New Terminal Ramps Will Offset Higher Costs And Winter Hurdles

Key Takeaways

• Saia's revenue growth is hindered by new terminal ramp-ups operating at breakeven, challenging immediate profitability amid uncertain market conditions.
  
• Rising expenses and external disruptions may pressure margins if cost controls and mitigation strategies are not effectively implemented.
  
• Strategic market expansion and customer acceptance drive growth and could improve profitability and enhance long-term shareholder value despite macroeconomic uncertainties.

Catalysts

Operates as a transportation company in North America.

• Saia's revenue growth is driven by new terminal ramp-ups, but these markets currently operate at breakeven. This suggests that while there is anticipated future growth, immediate profitability is challenged, which could adversely affect earnings if growth expectations are not met.
  
• The macroeconomic environment is uncertain, leading to sub-seasonal volume trends. Customers are cautious, impacting shipment volumes from Saia's legacy markets. This could result in lower revenue and earnings than expected if the caution persists.
  
• The company's first-quarter operating ratio deteriorated by 670 basis points compared to the previous year due to increased costs, including salaries and depreciation from new facilities. This higher cost base may pressure net margins if revenue growth does not accelerate as planned.
  
• External factors, such as severe winter weather, significantly impacted operations in key regions, contributing to reduced operating efficiency. If similar disruptions occur without corresponding mitigation strategies, this could impede margin improvement.
  
• There has been a notable increase in expenses, specifically a 12.6% rise in operating expenses compared to a modest 4.3% increase in revenue. If cost controls are not effectively implemented, this imbalance could continue to pressure net margins, leading to lower-than-expected earnings.

Saia Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Saia compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Saia's revenue will grow by 4.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 9.9% today to 9.6% in 3 years time.
• The bearish analysts expect earnings to reach $351.3 million (and earnings per share of $13.07) by about July 2028, up from $321.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 23.0x on those 2028 earnings, down from 25.7x today. This future PE is lower than the current PE for the US Transportation industry at 25.9x.
• Analysts expect the number of shares outstanding to grow by 0.16% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.49%, as per the Simply Wall St company report.

Saia Future Earnings Per Share Growth

Risks

• Saia reported first quarter records for revenue, tonnage, and shipments, even with one fewer workday compared to the previous year, indicating strong operational performance and potentially stable or improving revenue in the future.
  
• The company's successful expansion into new markets and customer acceptance in these areas have driven growth, which could lead to increased density and improved profitability in these markets, potentially enhancing net margins over time.
  
• Saia's contract renewals averaged 6.1% in the quarter, reflecting customer confidence in their high-quality service which could support stable or growing pricing and contribute to revenue growth.
  
• Despite macroeconomic uncertainties impacting current performance, the company is focused on pricing and mix optimization to improve service levels, which could stabilize or increase margins and earnings.
  
• Saia's long-term strategic investments in expanding its national network and building density in newer markets are expected to drive significant long-term value for shareholders and enhance future revenue and earnings.

Valuation

• The assumed bearish price target for Saia is $250.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Saia's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $380.0, and the most bearish reporting a price target of just $250.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $3.7 billion, earnings will come to $351.3 million, and it would be trading on a PE ratio of 23.0x, assuming you use a discount rate of 7.5%.
• Given the current share price of $310.98, the bearish analyst price target of $250.0 is 24.4% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.