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Forward Air Corp. (NASDAQ:FWRD) has recently extended its scope by acquiring Omni Logistics. This development may signify positive company growth, but it has also stirred concerns about the significant debt required for the merger and the reduced control for Forward Air shareholders. Although skepticism surrounds this merger, the company is expected to yield potential synergies. Efficient integration of economies of scale and enhanced service offerings could drive long-term growth and savings if executed effectively. The extent to which these synergies outweigh the acquisition costs remains uncertain and may pose a long-term risk to the company’s financial standing.
Forward Air’s growth has recently decelerated compared to 2022. This slowdown can be attributed not only to supply chain disruptions resulting from geopolitical factors but also to reduced consumer expenditure affecting shipping demands for retailers and e-commerce firms. Operating expenses have risen in line with the company’s growth, a common trend in the logistics industry. As the economy expands, a rebound in Forward Air’s revenues is anticipated as the demand for delivered goods continues to rise.
When assessing current events concerning Forward Air, it is essential to discern the long-term implications on the company and its stock price. Despite global political instability and declining revenues, Forward Air remains well-positioned to capitalize on its large-scale and superior execution services in the LTL industry. The stock has undergone a recent downward trajectory due to global political instability and declining revenues. While forecasting an improvement in global political stability may be challenging, truckload weights should rebound in 2024 as the need for logistics grows alongside expanding economies. The substantial debt incurred from acquiring Omni Logistics poses a long-term risk, particularly if the projected synergies fail to materialize or integration issues arise. Successful integration leading to economies of scale could potentially enhance shareholder value in the long run.
While current news, positive or negative, can influence investment decisions, an analysis of the company’s fundamentals and trajectory is crucial.
This article will primarily focus on the company’s long-term fundamentals to provide insight into its viability as an investment. It will also evaluate the company’s valuation relative to its price to determine if Forward Air is currently trading at an advantageous price. Various scenarios will be presented to estimate the company’s future returns. Finally, the author will provide their personal perspective on whether they are inclined to invest in the company and the reasons behind their decision.
Summary of the Company
One efficient method for gaining a holistic understanding of the company’s status is to utilize the BTMA Stock Analyzer’s company rating score. Forward Air’s rating score stands at 74.4 out of 100, indicating robust fundamentals with some reservations in the ROIC and Gross Margin categories.
Before drawing conclusions, a closer examination of individual categories is warranted.
BTMA Stock Analyzer
(Source: BTMA Stock Analyzer )
Fundamentals
The share price has trended downward since reaching its peak in 2022. This decline is largely attributed to negative reactions to the Omni Logistics merger. When coupled with global instability in the Red Sea and a decrease in consumer spending, it becomes evident why the stock price has fallen. The revenue generated in 2023 is lower than the peak of 2022. On average, the share price has grown by approximately 20.9% over the past 10 years, equating to a Compound Annual Growth Rate of 2.12%. At the current stock price, Forward Air is trading near its lowest point in the past decade.
BTMA Stock Analyzer
(Source: BTMA Stock Analyzer – Price Per Share History)
Earnings
Earnings remained relatively stable until the significant upsurge in 2022, driven by heightened logistics prices amidst supply chain shortages. It is anticipated that earnings will reflect a declining trend akin to the decrease in revenue in 2023. However, once the merger is effectively integrated, and economies of scale are leveraged, a substantial rebound in earnings per share is conceivable.
BTMA Stock Analyzer
(Source: BTMA Stock Analyzer – EPS History)
Given that earnings and stock prices do not always offer complete insights, evaluating other factors such as gross margins, return on equity, and return on invested capital is crucial.
Return on Equity
Return on equity has mirrored the earnings trend, influenced by the substantial revenue increase in 2022. Considering the aforementioned macro-level factors impacting the company’s performance, a short-term decline in ROE is expected. It is important to note that the outlier year of 2020 likely experienced a significant decline due to COVID-19. Excluding that year, the company has displayed consistent return on equity, even amidst changing economic conditions. For return on equity (ROE), a 5-year average of 16% or more is sought. In this regard, Forward Air surpasses the specified threshold.
BTMA Stock Analyzer
(Source: BTMA Stock Analyzer – ROE History)
Let’s contrast the ROE of this corporation to its industry. The average ROE of 110 transportation corporations is 22.06%.
