Kirby Corporation

Moat: 2.5/5

Understandability: 2/5

Balance Sheet Health: 4/5

Kirby Corporation is the largest tank barge operator in the United States, providing marine transportation services along inland waterways, the Gulf Coast, and beyond, as well as manufacturing and selling related equipment and providing repair 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.

Business Overview

Kirby Corporation (KEX) is primarily a marine transportation and distribution company. Here’s a breakdown of their operations:

  • Marine Transportation: This is KEX’s core business, encompassing a wide range of services:
  • Inland Waterway Transportation: Transporting liquid bulk cargoes, primarily along the Mississippi River System and the Gulf Intracoastal Waterway. Key cargoes include petrochemicals, refined petroleum products, black oil, and agricultural chemicals. * Coastal Transportation: Handling larger tank barges, mostly along the Gulf Coast and intracoastal waterways, transporting similar commodities. * Offshore Dry-Bulk Barge Transportation: Transporting mostly dry commodities such as aggregates and cement. * Marine Services: Providing repair, maintenance, and parts replacement for marine equipment.
  • Distribution and Services: While smaller, this segment provides:
    • Power Generation and Services: Manufacturing and maintaining power generation equipment, typically for high horsepower applications used by marine and inland applications as well as land based applications. The company is a leader in that space.
    • Industrial and Commercial Services: Providing specialty engineered and customized equipment for a range of industrial applications.

Industry Dynamics and Competitive Landscape

The transportation sector, especially inland marine transport, is characterized by a few key traits:

  • High Barriers to Entry: Significant capital requirements for acquiring barges, coupled with the need for specialized expertise, make it challenging for new players to quickly establish themselves. * Relationship-driven: In the oil and chemical business, long-standing relationships between shippers and transportation providers are quite common and difficult for new players to enter. * Cyclical Demand: The need for transportation services is often tied to the fluctuations in commodity markets. Hence it’s prone to economic cycles, like fuel prices, infrastructure and consumer demand. * Regulatory pressures: The industry is also highly regulated, focusing on safety, environmental protection, and vessel inspections.

KEX’s competitive landscape is varied:

  • Inland Marine Transportation: Dominated by a handful of established players, including Kirby, and a number of smaller players that typically operate in niche markets.
  • Coastal Transportation: This segment is smaller compared to inland operations, however it’s a fragmented market that’s also highly regulated.
  • Distribution and Services: This is a diverse market, but some key players are emerging because of increased investments in data and the need for more efficient energy usage.

What Makes Kirby Different?

Several factors set Kirby apart: * Scale and Scope: They have the largest fleet of inland tank barges and towboats in the U.S., resulting in significant cost advantages and network effects. * Established Relationships: Due to being present for years, they have a deep-rooted customer relationship that provides them with recurring business. * Integrated Operations: The company’s diverse capabilities in manufacturing, maintenance, and services provide a more streamlined business approach. * Focus on specialized markets: They focus in specialty transportation, which is highly difficult for new players to enter into.

Financials Analysis

Revenues: * KEX’s revenue is primarily generated by the Marine Transportation division. Distribution and Services is a lower component. * For the 9 months ending September 30, 2023, their Marine Transportation generated $1.6 billion in revenues, while Distribution and Services generated $1.24 billion.

  • In the last few quarters they have mentioned a high level of activity for marine transportation, and increasing demand for it’s services, particularly petrochemical and refined petroleum transportation. On the other hand Distribution and Services revenue is expected to be weaker due to supply chain issues that are likely to continue into the foreseeable future.

Margins:

  • Margins in the marine transport business have improved due to improved pricing and contract terms.
  • The company has cited that the marine transportation industry is tight with high barge utilization, which they have leveraged to gain better contract terms.
  • EBITDA margins for Marine Transportation in Q3 2023 were 28.6%, an increase from 24.6% in the previous year.
    • For Q3 2023, the margins for Distribution and Services have decreased to 10.7% from 12.6% a year ago.
  • The company has indicated that they are making efforts to improve margins in the distribution side by moving away from lower margin jobs and focusing on higher revenue and margin offerings. It seems this is a high priority for the management. * Overall, profitability is directly tied to how well the company’s fleet utilization rate and operating cost are under control.

