Wabash National: Stay Long (NYSE:WNC)


Wabash National Corp. (WNC) is a diversified semi-truck manufacturer that has been negatively impacted by the disruptions of the global pandemic. Wabash has reported lackluster operating results so far in 2020, so it should come as no surprise that the company’s stock has underperformed the broader market by a wide margin.

Data by YCharts

However, as shown, WNC shares have performed well since the March/April 2020 lows. I believe that the significant underperformance has created a buying opportunity for investors that are interested in a company that has great long-term business prospects.

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The Story

Wabash National Corp. is a diversified semi-truck manufacturer that operates in three main segments: Commercial Trailer Products, Diversified Products, and Final Mile Products. Wabash is a leader in several key industries and management continues to focus on diversifying the company’s business portfolio.

Source: Company Presentation

The company has had a rough start to 2020, as the COVID-related headwinds materially impacted its business. For some perspective, Wabash’s net sales are down 37% and the company reported a net loss of ~$106 million for the first half of the current year.

Source: Q2 2020 Earnings Slides

Revenue was down across the board with the Commercial Trailer Products segment (and more specifically the new trailer sales) being the biggest contributor. From an earnings perspective, the non-cash impairment charges related to the Walker Group and Supreme Industries acquisitions were the major drivers for the YoY decline in net income. However, it is important to mention that management again reinforced their belief that the Final Mile business (i.e., the segment that took the impairment charges) remains a significant part of the long-term story for the company. It also helps the bull case that industry analysts’ projections call for significant growth for this line of business for many years to come.

There is no denying the fact that Wabash stumbled through the first half of 2020, but, as I recently described here, there are reasons to remain long the stock. Wabash is a cyclical company so, yes, it will likely go as the economy goes. Therefore, the operating results so far this year were par for the course given the deteriorating backdrop.

Notice the significant drop in the March/April 2020 time frame. But investors should be encouraged by the thought that the current COVID-related disruptions could soon be a thing of the past. More specifically, many pundits, including Goldman Sachs, expect for a vaccine to be approved in the near[ish] future and that 2021 GDP growth will be strong.

Additionally, the White House recently increased their latest coronavirus stimulus package to $1.8 trillion (slightly lower than the $2.2 trillion bill that the Democrats offered up), but the likelihood of a bill getting passed before the election seems remote. However, if the politicians can get out of their own way and strike an agreement in the next 6-12 months, the economy and small market cap companies (including Wabash) will be the real winners.

An economic recovery will bode well for Wabash, and regardless of whether or not a short-term stimulus package gets passed, I believe that investors should view this company as more than just a recovery trade because it has several businesses (most notably, Final Mile) that have great long-term business prospects.

The Financials, By The Numbers

A detailed review of a company’s financial statements can provide a tremendous amount of value if the reader can decipher the information. The income statement reveals the company’s ability to generate a profit and how it performed over a specific period of time. Investors are able to figure out how a company is positioned, financially, from a review of the balance sheet. And lastly, the cash flow statement shows how a company managed its cash position and how exactly it generated cash to fund its operations.

Below are my takeaways from Wabash’s most recent financial statements:

Income Statement

Source: Q2 2020 10-Q

Observations (all for the 6 months ended June 30):

  • Net sales and the gross profit margin were down 37% and 26%, respectively.
  • Earnings were materially impacted by the $106 million goodwill impairment charge.
  • Interest expense is down 14% (the company recently refinanced its debt).

The takeaway: the company’s operating results were impacted by the economic disruptions related to the pandemic. On a positive note, management refinanced Wabash’s debt which will help with lower interest expenses in the years ahead.

Balance Sheet

Observations:

  • The current ratio is over 2.
  • The net debt balance is $320 million.

The takeaway: Wabash has a decent balance sheet that should allow for the company to weather any near-term storms.

Cash Flow Statement

Observations:

  • The company was able to report positive cash from operating activities in a tough operating environment.
  • The company paid almost $2 million less in interest.
  • The company continues to be a buyer of the stock (although I think management needs to now focus on keeping cash on hand instead of repurchasing shares).

The takeaway: nothing significant to note – the cash flow metrics show that the company was operating in a challenging environment.

Putting It All Together

Wabash’s financials show that its business was negatively impacted by the economic slowdown caused by COVID, but the company has a strong enough balance sheet to weather the current downturn. And cash (and liquidity) is currently not a major concern. However, management may need to pull other levers if the pandemic stretches well into 2021.

A review of Wabash’s financials did not have a material impact on the company’s long-term story, in my opinion.

Valuation

Wabash’s stock is attractively valued when compared to its peer group.

ChartData by YCharts

The company’s stock is also trading at an attractive valuation when compared to its own historical ratios.

Source: Morningstar

Wabash is definitely a cyclical company that will go as the economy goes, but when taking everything into consideration (i.e., shrinking share count, a more diversified business and a manageable balance sheet), it is hard not to like WNC shares in the $13 range.

Risks

A U.S. recession will have a negative impact on Wabash’s business. More specifically, the company’s operations are heavily tied to economic activity, so its customers will likely purchase less of Wabash’s products if its business prospects appear to be declining. Therefore, a deep[er] downturn would materially impact the stock price even at current levels. As such, investors should closely monitor current recession indicators because prolonged economic disruptions will cause downward pressure for Wabash’s stock.

Bottom Line

Wabash is not a 2020 story, but there are legitimate reasons to like the stock the further you are able to look out. The stock will likely remain under pressure through at least the end of 2020, but I believe that this small-cap company has promising long-term business prospects. As such, investors with a time horizon longer than two to three years should treat any further pullbacks as long-term buying opportunities.

Disclosure: I am/we are long WNC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure:
Disclaimer: This article is not a recommendation to buy or sell any stock mentioned. These are only my personal opinions. Every investor must do his/her own due diligence before making any investment decision.

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