Lineage, Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Lineage, Inc. is a global, temperature-controlled logistics company focusing on warehousing and transportation, that is experiencing rapid growth in revenues and earnings in a relatively fragmented industry that has seen rising demand since the advent of online retail.

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

Lineage, Inc. operates within the temperature-controlled logistics industry, a sector that is seeing an increase in demand due to the growing e-commerce grocery and food sales. The company provides warehousing and transportation services to customers and is aggressively expanding, as evidenced by its rapid growth. They also offer value-added services including case picking, kitting, and labeling. Lineage’s approach is to offer a national network of distribution and logistics solutions, which gives it an edge over local or regional warehouses.

Revenue Distribution

Lineage operates in two reportable segments which include Global Warehousing and Global Integrated Solutions.

  • Global Warehousing: This segment includes the operations of facilities for the storage and handling of customers’ products. It generates revenue from the storage of goods as well as a variety of value-added services, like case picking, kitting, and labeling.
  • Global Integrated Solutions: This segment focuses on providing integrated logistics solutions to customers, offering a variety of value-added services to support supply chain needs. It generates revenue through transportation and other logistics services.

The latest report shows that their warehousing services are the main contributor, followed by global integrated solutions. They are present all over the world with North America being the highest contributor of revenue, followed by Europe and then other foreign regions.

  • Growth in the temperature-controlled market: Due to the rapidly increasing e-commerce presence, there has been a huge demand for warehousing, storage, and supply chain for fresh products, directly increasing demand for companies like Lineage.
  • Consolidation: Given how fragmented the industry is right now, it is expected to see more consolidation in the sector. The big players are looking to expand and consolidate, as having more reach is becoming increasingly more important.
  • Technological adoption: Technology will further reshape the sector by giving way to new possibilities for inventory tracking, customer visibility, and transportation.

Margins

Lineage’s gross profit margin has stayed consistent, ranging from 38.3 to 41.5% during the 2021-2024 period. The adjusted operating margin has fluctuated more over time, from 11.6% in 2021 to a peak of 15.8% in 2022 and then a slight decline to 14.4% in 2023. The most recent quarter has shown very impressive results with net income of $133 million with a net income margin of 10.1% while the nine month period revenue growth was 16.6%. This demonstrates improvements in overall profitability, but it also shows a good amount of fluctuation in margins.

  • The CFO, Mr. Greg Lehmkuhl, mentioned that they are very focused on controlling operating expenses and improving operational leverage. In their most recent earning calls they emphasized using more automation, improved route densities, and utilizing existing resources more efficiently to improve profits.

Competitive Landscape

  • The temperature-controlled warehousing and logistics sector is quite fragmented with many local and regional operators. Lineage aims to use its national and global scale to outcompete these smaller competitors.
  • Lineage faces some direct competition from companies that specialize in either only warehousing or only transport, but few have combined the two into a single solution.
  • The biggest concern is the growing consolidation of larger players, some with very long histories and very strong relationships.

What makes Lineage Different?

  • Scale and Reach: They are the largest company, operating in more than 20 countries and with more than 400 facilities.
  • Integrated Solutions: They offer solutions for both warehousing and transportation.
  • Technological focus: They implement data-driven and automated systems.
  • Customer Relations: They build long-term relationships with their clients.
  • Sustainability: They are focusing on green operations and reducing wastage.
  • Strong Growth: They are one of the fastest-growing companies in the logistics space.

Moat: 2 / 5

Given the lack of strong brand identity and very low switching costs within their area, we will rate the business as having a narrow moat.

Here’s why:

  • Limited Pricing Power: Customers in their industry, for the most part, care about price above all else, meaning that price hikes to increase profitability will cause an exodus of clients. Therefore, a durable competitive advantage based on price is tough to have.
  • Some Barriers to Entry: While some barriers exist (such as the need for complex technology, regulatory approvals, or large distribution networks), these barriers are still surmountable for larger companies with enough resources and cash. Many of the advantages are not hard to imitate, which results in a high rate of competition and lower pricing power.
  • Potential Scale Advantages: They do have a massive scale and network advantage, which gives them higher density routes and an easier time finding customers with their distribution network. However, that is only a small moat by itself, as it is only part of a larger logistics ecosystem.
  • Potential Network Effects: While they have a lot of connections between suppliers and buyers, there isn’t really a real-network effect at play. If the customer is looking for low prices, then they would go with whoever can supply it for the lowest price.

Legitimate Risks that Could Harm the Moat and the Business Resilience

  • Rapid technological changes: Although the company is currently focusing on incorporating technology, advances from competitors may quickly outpace Lineage’s systems and give them a temporary cost advantage.
  • Industry consolidation: Growing consolidations of large players with better financial stability may reduce the company’s market share.
  • Intense competition: Existing competitors or new entrants could try to out-price or out-innovate the company’s offerings. The industry is extremely volatile.
  • Contract and Customer Risks: Given how large the contracts are, a company may decide to go a different way at renewal time, which can lead to lower sales.
  • Reliance on large customers: Some smaller firms or even large firms may decide to set up their own dedicated facilities and cut out intermediaries.
  • Debt: Despite having good cash flow, a lot of acquisitions could have the potential to weaken the balance sheet.
  • Disruption: A potential new technology could make their business obsolete.

Financials

  • Revenues and Growth: Lineage is rapidly expanding, especially internationally. Their revenues have grown from $3.2B in 2021 to $4.1B in 2022, and to $4.7B in 2023. Furthermore, the latest quarter shows a 16.6% increase YoY. The growth was mostly attributed to volume growth, pricing increases, and new acquisitions.
  • Earnings: Operating profitability has improved over the years, with the operating income for 2023 at $670 million, compared to $175 million in 2021. In the latest quarter, the net income totaled $133 million.
  • Debt: Long-term debt has risen to $11.5B, primarily due to various acquisitions. While the debt levels are large, cash and equivalents have climbed to $1.7B, giving them plenty of liquidity to handle their debt. Also, the net-debt-to-EBITDA ratio has come down over the years to about 5.8x, as the business is growing, which indicates their profits are improving faster than debt.
  • Leverage: While a considerable amount of their capital is acquired using debt, the firm’s equity ratio has improved over time. The higher proportion of equity is a better cushion and shows better financial solvency.

Understandability: 3 / 5

The company’s business is easy to understand in theory but is difficult in practice. While the main objective is easy to grasp, evaluating the long-term sustainable profitability of a logistics business requires an intense knowledge of the industry, including its competitive landscape, and various macroeconomic factors.

Balance Sheet Health: 4 / 5

While their debt is high because they have used debt as their method of funding acquisitions and they are highly leveraged, the company seems able to generate more than enough free cash flow to cover their liabilities while keeping up with growth, making their balance sheet relatively healthy. If the company was not able to grow, it would have been a different picture.

Disclaimer: This analysis is not investment advice, and is provided for informational purposes only. It is important to conduct your own due diligence and consult with a qualified financial advisor before making any investment decisions. Furthermore, the analysis is based on the information provided, which is publicly available and not always complete.