Profitability:

  • Net earnings attributable to Kirby for the 9 months ending September 30, 2023, are $241 million compared to $162 million for the same time period last year.
  • The increase was primarily due to higher fuel prices and better contract terms in their marine transportation division, and strong activity in their power generation business.
  • Free Cash Flow is a big driver for the business, which has seen a great jump, for the 9 months ending 2023 FCF was $332.7 millions while for the same period last year it was -$105.6 millions.
  • The large jump in FCF is mostly attributed to higher operating cash flows, due to high demand for marine transportation as well as their distribution services.

Balance Sheet Health: 4/5

  • While the company has a significant debt load, it is more than well covered by their assets. They have a very high cash flow and liquidity which is always an advantage. This helps them in not getting into trouble if a recession happens or business declines.
  • Total Debt : $1,785 million, total cash and equivalents : $452 million * They also do not have too many short term obligations. In general, their cash flow is more than enough to comfortably pay their debt.
  • They hold a sizable amount of inventory, which is a risk in case of bad economic downturns, but this risk is mitigated by their strong operational results and high demand for their products and services. * The debt to assets ratio of the business is good at 0.3, which is within norms for this industry. * Overall they have a relatively healthy balance sheet that can handle large economic turbulences.

Recent Concerns/Controversies and Management Response:

  • Supply chain issues, due to the global economic condition, are hurting the manufacturing side of the business. Although they believe this is temporary and should get better by 2024. * The impact of high inflation on some inputs has been a problem, but their contracts have been structured to pass on the cost to consumers.
  • The management has also said that they are seeing increases in labor costs and a shortage of employees. They have implemented a 10% increase in employee wages to fight this shortage. * A new tax law was enacted in early 2023, as they are a marine company, they expect this to have a slight effect on their revenues. * The management has stated they expect to maintain the capital structure and dividend policy, keeping debt in check while providing returns to shareholders. They are also actively engaging in share repurchase.

Moat Assessment:

Kirby’s economic moat is rated at 2.5/5. The reasoning is as follows:

  • Intangible Assets: They possess a strong brand recognition and a solid reputation within the marine transportation industry. However, brands in transportation don’t have as big of an advantage as a consumer-oriented business.
  • Switching Costs: Their integration into the supply chain, and long-term relationships with customers are providing them with some switching cost benefit. However it’s not high as in tech or software based companies.
  • Network Economics: The network effect is present in its extensive transportation network. Each location increases the overall capacity of their transportation, and it is not easy for smaller competitors to compete against them.
  • Cost Advantages: Due to their size and scope, they are able to negotiate better deals with vendors and have cost advantages in manufacturing equipment. However this advantage could decline as better competitors emerge.

Their moat is considered a Narrow Moat, meaning the company possesses identifiable competitive advantages that are likely to help with strong profits in the near term. However, these advantages are not very strong or difficult to replicate, therefore a Wide Moat is not conferred.

Legitimate Risks to the Moat:

  • Disruption Risk:
    • Emerging electric and autonomous shipping technologies could pose a long-term threat. However this is not expected to affect them very soon due to the nature of their work.
    • Changes in government regulations may effect what and how products are transported.
  • Pricing Pressures:
    • Intense competition in certain markets could lead to lower pricing power.
    • Large clients could negotiate better terms for them based on their large usage.
  • Economic Fluctuations: Downturns in global economy or decline in the commodity market could affect demand for transportation and reduce profitability.
  • Operational Risk:
    • Unexpected mechanical failures or accidents to ships can have a major effect on profits.
    • Weather issues on their operating waters can cause a short term damage to their operations.
  • Financial Risk
    • Increasing interest rates can make the business less profitable, hence they are looking at fixed rate terms for many of their borrowings.
      • Debt is always a risk and a large liability that they have.

Resilience

Despite the risks:

  • Kirby’s diverse operations provide some protection against a single point of failure.
  • Their strong market position provides them a strong base to operate from.
  • Their management has a long track record of effectively reacting to challenges and adjusting to economic conditions.

Understandability

The business gets a understandability rating of 2 out of 5. This is because, while their operations are mostly straightforward, their multiple business segments, complex financial analysis and the impact of numerous laws and policies make it difficult to completely understand.

Conclusion

Kirby Corporation is a market leader in an industry with limited competition that is likely to see a positive demand in the future. It has a relatively healthy balance sheet and is making changes to improve its business, particularly to improve margins in their distribution business. It should provide steady returns, though with limited upside.

Disclaimer: This analysis is intended for informational purposes only. Investing in equities has risks associated with it, including the risk of losing capital. This should not be taken as investment advice.