ The flatbed trucking industry has benefited from the economic expansion as exemplified by rising flatbed rates through June 2018. However, in July, rates on the spot and contract markets started to ease after the strong advances in the first half of the year. Nevertheless, in October, flatbed rates were still up 6% (spot) to 9% (contract) YOY. Since the flatbed sector exhibits seasonal fluctuations due to the many seasonal markets it serves (construction, housing, etc.), the cyclical economic uptrend still appears to be intact.


View Exhibit II

‣ The company continues to build awareness by attending Analyst Conferences:
     ◦ Seaport Global Energy & Industrials Conference (August 29, 2018)
     ◦ Cowen 11th Annual Global Transportation Conference (September 6, 2018)
     ◦ Liolios 7th Annual Gateway Conference (September 6, 2018)
     ◦ 2018 Buckingham Industrials Conference (September 20, 2018)

‣ Daseke Inc. continues to be the major consolidator in the highly fragmented open deck trucking space.

Third Quarter 2018 Financial Results

On November 6, 2018, Daseke Inc. reported results for the third quarter ending September 30, 2018. The company reported total revenues of $461.6 million, which increased 99.5% from $231.3 million in the third quarter of 2017. The increase was primarily due to the seven acquisitions of scale during the preceding 12 months. Excluding the effect of the acquisitions, total revenues increased 17.4% as fuel surcharge, freight and brokerage revenues increased 49.2%, 11.1% and 30.7%, respectively, as the company benefited from a favorable rate environment and the implementation of operational improvements.

Revenue generated by the Flatbed Solutions segment increased 112% YOY to $181.5 million, primarily due to the acquisition of TSH & Co and Builders Transportation Company. Excluding the effect of the acquisition, revenue increased 18.0% (or $15.4 million), primarily due a 57.2% increase in fuel surcharges, a 12.7% increase in brokerage revenue and a 13.8% increase in freight revenue.

Revenue of the Specialized Solutions segment increased 92.3% YOY to $283.9 million, which was primarily due to nine acquisitions (Big Freight Systems, Schilli Transportation Services, The Steelman Companies, R&R Trucking, Roadmaster Group, Moore Freight Services, Belmont, Aveda and Kelsey Trail). Excluding the effect of recent acquisitions, revenue increased 19.7% (or $29.1 million), primarily due a 45.4% increase in fuel surcharges, a 12.8% increase in freight revenue and a 37.9% increase in brokerage revenue.

Salaries, wages and employee benefits expense increased 76.7% (or $49.8 million) to $114.8 million, primarily due to recent acquisitions. Excluding the effect of acquisitions, salaries, wages and employee benefits expense increased 12.9%, primarily due to increased employee and driver compensation, along with general inflation. Total fuel expense increased 57.4% to $38.9 million, primarily a result of higher fuel prices and as a result of recent acquisitions. Excluding the effect of acquisitions, fuel expense increased 17.5%. Operations and maintenance expense increased 46.6%. Purchased freight expense increased 177% to $170.5 million, primarily due to acquisitions. Excluding the effect of acquisitions, purchased freight expense increased 25.3%.

The company reported net income attributable to common stockholders of $0.942 million (or $0.01 per diluted share) versus a loss of $1.175 million (or $0.03 per diluted share) in the third quarter of 2017. Weighted average shares outstanding increased 65.9% from 39,359,523 to 65,289,320 shares.

Adjusted EBITDA increased 95.9% to $52.849 million compared to $26,977 million in the third quarter of 2017.

Management’s Guidance for 2018

Management conservatively maintained its guidance for 2018. Total revenues are anticipated to grow to approximately $1.55 billion versus the $846.3 million reported in 2017. Adjusted EBITDA is anticipated to increase to approximately $170 million compared to $91.9 million in 2017.

Initiatives to Improve Operational Effectiveness

On May 14, 2018, Daseke announced the formation of Daseke Fleet Services, a new department to help support the company’s growing scale by improving the economies of scale in the areas of purchasing, equipment optimization and maintenance. Based in Phoenix, the Fleet Services Department will focus on supporting Daseke’s operating companies through “lifecycle management of revenue equipment including maximization of national purchasing power, enhanced maintenance programs, strategic disposition of assets and high-level warranty management.” Three veteran executives (Brett Thompson, Erek Starnes and Gloria Pliler) were tapped to support the effort.

In addition to seeking best pricing for the purchase of tractors and trailers, Daseke Fleet Services has launched an effort to find the best price to sell equipment directly to the next owner rather than the traditional method of trading-in the equipment to dealers. During the third quarter of 2018 alone, $1.4 million worth of dispositions were effectuated. Also, approximately 100 equipment transfers between operating companies have been completed allowing for the more efficient use of existing equipment. In addition, over the next 12 months, $3.5 million of savings are expected to be captured through centralized purchasing of tires, diesel fuel, batteries, lubricants, insurance, etc.

Common Stock Offerings

On the third quarter conference call held on November 6, 2018, management stated that there is no intention to issue equity at the stock’s current depressed level. In addition, management anticipates not closing any acquisitions until the second quarter of 2019. In the meantime, management’s focus will be on improving operating results (particularly organic growth and integration) and improving the company’s debt structure, primarily through optimizing the interest expense incurred.

Indicated Target

Based on comparative analysis that utilizes the valuation metric of EV/EBITDA, a mid-second quartile industry multiple indicates a share price target of $10.15.

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