Consequently, Forward Air’s 5-year mean of 16.8% is lower than its counterparts. Even though in 2022 they have outperformed this standard.
Return on Invested Capital
The return on invested capital experienced a notable surge in 2022 akin to previous charts. The company has escalated capital expenditure after 2020 and has maintained that level for the preceding three years. At least for 2021 and 2022, the company returned greater if not similar levels to previous returns before COVID. This is a highly commendable metric for a logistics company that must perpetuate its competitive advantage through sustained reinvestment into the business. I yet again foresee a minor decline in 2023 and beyond due to short-term impacts on the growth side. For return on invested capital (ROIC), I also search for a 5-year mean of 16% or more. Thus, Forward Air fails to surpass this, but would if we excluded the outlier year.
BTMA Stock Analyzer
(Source: BTMA Stock Analyzer – Return on Invested Capital History)
Gross Margin Percent
The gross margin percentage (GMP) has remained stable over the last 5 years. Even during COVID, Forward Air maintained a healthy margin for its business. I anticipate the surge seen in 2022 will most likely reduce to its nominal levels in 2023 and beyond. As economies of scale are leveraged after the merger, we should see gross margin improvement or at least operation cost improvement. If no cost reductions are realized, merger integration would be considered a struggle for the company. I typically look for companies with a gross margin percent consistently above 30%. Thus, Forward Air falls below this benchmark.
BTMA Stock Analyzer
(Source: BTMA Stock Analyzer – Gross Margin Percent History)
Financial Stability
Examining other fundamentals involving the balance sheet, we can perceive that the debt-to-equity is less than one. This is a favorable level for debt to equity. Bear in mind that this current value does not account for the recent debt load taken on due to the merger.
Forward Air’s Current Ratio of 1.28 indicates it can settle short-term debt with its current assets.
Ideally, we’d prefer to observe a Current Ratio of more than 1, so Forward Air surpasses this threshold.
Forward Air displays a diverse set of factors when inspecting its fundamentals. The company recently undertook a substantial acquisition which is somewhat precarious with the amount they paid for Omni Logistics. Revenue has dwindled and this will directly impact numerous fundamental aspects in 2023 and beyond into 2024. In the long run, I believe the merger can position this company for sustained growth if they can attain their synergies and economies of scale.
Forward Air presently disburses a dividend of about 2.2%.
BTMA Stock Analyzer
(Source: BTMA Stock Analyzer – Misc. Fundamentals)
This analysis wouldn’t be comprehensive without pondering the value of the company vs. share price.
Value Vs. Price
The company’s Price-Earnings Ratio of 10.62 indicates that Forward Air is undervalued when juxtaposed with Forward Air’s Ratio to a long-term market average PE Ratio of 15.
The 10-year and 5-year average PE Ratio of FWRD has typically been 24.3 and 23.3, respectively. This also indicates that FWRD could be currently trading at a low price when comparing to its average historical PE Ratio range.
BTMA Stock Analyzer
(Source: BTMA Stock Analyzer – Stock Value)
The Estimated Value of the Stock is $84.74, versus the current stock price of $43.49. This indicates that Forward Air is currently selling below its value.
For more detailed valuation purposes, I will be using a conservative diluted EPS of 3.85. I’ve used various past averages of growth rates and PE Ratios to compute different scenarios of valuation ranges from low to average values. The valuations compare growth rates of EPS, Book Value, and Total Equity.
In the table below, you can see the different scenarios, and in the chart, you will see vertical valuation lines that correspond to the table valuation ranges. The dots on the lines represent the current stock price. If the dot is towards the bottom of the valuation range, this would indicate that the stock is undervalued. If the dot is near the top of the valuation line, this would show an overvalued stock.
BTMA Wealth Builders Club
BTMA Wealth Builders Club
(Source: BTMA WealthBuilders Club)
As per this assessment of worth, FWRD is underestimated in all categories except the ultimate category (Valuation Based on Low and Average Forward Growth & PE).
By this examination, the mean assessment is approximately $68.67 per share compared to its existing value of about $41, signifying FWRD’s significant undervaluation.
