Schneider National, Inc.

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

Schneider National, Inc. is a leading provider of transportation and logistics services, primarily in North America, focusing on truckload, intermodal, and logistics brokerage solutions.

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: Schneider National, Inc. (SNDR) is a transportation and logistics company primarily focused on truckload services in North America. They offer truckload services in varying forms such as one-way, dedicated, and specialized freight, as well as intermodal solutions. This means that, rather than using their own trucks, they combine rail and truck transport, and logistics brokerage solutions which means they help other companies find transportation services.

  • Revenue Distribution: SNDR’s revenues are primarily derived from its truckload segment which is around 68% of total revenue as of 2022 (based on the 10K), with intermodal and logistics brokerage making up the remaining portion.

  • Trends in the Industry: The transportation industry is very dependent on macro economic conditions, and is therefore very volatile. Supply chain issues, inflation, interest rates and consumer demand directly impact the revenue and margins of companies in this space. Due to fuel prices and the availability of equipment and drivers the industry is facing a big period of uncertainty. In particular there is a shortage of qualified drivers, which has created high wage inflation for these type of jobs. The industry is also undergoing a tech transformation with automation and digitization being heavily adopted by players in the space.

  • Margins: Looking at financial statements, Schneider’s operating margins are relatively low, often staying around 9 to 10%, even during prosperous times. This reflects that the transportation and logistics industry is very competitive and very dependent on macro economic factors, like fuel and equipment price fluctuations.

  • Competitive Landscape: The transportation industry is competitive and fragmented and requires high levels of capital. Trucking is very easy to enter due to low startup barriers. The competition comes from large national companies, medium sized regional players and smaller companies, each with a different cost structure and strategy. Due to industry dynamics there is a constant push for consolidation, efficiency and technology adoption to reduce costs and increase capacity.

What Makes Schneider Different?: While Schneider operates in a commoditized space, their scale and broad service offerings helps it to better serve its clients, and it utilizes technology and data analytics to help customers efficiently manage transportation and logistics. They are a veteran firm with almost 100 years of operating history and have well-known reputation, as well as a large scale that allows it to better adapt to different macro and competitive conditions. Finally, they have invested a considerable sum to move their fleet toward cleaner electric power.

Financial Analysis:

  • Revenues: Schneider’s revenues are subject to cyclical forces and macro economic environment. Although they have tried to diversify into different modes of transportation and logistics, their revenues have followed similar patterns. The company grew to $6.62 Billion in total revenues in 2022, a massive jump of 17.5% from 2021. The first three quarters of 2023 have seen revenues of $4.88 billion with a 4.9% year-over-year decline in growth. This shows the cyclical nature of the industry and it seems like growth has slowed down since 2022, partially due to slowing economic growth in North America.
  • Profitability: As mentioned earlier, profit margins in this business are slim. Net profit margin has historically been in the single digits even in prosperous times. Operating margin has been 8.6% in the three months ended 30th of September 2022 and in 2023 the 9-month operating margin is 8.5%. Net income has varied substantially along with revenues, from -$88 Million to $434 Million within a couple of years.
  • Cash Flow: In the first 3 quarters of 2023, they generated positive cash flows from operating activities to $529 million. In their financing activities, the company has repurchased around $191 million of stock while paying $87 million in dividends. The company’s net cash flow is a very volatile figure dependent on acquisitions, capital expenditures and operations of the business and it should not be relied as a single indicator for investment.
  • Capital Structure: Schneider has a substantial debt component with a debt to equity of 77% and debt to capital of about 43% as of Q3 2023. They also have access to more than $1 billion of undrawn borrowing credit. They should be able to comfortably operate with current capital structure and can pursue new growth opportunities if required.
  • Shareholder Returns: The company has a low, but rising dividend yield at around 1.8%. They have bought back around $191 million of stock in the first 3 quarters of 2023 and seem to be focused on returning capital to their shareholders.

Moat Rating: 2 / 5

Justification: While Schneider has some positive aspects that suggest it is somewhat better than other companies in the industry, it still fails to establish a wider moat. The network effect for a freight broker business, even with data analytic capabilities is very easy to replicate by competitors. The supply chain has high switching costs due to tight integration to clients businesses but since these are all individual agreements, they do not translate into a scalable competitive advantage. The cost advantages are weak because of the labor and fuel shortages, that will be overcome over time as the economic situation stabilizes. The only moat they somewhat possess is their size and the wide range of service offerings which makes them well positioned for large scale customers and also helps them to create efficiencies which reduces costs. Based on this, the company has a narrow moat.

Risks to the Moat and Business Resilience: * Economic Downturn: Since transportation and logistics is an essential part of the economy, they are heavily affected by economic downturn and reduction in consumer demand. Reduced demand leads to lower revenue and profitability. * Increased Fuel Costs: High fuel costs directly impact the company’s revenue and profitability. As a large player in the sector, they can pass on most fuel costs, but to a point. Beyond that, their profits will get hurt and they have to compete with smaller players with lower capital costs that can offer reduced prices and still profit. * Driver Shortage: The lack of qualified drivers pushes wages up and makes retaining talent costly. It also hurts the company’s ability to fulfill customer demands and can lead to revenue losses. * Disruption by Technology: The transportation industry is seeing technological disruptions and new business models that may cause incumbents to loose market share. Although they are trying to use technology to gain a competitive edge, disruption could potentially bypass their business if someone has an even more efficient tech-based solution. This is less probable, but still a risk that can’t be ignored. * Operational Issues: As discussed in the analysis section, the company has very complex operations and several issues that often involve bad accounting decisions. A series of poor business decisions and inefficient operations, all at a large scale, can greatly damage the company’s financial well-being. * Acquisition Risk: As many mature and slowly growing companies, Schneider tries to achieve growth through acquisitions. However, these acquisitions carry significant integration risk that could cost the company resources as well as not provide the benefits they were supposed to achieve. * Customer Concentration: While they claim to have a wide customer base, a significant amount of their revenue comes from their top customers which implies that they have significant customer concentration. Loss of any key customer could substantially affect the company’s revenues.

Business Understandability: 2 / 5

Justification: Even though the company does not have a complex business model, there are a lot of intricacies and details that will be hard for any normal investor to understand. This makes analyzing the company in-depth a very difficult job. Also, the financial statements have lots of adjustments and accounting jargon that a common investor might have a hard time understanding. There are a lot of things happening behind the surface as to how they generate revenues, which makes it less understandable.

Balance Sheet Health: 4 / 5

Justification: The company has a decent balance sheet with a comfortable leverage ratio and access to enough credit. Although they have high debt, their cash flow from operations is positive. Most of their liabilities are predictable and manageable. Their cash and marketable securities and equity can cover all their current liabilities. All this points towards a good balance sheet and overall a good financial health. They do need to improve on profitability in the long run, to lower risks associated with the business.

Recent Problems & Concerns: In the Q3 2023 earnings call they mentioned softness in market conditions due to inventory destocking, but they also expressed optimism about improvement in the next quarter. They have reduced capital expenditures and are trying to gain efficiencies through automation and technology adoption. Also their debt levels are currently not a concern because of access to a large line of credit. They have also had a very substantial increase in fuel expense as compared to the last few years. While they can try to partially pass these costs, the company may suffer in case they cannot do it effectively. They have been aggressively pushing intermodal transport and logistics and these segments have shown excellent growth compared to the more traditional trucking segment, so it seems that they will continue to pursue diversification and growth in these segments. Finally, there was a sharp decrease in the growth rates since the end of 2022 which needs to be carefully looked into, as if this continues, it may erode the business.