Daseke, Inc.

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 3/5

Daseke, Inc. is a North American transportation and logistics company specializing in flatbed, open deck, and specialized freight.

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.

Business Overview

Daseke operates in the fragmented specialized transportation market, focusing on hauling over-dimensional cargo such as heavy equipment, wind turbine components, and construction materials.

They do this through an asset-based business model. They use a combination of company-owned equipment and owner-operator capacity and try to create long-term relationships with the leading industrial players of the US. They have about 4500+ tractors and about 11,000+ trailers. Daseke focuses on the specialized freight sector, which is distinct from standard trucking due to the unique needs for oversized, heavy, and complex shipments. These types of hauls are usually not on fixed routes and have lower volume than van or reefer trucking. They also do a lot of logistics work (managing transportation services) via a brokerage. They have two segments: specialized solutions and industrial solutions. Specialized solutions account for the majority of their revenue and primarily focus on markets such as heavy manufacturing, construction, energy, and high-security cargo. Industrial solutions focus more on high-volume, repetitive transportation hauls in areas like aerospace and building materials.

Daseke’s strategy centers on achieving scale in a fragmented industry, and capturing growth from non-residential construction, heavy manufacturing, and the oil and gas sectors.

Revenue Distribution:

Daseke generates revenue from a mix of core freight services, brokerage operations (logistics), and other ancillary services.

Core Freight: This segment accounts for a large majority of their revenue, generated from hauling specialized and industrial freight. The revenues generated from this segment is directly impacted by the economic environment and the demand of companies in the sectors they target.
Brokerage: This segment represents their logistics platform and contributes significantly to revenues. They work as a broker between various parties in order to get cargo moved.
Other Services: Includes things like maintenance and fuel. They are smaller in size.

Industry Trends:

The specialized transportation market is characterized by the following:

Cyclicality: The demand for flatbed and specialized freight is tied to economic cycles, with downturns in manufacturing, construction, and oil & gas impacting volumes.
Fragmentation: Unlike the van and reefer freight market, the specialized freight market is highly fragmented, with numerous small and mid-sized players. This can lead to market inefficiencies.
Focus on Specialized Equipment: The specialized freight industry requires specialized equipment, such as heavy-haul trailers and cranes. As well as specific certifications that are not needed by other types of truckers, which can create barriers to entry.
Increasing Demand for Logistics: More and more companies are looking for a complete logistical solution. This includes not just hauling the cargo, but managing all the aspects of the transportation.
Technology Adoption: There has been an increase in the use of technology to improve trucking operations, and reduce costs. This has taken form in things like more advanced GPS and routing systems, and predictive models.
Capacity Shortages: There’s often a shortage of experienced truckers. This can lead to volatility in pricing of transportation services.
Environmental Regulations: The trucking industry as a whole is under scrutiny due to increasing focus on climate and environment. New regulations will cause uncertainty and impact operations.

Competitive Landscape

Daseke competes against a wide range of companies, including:

Smaller Local Players: Numerous local and regional trucking companies specializing in niche markets.
Larger Asset-Based Transportation Companies: Companies with established networks and high market coverage, but usually less experienced in niche trucking.
Brokers: Brokers who organize shipments with various transportation providers.
Private Fleets: Some companies that transport their own raw materials or finished goods have their own private fleets and might not require services from external transportation firms.

What Makes Daseke Different:

Scale in a Fragmented Market: Daseke’s strategy is to create a national scale business in a very fragmented sector. It is the biggest flatbed and specialized trucking company in the US.
Specialized Expertise: Daseke provides specialized hauling services that are difficult to replicate for its competitors. This includes hauling extremely large cargo and dealing with various different permits and logistics that other truckers don’t typically do.
Long-Term Customer Relationships: Daseke focuses on developing strong, long-term relationships with customers through reliable service, which should make the business sticky and less prone to competition.
Integrated Logistics: They offer not just hauling services, but also a wide portfolio of logistics solutions, such as project planning. This creates more value to the customer.

Moat Analysis: 2 / 5

Daseke’s economic moat is narrow and primarily stemming from some scale-based cost advantages and its specialization within the flatbed and specialized trucking industry.

Intangible Assets: Daseke has some intangible assets in the form of brand recognition, and proprietary technologies. They have some reputation with very large industrial companies as a dependable, high-quality transportation partner. But they don’t have any strong brand recognition as a consumer product.
Switching Costs: Switching costs are limited as freight rates are negotiated based on the current market. Most firms do a lot of price comparison, and they will be ready to switch if a competitor offers a cheaper quote.
Network Effect: There are some network effects because a larger network allows better routing, reduces empty loads, and creates better utilization of their trucking fleet. Their established network also makes it easier to service their biggest customers, which are all over the country. Even if they don’t have a physical presence close to their customer’s jobsite, they can still tap into the network and bring the required equipment and expertise.
Cost Advantages: Their massive distribution network allows them to maintain a lower cost profile than its competitors in many markets. In niche markets and difficult hauls, their expertise allows them to do this better, faster, and more reliably than competitors. They also benefit from their in-house maintenance capabilities.

While the company has some cost advantages and a reasonable scale, its returns on invested capital are not high. Further, companies with larger fleet and better routing/scheduling optimization systems can still compete against Daseke by offering cheaper prices, which can easily erode profitability. For that reason, Daseke’s moat can only be rated as a 2.

