Rating Update: Stock Rating C-Low Neutral (7/10/19)-USA Truck Inc (USAK).

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BUSINESS

USA Truck, Inc., a truckload carrier, provides general commodities transportation services in the United States, Mexico, and Canada. It operates through two segments, Trucking and USAT Logistics. The Trucking segment offers truckload services as a medium to long-haul common carrier; and dedicated freight services. The USAT Logistics segment provides freight brokerage and rail intermodal services. As of December 31, 2017, the company’s fleet consisted of 1,669 tractors, which included 247 independent contractor tractors; and 5,596 trailers. USA Truck, Inc. was founded in 1983 and is headquartered in Van Buren, Arkansas.
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INVESTMENT RATING

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Reflecting future returns on capital that are forecasted to exceed the cost of capital, USAK is expected to continue to be a major Value Builder.

USA Truck has a current Value Trend Rating of C (Low Neutral).
With this rating, PTR’s two proprietary measures of a stock’s current attractiveness are providing very contradictory signals. USA Truck has a very high Appreciation Score of 95 but a very low Power Rating of 0, and the Low Neutral Value Trend Rating results.

USA Truck’s stock is selling well below targeted value. The current stock price of $9.34 compares to targeted value 12 months forward of $37.
USA Truck’s very high appreciation potential results in an appreciation score of 95 (only 5% of the universe has greater appreciation potential.)
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USA Truck has a Power Rating of 0. (USAK’s very low Power Rating indicates that it only has a higher likelihood of achieving favorable investment performance over the near to intermediate term than 0% of companies in the universe.)
Factors contributing to this very low Power Rating include: USAK’s earnings estimates have fallen very significantly in recent months; recent price action has been extremely unfavorable; and is in an extremely unfavorable position current.

INVESTMENT PROFILE

USA Truck’s financial strength is low. Financial strength rating is 24.
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Relative to the S&P 500 Composite, USA Truck Inc has slightly more Value than Growth characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that USAK is extremely high risk. High historical growth is a positive for USA Truck. Relative weaknesses include: low historical profitability, low financial strength, high stock price volatility, high financial leverage, and high earnings variability. USA Truck’s valuation is low: low dividend yield, low P/E ratio, and low price/book ratio. USAK has unusually low market capitalization.

CURRENT SIGNALS

USA Truck’s current operations are strong. Return on equity is rising, reflecting: widening pretax margins; rising tax keep rate; and rising leverage.

USA Truck’s current technical position is very weak. The stock price is in a 5.4 month down move. The stock has declined 33.0% from its prior high. The stock price is below its 200 day moving average which is in a downtrend. USA Truck’s stock price decline is extreme and the stock appears oversold.

ALERTS

USA Truck Inc (NASDAQ: USAK). Modest negative changes in fundamentals have recently occurred. Negative developments: the consensus estimate for December, 2019 decreased significantly, and the consensus estimate for December, 2020 decreased significantly. Positive development: significant quarterly earnings acceleration occurred.
The stock is currently rated C.
USA Truck Inc (NASDAQ: USAK) stock closed at $0.03 on 7/10/19 after a major increase of 14.6%. However, below average trading volume at 78% of normal accompanied the advance. The stock has declined -6.2% during the last week and has been extremely weak relative to the market over the last nine months.

CASH FLOW

In 2018, USA Truck generated a very significant increase in cash of +$0.92 million (+1293%). Sources of cash were much larger than uses. Cash generated from 2018 EBITDA totalled +$47.82 million. Non-operating sources contributed +$0.73 million (+2% of EBITDA). Cash taxes consumed -$1.99 million (-4% of EBITDA). Re-investment in the business amounted to -$96.77 million (-202% of EBITDA). On a net basis, debt investors contributed +$49.35 million (+103% of EBITDA) while equity investors contributed +$1.78 million (+4% of EBITDA).
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USA Truck’s Non-operating Income, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by a similar trend for the Usa Truck Inc Peer Group. (Since 2016 Non-operating Income, %EBITDA has experienced a very sharp recovery.) In most years, USA Truck was in the top quartile and second quartile. Currently, USA Truck is upper quartile at +2% of EBITDA (+$0.73 million).

