FWRD Stock Study (5-24-24)

Posted by Mark on June 28, 2024 at 06:57 | Last modified: May 24, 2024 16:40

I recently did a stock study on Forward Air Corp. (FWRD, $12.50). Previous studies are here, here, and here.

M* writes:

     > Forward Air Corp is an asset-light freight and logistics company. The
     > company’s operating segment includes Expedited Freight and Intermodal.
     > It generates maximum revenue from the Expedited Freight segment. The
     > expedited Freight segment operates a comprehensive national network to
     > provide expedited regional, inter-regional and national LTL (less-than-
     > truckload) services. It also offers customers local pick-up and
     > delivery and other services including final mile, truckload, shipment
     > consolidation and deconsolidation, warehousing, customs brokerage, and
     > other handling. The Company conducts business in the United States,
     > Canada, and Mexico.

The Rule of Five says for every five stocks purchased through the BI process, one can be expected to vastly underperform. This would be the one. It’s a true fallen angel.

From what I can tell, the medium-size company endured a tumultuous acquisition of Omni Logistics that closed in Jan 2024. The process involved C-suite conflict, resignation of the CEO, and a last-ditch effort to back out of the deal. A class-action lawsuit by shareholders is pending.

This First Cut is to determine whether the market has vastly overreacted to bad news—akin to the banks one year ago.

Articles to read for more background on the story may be found here, here, and here.

My previous studies can be referenced to see how the company performs pre-merger.

Due to depressed/negative earnings, FWRD no longer passes visual inspection and would surely score low on Quality. This would not be suitable as a core portfolio position. Any purchase of the stock is probably best regarded as gambling since we have no idea how it will perform as a combined entity under new management.

With regard to sales growth:

• YF projects YOY 80.7% and 8.6% growth for ’24 and ’25 (based on 4 analysts).
• Zacks projects YOY 58.5% and 8.4% for ’24 and ’25, respectively (3 analysts).
• Value Line projects 21.3% annualized growth from ’23-’28.
• CFRA projects 85.5% YOY and 43.6% per year for ’24 and ’23-’25, respectively (5).

Analysts project the acquisition to dramatically increase sales. Growth rate is uncertain, however. I am forecasting below the ’25 YOY estimates at 5.0% per year.

With regard to EPS growth:

• MarketWatch projects contraction of 5.4% YOY and 7.9% per year for ’25 and ’24-’26 (based on 7 analysts).
• Nasdaq.com projects growth of 293% YOY for ’25 (3 analysts).
• YF projects 408% YOY growth for ’25 (4) and 5-year annualized growth of 13.2%.
• Zacks projects 293% YOY growth for ’25 (3).
• Value Line projects annualized contraction of 6.0% from ’23-’28 and 41.4% annualized growth from ’24-’28.
• CFRA projects contraction of 171% YOY and 20.7% per year for ’24 and ’23-’25, respectively (4).

Consensus is that 2024 will be a down year but only some are predicting actual loss. Percentage changes from negative numbers make no sense. Value Line and YF are the two sources that could be giving credible estimates. I’m skeptical of latter being unchanged from nine months ago. The former is wildly optimistic.

I am forecasting zero growth to be conservative. Initial value will be 2023 EPS of $1.64/share. Value Line predicts the acquisition to be dilutive for ’24 and accretive thereafter. If the company is well-run, then growth should resume by ’25.

My Forecast High P/E is 17.0. Over the past decade (74.0 outlier in ’23 excluded), high P/E ranges from 17.6 in ’22 to 56.4 in ’16 with a last-5-year mean of 28.1. The last-5-year-mean average P/E is 24.4 ($12.50 / $1.64 = 7.6 makes sense to me as current P/E despite website stating -5.5). I am forecasting below the range.

My Forecast Low P/E is 5.0. Over the past decade, low P/E ranges from 11.8 in ’22 to 40.0 in ’16 with a last-5-year mean of 20.8. I am forecasting below the entire range and less than the current P/E.

My Low Stock Price Forecast (LSPF) of $8.20 is default based on initial value given above. This is 34.4% less than the previous close and 26.8% less than the 52-week low.

Over the past decade, the lowest Payout Ratio (PR) is 13.4% in ’22 and the last-5-year mean is 24.2% (excluding ’23 outlier of 58.5%). The current dividend yield is an attractive 7.7%. With the company taking on substantial debt to make the acquisition, though, I will forecast well below the range by setting the dividend aside completely (i.e. zero).

These inputs land FWRD in the BUY zone with a U/D ratio of 3.1. Total Annualized Return (TAR) is 17.4%.

PAR (using Forecast Average—not High—P/E) is less than I seek for a medium-size company at 7.6%. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on only six studies in the past 90 days (my study and one other outlier excluded), averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and PR are 5.3%, 12.0%, 23.0, 16.4, and 28.5%, respectively. I am lower across the board. Value Line projects average annual P/E of 23.0 that is higher than MS (19.7) and much higher than mine (11.0).

MS high / low EPS are $5.12 / $2.94 versus my $1.64 / $1.64 (per share). I use zero growth and a minimally low EPS. Value Line’s high EPS of $3.00 is in the middle.

MS LSPF of $18.70 (INVALID on today’s date) implies a Forecast Low P/E of 6.4 versus the above-stated 22.0. MS LSPF is 61.2% less than the default $2.94/share * 16.4 = $48.22 (also INVALID). MS LSPF is 128% greater than mine, though. One of the six studies (from 5/23/24) has a LSPF of -$15.90 (stock prices cannot be negative). The other five studies were done at least three weeks ago with stock ~$22.

TAR (over 15.0% preferred) is less than MS 35.7%. I can’t rely too much on comparison with a tiny MS sample. Value Line clearly thinks the company will survive and I’ve discounted EPS growth to zero off an already-depressed base (down 77.0% YOY in ’23). I believe MOS is robust in the current study.

With regard to valuation, Relative Value [(current P/E) / 5-year-mean average P/E] is fire-sale cheap at 0.31.

Despite a robust MOS, my major concerns include:

• Increased debt forcing the company into bankruptcy (Value Line rates Financial Strength as “B+”, but I don’t know if that is current or frozen from pre-merger status).
• Dividend cut sending stock tumbling further.
• M* listing Uncertainty [level] as “extreme.”

FWRD is a BUY under $13/share. Were visual inspection successful, the BI TAR criterion would be satisfied right now. As a low-quality stock, however, I would limit any purchase to speculative capital only.