SAIA Stock Forecast: Thriving in the Post-Yellow Corp. Era

Meiru ZhongThis SAIA Stock Forecast article was written by Meiru Zhong – Financial Analyst at I Know First.

Highlights

  • Yellow Corp., the third-largest player in the LTL industry, filed for bankruptcy in July 2023, presenting an opportunity for SAIA to expand its business and increase sales by tapping into its market share.
  • Saia’s Q3’23 financial report showed robust performance, marked by significant increases in LTL volume and tonnage.
  • Flat operating margins reflected rising expenses, particularly in salaries, wages, and employee benefits. The company increased transportation miles and workforce utilization to manage costs.
  • Saia demonstrated financial strength with a current ratio of 2.16 and debt-to-EBITDA ratio of 0.24, outperforming peers in the LTL industry. Its sufficient capital resources facilitated its strategic expansion and sustained operation.
  • DCF supports the $511 target stock price for Saia, Inc., 13% upside potential from the January 29, 2024 price of $450.15.
(Source: xrtlogistics.com)

Overview

Saia, Inc. (SAIA) is a leading transportation company focused on transporting less-than-truckload (LTL) shipments across 45 states. The company was founded by Louis Saia, Sr. in 1924 and is headquartered in Johns Creek, Georgia. By the third quarter of 2023, SAIA has 193 terminals, 13,000 non-union employees, and 27,000 tractors, trailers, and forklifts. The average LTL shipment weight was around 1,360 pounds and the average length of the haul was approximately 896 miles. With high-quality service, its cargo claims ratio was 0.58% in Q3 2023, with revenue of $775.1 million and operating income of $128.4 million.

Marching Amid Unprecedented Growth and Market Dynamics

We previously published our analysis for Saia, Inc., when the company’s share price was $214.35 on December 29, 2022. Based on the firm’s positive outlook and strategic planning at that time, we projected an intrinsic value of $250 in 2022 and a share price of $274 in 2023 (See report here). Share hovered around our estimated price target until July 2023 but things changed after that month. SAIA immediately surged and the upward trend continued, reaching $450.15 on January 29, 2024.

(Source: finance.yahoo)

The magical July event has supported the stock to break through historical records many times, and the upward trend does not seem to have stopped. What happened that month? Will the upward trend continue? Let’s take a time machine back to that moment. In the less-than-truckload (LTL) industry, the four largest carriers account for approximately 50% of total revenue share. Yellow Corp., the third largest company with about 10% of the LTL market, filed for bankruptcy and ceased operations on July 30, 2023, after nearly 100 years in business. Following the August 7 announcement “Yellow Corporation Files Voluntary Chapter 11 Petitions”, Yellow stated that it would sell its assets and real estate to obtain liquidity to support its business. Since LTL is a smaller and concentrated subset of the trucking industry, the exit of a third giant means all of its cargo and workers will be up for grabs, and other players in the LTL industry can leverage Yellow’s existing market share to expand business and significantly increase sales.

(Source: SAIA investor presentation third quarter 2023)

Robust LTL Growth and Strategic Pricing Measures

Saia’s Q3’23 financial report showed LTL volume and LTL tonnage per business day increased 12.2% and 6.7% respectively, resulting in a 3.1% rise in LTL yields. Revenue and EBITDA also trended upward, up 6.2% and 4.3% respectively compared to Q3 2022. Operating ratio (%) improved by 100 basis points, resulting in earnings per share of $0.78. The increase in sales was primarily due to higher shipments and tonnage resulting from the reallocation of freight following Yellow Corp.’s bankruptcy. It said that about 75% to 80% of the company’s operating revenue this year is attributed to specific customer price negotiations, and the remaining 20% to 25% of revenue is attributed to general price increases.

(Source: SAIA investor presentation third quarter 2023)

When talking about pricing and revenue management, two factors are worth noting: General Rate Increase (GRI) and fuel surcharge revenue. First, Saia implemented FRIs of 6.5% and 7.5% on January 30, 2023, and January 24, 2022, respectively, for customers representing approximately 20% to 25% of Saia’s operating revenue. On October 24, 2023, the company announced updated GRIs for LTL and truckload shipping, effective December 4, 2023, which are expected to average 7.5%. For remaining customers, the service will be subject to contract-specific charges and will not be affected by GRI. In addition to GRI, fuel surcharge revenue is also an important factor affecting revenue and is reset every week. Due to the decrease in the average cost of diesel during the period, the proportion of fuel surcharge revenue to total operating revenue dropped to 16.9% in the third quarter of 2023, compared with 20.5% in the same period last year.

Managing Operating Expenses with Rising Sales

The flat operating margin suggests that the company’s operating expenses have grown almost as fast as sales. In particular, salaries, wages, and employees’ benefits dominated, rising 15.9%, primarily due to higher employee hours and headcount as a result of higher overall sales in the third quarter of 2023. Company-wide wages have also increased by about 4.1% since July. Rather than purchasing additional transport, the company responded to growing truckloads by increasing purchased transportation miles, employee hours, and headcount, which effectively managed its cost structure and avoided significant future depreciation and amortization fees.