USA Truck’s Cash Taxes, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by a similar trend for the Usa Truck Inc Peer Group. In most years, USA Truck was in the top quartile and second quartile. Currently, USA Truck is slightly below median at -4% of EBITDA (-$1.99 million).

USA Truck’s Business Re-investment, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Usa Truck Inc Peer Group. In most years, USA Truck was in the lower quartile and top quartile. Currently, USA Truck is lower quartile at -202% of EBITDA (-$96.77 million).

USA Truck’s Debt Investors, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by an opposite trend for the Usa Truck Inc Peer Group. In most years, USA Truck was in the top quartile and third quartile. Currently, USA Truck is upper quartile at +103% of EBITDA (+$49.35 million).

USA Truck’s Equity Investors, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Usa Truck Inc Peer Group. (Since 2016 Equity Investors, %EBITDA has experienced a very sharp recovery.) In most years, USA Truck was in the second quartile and lower quartile. Currently, USA Truck is upper quartile at +4% of EBITDA (+$1.78 million).

USA Truck’s Change in Cash, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by stability for the Usa Truck Inc Peer Group as well. In most years, USA Truck was in the second quartile and third quartile. Currently, USA Truck is at median at +2% of EBITDA (+$0.92 million).
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USA Truck’s Cash, %Revenue has exhibited little to no overall change over the period. This stability was accompanied by stability for the Usa Truck Inc Peer Group as well. In most years, USA Truck was in the lower quartile. Currently, USA Truck is lower quartile at +0%.

PROFITABILITY

USA Truck’s return on equity has improved very significantly since 2014 accelerating very sharply after the 2016 level.
The key to the story for USAK is a strong positive trend in pretax operating return significantly augmented by a very strong positive trend in non-operating factors.
The productivity of USA Truck’s assets rose over the full period 2009-2019: asset turnover has exhibited a minor overall uptrend but it experienced a sharp decline after the 2014 high.
Reinforcing this trend, pretax margin enjoyed a volatile overall uptrend that accelerated very sharply from the 2016 level.
Non-operating factors (income taxes and financial leverage) had a very significant positive influence on return on equity.
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USA Truck’s return on equity is upper quartile (15.2%) for the four quarters ended March, 2019.
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Operating performance (pretax return on assets) is at the upper quartile (4.8%) reflecting asset turnover that is at median (1.53X) and upper quartile pretax margin (3.2%).
Tax “keep” rate (income tax management) is slightly below median (73.8%) resulting in after tax return on assets that is above median.
Financial leverage (leverage) is at the upper quartile (4.26X).

GROWTH RATES

There are no significant differences between USA Truck’s longer term growth and growth in recent years.
USA Truck’s historical income statement growth and balance sheet growth have diverged. Revenue growth has paralleled asset growth; earnings growth has exceeded equity growth.

Annual revenue growth has been 4.4% per year.

Total asset growth has been 2.2% per year. (More recently it has been 8.3%.)

Annual E.P.S. growth has been 17.0% per year. (More recently it has been 24.2%.)

Equity growth has been -4.2% per year. (More recently it has been 13.0%.)
No consensus growth rate forecast is available for USA Truck.
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Relative to the Usa Truck Inc Peer Group, USA Truck’s historical growth measures are erratic. E.P.S. growth (17.0%) has been at the upper quartile. Revenue growth (4.4%) has been at median. Equity growth (-4.2%) has been substantially below median. Total asset growth (2.2%) has been below median.