Summarizing Fundamental Aspects
Upon analyzing the fundamental features of Forward Air, the prospect of leveraging its recent consolidation seems secure in the long run. Fundamentally, the elements (EPS, ROE, ROIC, Gross Margins) are either at a satisfactory level or showing an inclination towards it. Nonetheless, there could be a decrease in these aspects by 2024 owing to declining company revenues.
Given the realization of synergies resultant from the merger, the growth will have a substantial influence on the stock and the company’s fundamentals. Despite an anticipated decline in revenue, the company maintains a robust ROIC, thereby demonstrating its resilience, even during economic downturns. I shall monitor enhancements in gross margins and operational cost efficiencies as Omni Logistics integrates into the company. Failure to realize cost efficiencies could pose a high-risk scenario, being the easiest synergies to capture.
Forward Air Versus the S&P 500
Now, let’s compare Forward Air’s performance against the US stock market benchmark, the S&P 500, over the past decade. From the graph below, it is evident that Forward Air has not outperformed the overall market. However, its current return level in comparison to the market is notably lower than its previous disparities, indicating a potential extreme undervaluation at present. Furthermore, the company is poised for expansion following its recent merger with Omni Logistics.
Hence, even though Forward Air typically does not surpass the S&P 500, the current moment presents a compelling opportunity to invest at an exceptionally low price and capitalize on subsequent growth and price increases.
Morningstar
Forward-Looking Conclusion
Over the next five years, analysts tracking this company anticipate an average yearly earnings growth rate of 13.16%.
Additionally, the mean one-year target price for this stock is $67.50, representing a roughly 55% rise within a year.
The Estimated Annual Compounding Rate of Return stands at 19.25%.
With the analysts’ projections, an investment today might anticipate approximately 10% (limited growth) to 13% (moderate growth) yearly in the long term.
Here is an alternative situation based on FWRD’s historic earnings growth. Over the past 10 and 5 years, the average EPS growth rate was about 5.5% and 8.7%, respectively.
Contrasting this with cash flow growth over the last 10 and 5 years, the average growth was 12.5% and 9.3%, respectively. Therefore, considering all these potential returns, the average annual return could conceivably averagely reach 11%.
Does Forward Air Meet My Criteria?
- Company Rating 70+ out of 100? Yes (74.4)
- Annual Growth Rate of Share Price > 12%? No (2.12%)
- Historically Increasing Earnings? Yes
- ROE (5-year average 16% or more)? Yes (16.8%)
- ROIC (5-year average 16% or more)? No (13%)
- Gross Margin % (5-year average > 30%)? No (21.6%)
- Debt-to-Equity (less than 1)? Yes
- Current Ratio (greater than 1)? Yes
- Outperformed S&P 500 for the most part of the last 10 years? No
- Anticipated continuity in successful selling of core product/service for the next 10 years? Yes
Forward Air scored 6/10, or 60%. Hence, the company exhibits promising fundamentals but also entails some risks that necessitate careful consideration before establishing a position.
Is Forward Air Currently at a Bargain Price?
- Price Earnings less than 16? Yes (10.6)
- Average Valuation exceeds the Current Stock Price? Yes (Value $68.67 > $41 Stock Price)
Forward Air profiles as a mixed bag. Geopolitical complexities, revenue downturn, and a substantial merger have curbed the overall perception of the company’s balance sheet. These factors have contributed to the per-share price decrease and the risk outlook for the company in the short and long terms. Nevertheless, the fundamentals display substantial promise, with most metrics at or trending towards satisfactory levels.
The stock appears to have declined not solely based on fundamentals but has also suffered from excessively pessimistic attitudes, driving the share price to nearly a 10-year low. Nevertheless, nearly every valuation indicator advises that the stock is significantly undervalued.
Should the recent merger prove to be somewhat successful, the stock could ascend, yielding favorable returns for investors. The outlook for LTL logistics does not indicate a decline in the near future, given the continuous growth of e-commerce. The scale economies and synergies that Forward Air can achieve position them to outperform the fragmented logistics market in terms of pricing and market share capture. Failure of the merger could result in further declines in the company’s stock price in the long run, although I foresee a short-term recovery due to overselling.
Upon analysis, it is evident that the stock is markedly undervalued, and its strong long-term fundamentals justify assuming some additional risks and concerns associated with the company. Although the stock price might continue to decrease, it is approaching a level that merits establishing a position in Forward Air and withstanding the market challenges.