Sufficient Liquidity and Capital Resources

In the LTL industry, maintaining an appropriate debt ratio and having sufficient liquidity is crucial, especially after the bankruptcy of Yellow Corp. By the third quarter of 2023, the company’s current ratio was 2.16, indicating that Saia’s current assets could cover 2.16 times its current liabilities. This figure was better than 74.28% of the peers in the transportation industry. Additionally, the company’s debt to EBITDA was 0.24, which ranked better than 93.76% of the peers. Its EBITDA was 4 times its total debt. For both short-term and long-term debt, the company has a strong ability to meet its financial obligations.

SAIA’s capital resources include cash on hand, cash flow from operations (CFO), and funds available through the credit agreement, specifically cash and cash equivalents increased by 66.4%, and CFO up by 21.0% for the nine months ended Sept 2023. To sustain the improved performance in operating activities, Saia increased capital expenditures by $59.0 million to expand its footprint and increase market density. For example, the company announced the opening of the new LTL Freight terminal in Muncie, Indiana on May 22, 2023, and its newest terminal in Scarborough, Maine, south of Portland on October 30, 2023, which is the eighth terminal opened since January this year and the first terminal opened in the state in the U.S. Moreover, its net cash used in financing activities was reduced by 5.4 million due to decreased capital lease payments and fewer taxes withholding on equity-based compensation shares during the first nine months of 2023, compared with the same period in 2022.

(Source: SAIA Q3’ 2023)

SAIA’s Outlook: Opportunities and Challenges

The company faces both positive and challenging impacts on its business operations as the less-than-truckload market continues to absorb the reallocation of volumes caused by the discontinuation of operations by a large competitor. Profitability associated with increased sales volume is uncertain because increases in revenue may be offset by higher costs, such as increases in salaries, wages, and employee benefit expenses. While SAIA aims to improve customer service to support continued pricing, increasingly higher prices may scare away customers who may seek more economical and affordable services. 

If the company continues to expand market share by expanding geographical and terminal operations, operating leverage will be higher, meaning the company’s profits will become sensitive. As sales increase, the increase in profits will exceed the increase in revenue; but as sales reduce, the decline in profits will exceed the decline in revenue, triggering huge financial risks. Therefore, Saiyan’s future is full of opportunities and challenges.

DCF Estimates $511 SAIA Stock Forecast

The DCF analysis shows that SAIA’s intrinsic, 1-year, and 2-year stock price should be around $511, $563, and $606 respectively, which is 13%, 25%, and 35% upside potential from the price of $450.15 on Jan 29, 2024. It’s clear that SAIA stock price right now is undervalued and it’s a good time to buy in.

The DCF model is built based on the following assumptions:

  • The risk-free rate is 3.69% according to the average of the U.S. 10-year zero coupon bond. The risk premium of 4.5% comes from the average figure on the Finbox.
  • Beta 1.51 is calculated based on the slope of the change of monthly SAIA stock price and S&P500 price from 2019 to 2024.
  • The cost of debt is calculated as a weighted average interest expense of 3.7%, finance lease discount rate of 3.55%, and operating lease discount rate of 4.5%, concluding at 3.8%.
  • The tax rate is the effective tax rate derived from the 10-K, which is about 23%.
  • The terminal growth rate is assumed as the weighted average of the U.S. economy growth rate of 3%.

Due to the uncertainties in the macroeconomic environment, it is difficult to accurately predict the impact of relevant risk factors such as epidemics and wars, and the assumption may not be valid. A sensitivity matrix is created to show the impacts on SAIA’s intrinsic stock price by altering WACC (weighted average cost of capital) and terminal growth rate.

Conclusion

I take a buy-side on SAIA stock because the DCF target price is $511, a 13% upside difference from the current price. Following Yellow Corp.’s bankruptcy, Saia seized on the opportunity to expand its market share, as reflected in its strong Q3’23 financial report. The Company’s strategic expansion efforts, supported by adequate capital resources, position it well for continued success. Although there are many uncertainties, I believe SAIA can ride on the momentum and become the next giant in the LTL industry.

It is worth paying attention that the stock-picking AI of I Know First has a high signal on the one-year market trend forecasts, supporting my position for the SAIA stock forecast. The light green for the short-term forecasts is mildly bullish, while the darker green is a strong bullish signal for the one-year forecast.

Past Success with SAIA Stock Forecast

I Know First has been bullish on the SAIA stock forecast in the past. On January 30th, 2023 the I Know First algorithm issued a forecast for SAIA stock price and recommended SAIA as one of the best transportation stocks to buy. The AI-driven SAIA stock prediction was successful on a 1-year time horizon resulting in more than 66.10%.

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