ARCBEST CORPORATION

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

ArcBest Corporation is a logistics company that provides a range of transportation and supply chain solutions with a focus on less-than-truckload (LTL) freight services. It also offers broader logistics services, including expedited shipping, warehousing, and truckload services.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

ArcBest operates in a highly competitive and complex industry with intense price competition, making establishing a wide moat challenging. While it possesses certain advantages, those advantages are not always sustainable or difficult to replicate over time.

Moat Analysis: 3 / 5

  • Strength:
  • ArcBest benefits from its long-standing history and scale in the transportation and logistics industry. This allows it to maintain a large, established network that is hard to replicate easily. The brand reputation has a good track record, and their service network has improved from investments in technology.
  • ArcBest is a well-established and recognized brand within the less-than-truckload (LTL) shipping space, which builds a level of customer trust.
    • The company offers bundled solutions through multiple service lines and can leverage its broad offering to capture a wide range of customers.
  • Weakness:
  • While it has made investments in technology, its business is still subject to the whims of market conditions and is easily affected by price competition, meaning no large pricing advantage. Their operations also require an extensive supply chain and many labor-intensive aspects.

  • The logistics industry has low barriers to entry, and they are easily replicated, making it difficult for ArcBest to develop a truly unique approach.

  • Overall Moat Assessment:

    • The company has shown some ability to fend off competition and generate consistent profits but does not hold a truly formidable moat. This is because their competitive advantages are easily and regularly challenged and it is not clear how they will continue generating profits in the long run. They need to develop a greater degree of differentiation and create higher switching costs for the users for a moat to have a stronger rating.

Risks to the Moat and Business Resilience:

  • Economic Downturn: A slowdown in the overall economy could impact shipping volumes and demand for ArcBest’s services, which would hurt its revenue.
  • Competitive Pressure: The logistics industry is highly competitive with numerous players. Any intense price competition could lead to lower margins for ArcBest.
  • Labor and Fuel Costs: Labor and fuel costs are major expense categories for ArcBest. Increases in either can make it harder for the company to maintain margins.
  • The company is subject to many labor agreements, which creates inflexibility.
  • Technological Changes: New technologies could disrupt the logistics industry. Companies that are slow to innovate could lose their competitive position.
  • The company needs to keep investing more in technology for its operations.
  • Acquisition Integration: Difficulty integrating acquisitions and ensuring these are profitable.
  • Customer Concentration: Losing a major customer or having too much reliance on any particular customer may adversely affect revenue.

  • Fuel Prices are a huge component of their costs.

  • Resilience:
    • It’s more resilient than traditional logistics companies, because they have different types of services so a diversified approach is a plus. However, the moat is not very strong so they are prone to have competition affect their returns, hence their resilience is limited.

Business Description and Analysis:

  • Revenue Distribution: ArcBest’s revenue is derived from its various operating segments, including:
    • Asset-Based Operations: Revenue from less-than-truckload (LTL) services through ABF Freight. This segment is mainly involved in moving relatively smaller shipment sizes directly from a customer’s origin point to its destination.
    • Asset-Light Operations: This division of ArcBest is responsible for everything other than LTL shipping. This includes truckload transportation through a large network of third-party carriers, expedited shipping solutions, and final-mile and international shipping.
  • The asset-light operation is the larger part of their revenue stream now. It also serves as a buffer during downturns in their traditional LTL freight business.
  • Industry Trends:
    • E-commerce growth continues to push demand for delivery services, especially in last-mile shipping.
    • More supply chain complexity leads to greater demand for more integrated logistics solutions.
    • Technology advances will result in better tracking, route optimization, and data usage.
  • Industry consolidation will make bigger competitors to emerge.
  • Margins:
    • The company’s operating margins have shown some variability.
    • Costs including fuel and labor fluctuations can have a big impact on margins.
    • Their 2022 revenue was $5.3 billion and gross margin was around 22%.
  • Competitive Landscape:
    • The logistics industry is fragmented with many competitors. This includes national and regional carriers, third-party logistics providers, and brokers.
    • The competition is mostly on price.
  • Companies such as J.B. Hunt, Schneider, and XPO Logistics represent just some of their formidable competitors.
  • What Makes ArcBest Different?
    • ArcBest has an integrated approach providing both LTL and non-asset based services.
    • They have a tech-oriented approach to provide real-time tracking.
    • Their strong position within the LTL market sets them apart and their diversified logistics operations provides a safety net to the traditional operations.

Financial Analysis:

  • Income Statement:
    • The company’s revenue growth has been inconsistent.
    • The company’s operating margin has varied within a few percentage points over the past 5 years. It seems difficult for management to maintain consistency on their operating margins as a result of external factors.
    • Net income has shown big fluctuations through the years. They have had net losses in 2019, 2020 and 2022. They did have huge net incomes during periods of higher demand, such as in 2021.
    • Profitability and margins have suffered in the latest fiscal year due to increased costs and decreased demand for shipping. This includes declines in volume, pricing, and fuel surcharges, which hurt revenue and profits.
  • Balance Sheet:
    • Total assets have increased steadily, mostly through property, plant, and equipment.
    • Liabilities has also increased in the same periods, with long term debt increasing especially in 2022 and 2023.
    • As a result the debt to asset ratio has stayed around a consistent 30%, meaning higher financial leverage
    • Book value of equity per share has continued to rise steadily, as the company continues to grow its assets.
  • Cash Flow:
  • Operating cash flow has varied dramatically between the years, often times going into negative territory during periods with declines. This shows how cyclical and sensitive the cash flows of the company are.
  • The business is making consistent investments into the company, showing that it has the potential to grow in the long run. This can also indicate a long-term focus by the management.
  • Recent Problems:
  • The company has been struggling with the effects of high inflation and rising interest rates. These have resulted in declining earnings and reduced cash flows in the recent past. Management has noted that their strategies have been affected as they face a softening freight market, and that they are focusing on cost control measures and are looking to improve efficiencies in their operations. * They have also had high turnover in their asset-light division.
  • They have stated that the supply chain remains tight, with long delivery times for some of their customers. They also mentioned a softening freight market that was hurting profits.

Understandability: 3 / 5

  • The business model of ArcBest is not overly complicated.
  • The different components of their operations and how the logistics industry works are understandable to most investors.
  • Their financials, while complex, follow relatively standard accounting principles.
    • A company overview requires knowledge of multiple segments of the company, and understanding different accounting adjustments.

Balance Sheet Health: 4 / 5

  • Overall, ArcBest shows good balance sheet health with appropriate amounts of assets and manageable liabilities.
  • Debt levels increased in the latest year, but they have not increased so much to make the company severely overleveraged. Their debt-to-asset ratio of 30% is still well-within reasonable margins.
  • Most long-term assets are composed of real property and equipment. Therefore it is harder to create value by cutting those.
  • High tangible assets do create more stability, therefore the company has strong solvency.
  • The balance sheet is not extremely liquid with most of its assets concentrated in equipment and real estate.
    • However, their strong free cash flows have the potential to easily pay off debt.

The company is struggling with the effects of inflation and decreased volumes, but their diversified operating model and cost-cutting programs should help them with any future downturns. They also need to show they have the ability to better handle external factors and not lose profits during market downturns.