Legitimate Risks

Daseke’s moat and business face several risks:

Economic Cyclicality: As mentioned earlier, demand for specialized transportation services is correlated with the overall economy. A decline in manufacturing, construction, and energy could result in a significant decline in their revenues and profitability. This can be partially mitigated by diversification of their client base across all sectors, which is something they are currently focused on.
Competition: The fragmented nature of the market means that it’s relatively easy to enter, and therefore there are tons of smaller, and regional players that have lower overhead costs and are willing to offer cheaper services. Therefore, competition is likely to keep prices down and limit the company’s profits.
Fleet Management and Maintenance: Maintaining a large fleet of specialized equipment is costly. Higher fuel prices or increasing vehicle maintenance costs could impact profitability.
Technological Disruption: Autonomous driving and other tech advancements could radically change the way freight is moved in the US, giving a competitive advantage to companies that adapt quicker. However, it could also lead to better margins for Daseke because of improved efficiency.
Owner-Operator Management: The company relies on owner-operators and managing them effectively is complex and if the relationship is mishandled, it can severely impact the company.
M&A Risks: Daseke has mostly grown via acquisitions. There’s risk in integrating these different companies into one seamless business and some acquisitions will inevitably fail to live up to management’s expectations.
Regulatory Changes: New environmental or safety regulations may impact operating costs and require further capital expenditures.
Volatility in Freight Rates: The pricing environment is volatile, which can lead to huge fluctuations in revenue as customer’s needs shift and supply/demand dynamics change.

Resilience:

Daseke’s resilience stems from its long-term contracts with big players and a wide variety of different hauls, making their business not extremely reliant on one market sector.

Daseke’s management team is also relatively experienced in dealing with volatile economic conditions. The fact that they own specialized assets and equipment gives them some level of protection, as entry barriers are higher in the specialized freight market.

Financials

Daseke’s financials show a fluctuating performance:

Revenue Growth: From 2012 to 2020, Daseke saw a massive increase in revenues, mostly due to acquisitions. Over the past few years, they haven’t seen a consistent year-over-year revenue increase. Recent YoY revenues have been mostly flat, and in some years, even lower than the previous year. However, they seem to have stabilized the business.
Profitability: Despite its revenue growth, Daseke’s profitability has been historically low. Although they improved their margins in the recent few years, its profitability is very susceptible to changes in price. Their net profit margin is generally low, which can be expected with transportation and logistics companies.
ROIC: Despite their size and scale, Daseke’s return on invested capital is typically low (around 8% to 12%) with some fluctuations during volatile periods.
Debt: Daseke uses debt to fuel its acquisitions, which has lead to significant debt burdens in the past. In the past couple of years they have put more focus on paying down the debt, and in reducing operational expenses. This has led to a more sustainable financial outlook.
Cash Flows: Daseke has been free cash flow negative, but has recently improved these metrics, mostly due to their cost-cutting efforts. As the companies grow more organically, the free cash flows should become more consistent and larger.

Understandability: 2 / 5

Daseke’s business model is relatively straightforward. However, the complexities of the logistics industry, and its fragmented market, makes understanding its full business difficult.

The financial reporting is pretty complicated and detailed which makes assessing the company’s historical performance difficult. Further, because they use various metrics such as ROIC, Adjusted EBITDA, and Free Cash Flows, that the company calculates differently than most public companies, it adds another layer of difficulty. For that reason, I would rate it as a 2 for understandability.

Balance Sheet Health: 3 / 5

Daseke’s balance sheet is neither extremely healthy, nor extremely unhealthy, with a mix of good and bad.

Their high debt levels, mainly stemming from acquisitions, has been a concern in the past. But they are working to reduce it. Their long-term debt to equity ratio is still very high, but has been coming down over the past year. If they fail to improve or maintain their credit ratings, they could have problems raising capital in the future, and paying down their long-term debt. On the other hand, their cash position is slowly increasing, and their receivables have improved due to better sales and increased customer base.

Because of the mix of good and bad, and some uncertainty regarding long-term debt repayments, a rating of 3 is appropriate.

Recent Concerns and Management Outlook

Daseke has faced a number of challenges in the past few years:

Integration of Acquired Companies: Integration has been a struggle for Daseke, and they have noted that it will take time to fully integrate all acquired companies, to realize the full benefits of their acquisitions. Management has explicitly stated that they are not looking for any more large acquisitions in the near term. Instead, they will focus on integrating the companies they already own, and extracting value.
Poor Financial Performance: Their financial statements have been a source of concern for investors, due to highly volatile swings in revenues and profits. Management recognizes these concerns and has made it a point to streamline business operations, and reduce costs.
Debt Burden: High debt load that they accumulated through acquisitions, remains a risk and continues to concern investors. Management has been focused on de-leveraging and has shown progress.
Macroeconomic Uncertainty: They noted on a recent earnings call that they are uncertain about a slowing economy that may impact their revenues, going forward.

Management has emphasized its focus on enhancing profitability through operating efficiencies and disciplined capital allocation, rather than just top-line growth.

Management is focusing on building a more robust business by:

Increased Focus on Operational Efficiencies: streamlining processes, controlling costs, and ensuring better asset utilization. They mentioned many times that they are focusing on improving profitability via cost cutting.
Strategic Customer Relationships: Focus on long-term relationships with clients by offering comprehensive transportation and logistics solutions.
Organic Growth: While they have grown through acquisitions in the past, they now have a focus on growing organically rather than through M&A.

In conclusion, Daseke’s moat is not strong, but the company has a decent level of operational expertise and large distribution networks that could help create some long-term competitive advantages.