Consensus growth forecast is unavailable.
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PRICE HISTORY

Over the full time period, USA Truck’s stock price performance has been variable and significantly below market. Between September, 2008 and July, 2019, USA Truck’s stock price fell -41%; relative to the market, this was a -77% loss. Significant price moves during the period: 1) February, 2018 – July, 2019: -63%; 2) May, 2017 – February, 2018: +288%; 3) May, 2016 – May, 2017: -67%; 4) October, 2012 – February, 2015: +968%; 5) January, 2012 – October, 2012: -69%; and 6) April, 2010 – August, 2011: -58%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of -56.9% is lower quartile relative to the S&P 500 Composite.
In addition to being lower quartile relative to S&P 500 Composite, current annual total return performance through June, 2019 of -56.9% is lower quartile relative to USA Truck Inc Peer Group.

Current 5-year total return performance of -11.5% is lower quartile relative to the S&P 500 Composite.
Through June, 2019, with lower quartile current 5-year total return of -11.5% relative to S&P 500 Composite, USA Truck’s total return performance is below median relative to USA Truck Inc Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, USAK’s overall valuation is exceptionally low. Four of five factors are upper quartile. The highest factor is the ratio of enterprise value/earnings before interest and taxes, followed by the ratio of enterprise value/assets, then by the price/earnings ratio, then by the price/equity ratio. The lowest factor, ratio of enterprise value/revenue, is lower quartile.

Relative to USA Truck Inc Peer Group, USAK’s overall valuation is low. The highest factor, the ratio of enterprise value/revenue, is slightly below median. Ratio of enterprise value/assets is slightly below median. Ratio of enterprise value/earnings before interest and taxes is near the lower quartile. Price/equity ratio is near the lower quartile. The lowest factor, the price/earnings ratio, is lower quartile.
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USA Truck has no value gap compared to the median valuation. For USAK to rise to median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 0.48X to 0.49X. If USAK’s ratio of enterprise value/revenue were to rise to 0.49X, its stock price would be lower by $1 to $10.
For USAK to hit lower quartile valuation relative to the USA Truck Inc Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 0.48X to 0.30X. If USAK’s ratio of enterprise value/revenue were to fall to 0.30X, its stock price would decline by $-12 from the current level of $9.34.

VALUE TARGETS

Reflecting future returns on capital that are forecasted to exceed the cost of capital, USAK is expected to continue to be a major Value Builder.
USA Truck’s current Price Target of $40 represents a +326% change from the current price of $9.34.
This very high appreciation potential results in an appreciation score of 95 (only 5% of the universe has greater appreciation potential.)
Notwithstanding this high Appreciation Score of 95, the low Power Rating of 0 results in an Value Trend Rating of C.
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USA Truck’s current Price Target is $40 (-6% from the 2018 Target of $42 but +326% from the 07/10/19 price of $9.34). This plateau in the Target is the result of a +11% increase in the equity base and a -15% decrease in the price/equity multiple. The forecasted decline in return on equity has a very large negative impact on the price/equity multiple and the forecasted increase in cost of equity has a large negative impact as well. Partially offsetting these Drivers, the forecasted increase in growth has a very large positive impact.
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PTR’s return on equity forecast is 18.0% — below our recent forecasts. Forecasted return on equity enjoyed a dramatic, variable increase between 2010 and 2018. The current forecast is significantly above the 2013 low of 4%.

PTR’s growth forecast is 8.0% — slightly above our recent forecasts. Forecasted growth suffered a dramatic, erratic decline between 2010 and 2018. The current forecast is well above the 2015 low of 1%.

PTR’s cost of equity forecast is 8.7% — in line with recent levels. Forecasted cost of equity suffered a dramatic, erratic increase between 2010 and 2018. The current forecast is above the 2013 low of 4.8%.
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At USA Truck’s current price of $9.34, investors are placing a negative value of $-13 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of 3.0% per year, and a return on equity of 23.2% versus a cost of equity of 7.5%.
PTR’s 2020 Price Target of $40 is based on these forecasts and reflects an estimated value of existing assets of $12 and a value of future investments of $28.

About John Lafferty 40696 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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