Forward Air Corporation

My Disclaimer
I am a long-term buy and hold investor, practicing a value investing philosophy. I am not a licensed or registered investment professional. I currently have NO investment position in the company mentioned in this report. Financial statement data was obtained from the company’s most recent SEC 10-K filing.

Risk
Past and future gains contained herein are based on actual and anticipated earnings, actual and anticipated dividends, and actual and anticipated price appreciation. Valuations, while given as a specific amount, are always within a valuation range. Investors should be aware that any investment has the potential for loss, and past performance is no guarantee of future results.

Intent
The intent of this report is to provide the reader with a brief overview of my various company valuations so they can independently determine their current level of investment interest.

What They Do
Forward Air is a high-service level truckload carrier and contractor to the air cargo industry providing scheduled trucking services to air freight forwarders, fully integrated air cargo carriers and domestic and international airlines. The company also provides short- to medium-haul delivery. Industry peers include International Air Transport Services Group (Nasdaq: ATSG) and Old Dominion Freight Line (Nasdaq: ODFL).

Acquisitions Highlights
In April 2019, the company acquired certain assets and liabilities of FSA Network, Inc., doing business as FSA Logistix, as part of the company’s strategy to expand final mile pickup and delivery operations. The purchase price was $27 million and a potential earnout of up to $15 million. In July 2019, the company acquired certain assets and liabilities of O.S.T. Logistics, Inc. and O.S.T. Trucking Co., Inc. for $12 million. OST is a drayage company and provides the Intermodal segment with an expanded footprint on the East Coast, with locations in the Pennsylvania, Maryland, Virginia, South Carolina and Georgia markets.

Divestitures Highlights
The company listed no new business divestitures in its most recent SEC 10-K filing.

Subsequent Events
In January 2020, the company acquired substantially all of the assets of Linn Star Holdings, Inc., Linn Star Transfer, Inc. and Linn Star Logistics, LLC for $57.2 million. Linn Star is a privately-held Final Mile provider headquartered in Cedar Rapids, Iowa.

Short-Term Target
My current short-term target for the stock is $58.03 with an initial trailing stop set at $56.55. Based on a recent price of $57.41, upward price movement will find resistance at $58.84 and again at $63.06, with final resistance found at $66.73. Downward price movement will find support at $54.00 and again at $51.37, with final support found at $49.74.

Volatility Adjustment
There are different metrics available to help investors determine the volatility of a particular stock as compared to the volatility of the market as a whole. To me, the beta ratio is the metric that is the most representative of a stock’s volatility. A beta ratio of less than 1 means that the security’s price will be less volatile than the market, while a beta ratio greater than 1 indicates that the security’s price will be more volatile than the market. Basis my current beta ratio for this stock of 1.18, my volatility adjustment to recent pricing is $9 per share, making my current volatility adjusted price $49.

Quality of Earnings
A company’s earnings can be impacted by a variety of sources unrelated to the company’s current day to day operations. Discontinued operations, tax refunds, depreciation, and impairment for example, may distort a company’s operating income and consequently its fair value. Investors should always explore the sources of a company’s operating income to better understand potential valuation impacts. Of the company’s per share earnings of $4.59, $0.00 came from some combination of other sources, income taxes, minority interests, or discontinued operations.

Key Performance Indicator Rating
I use key performance indicators (KPIs) as a barometer to measure the effectiveness of management. Several of the metrics that I use are the tangible asset ratio, return on invested capital, free cash flow growth, earnings growth, debt growth, the dividend payout ratio, and the cash conversion cycle. Admittedly, my use of these and other metrics as a way to determine the effectiveness of management is subjective. Be that as it may, for me, they work. Based on a 0-105 scale, my KPI for this company is 66.

Five Year Growth of $10K
Had you invested $10K in this company five years ago (12/31/14), you would have received 199 shares of stock with a cost basis of $50.37 per share. Had you held the stock for five years and then closed your position (12/31/2019), you would have closed at $69.31 per share. During that holding period you would have collected $118 in regular and special dividends, and your initial $10K investment would have returned to you $13,760 a gain of 38% excluding regular and special dividends.

Annual Shareholder Return
I calculate annual shareholder return by subtracting the stock price at the close of business on the last day of a company’s fiscal year, from the stock price at the start of business on the first day of the company’s fiscal year, plus any dividends paid during that period, and then dividing the result by the opening stock price on the first day of a company’s fiscal year.

For fiscal 2019, the company spent $2.00 per share buying back company stock, paid a common stock dividend of $0.73, and had year-over-year annual price appreciation of $14.46, which created a year-over-year annual shareholder return of 28%.

Over the prior five year period, the company spent an average of $1.45 per share buying back company stock, paid an average annual common stock dividend of $0.55, and had an average annual price appreciation of $2.19, which created an average annual shareholder return of 7%.

Cost of Common Equity
The cost of common equity is the minimum annual rate of return an investor should expect to earn when investing in shares of a particular company. I calculate this by adding the thirty-year treasury yield to the beta ratio for the stock multiplied by my default equity risk premium. My cost of common equity for this stock is 4.88%.

Insider Transactions
The SEC classifies insiders as “management, officers or any beneficial owners with more than 10% class of a company’s security.” Insiders are required to abide by certain rules and fill out SEC forms every time they buy or sell company shares. In addition, to prevent insider trading, or benefiting illegally from material non-public information that their positions give them access to, the law prevents insiders from deposing of shares within six months of their purchase. This effectively bars insiders from profiting from quick trades based on their “insider” knowledge.

Over the past 12 months, the company has recorded 71 insider trades involving 167,900 shares of stock. Of those insider trades, 36 were Buys involving 109,271 shares of stock, and 35 were Sells involving 58,719 shares of stock, creating an insider buy to sell ratio of 1.9 to 1..

Enterprise and Equity Values
As a fair value investor, I am looking for companies that have low debt and generate lots of cash. To me, the easiest way to highlight a company’s ability to generate cash is to compare the Enterprise Value to the Equity Value, what I call my E2E Ratio. What I am looking for with this ratio is something close to or above 1, meaning the company generates cash at a rate equal to or faster than it generates debt. For this company my enterprise value (market cap plus debt less cash) is $63 and my equity value (market cap plus cash less debt) is $52, making my E2E Ratio, 0.82.

Risk/Reward Ratio
I determine my risk reward ratio by subtracting the current price from my terminate target and then dividing that result by my initiate target less a price fluctuation variable of 20%. What I am looking for with this ratio is a value of 5 or greater. My risk/reward ratio for this stock is 1.

Prior Average Valuations
My average valuation for the prior five year fiscal period was $55. The stock price during that time period averaged $51, earnings averaged $3.87 per share, and the average PE Ratio was 13. The current PE Ratio is 13.

Fair Value Investing
It is important to remember that the current market price of an equity is the price negotiated between a willing buyer and a willing seller. This market price is not the fair value of the associated company, but the negotiated price of a single equity trade. To a fair value investor, consideration is given to a company’s overall financial condition including past and future earnings growth, and free cash flow in addition to current pricing and estimated fair value.

Accordingly, my most recent fair value estimate for this stock is $60. My worksheet target prices reflect this fair value estimate.

Forward Air Corporation (Nasdaq: FWRD) – FYE 12/2019 – FAIRLY VALUED – The stock is currently trading at levels above my most recent $36 initiate target, but below my most recent $75 reduce target. Please See Linked PDF Worksheet.

There you are, short and, hopefully, to the point.

Wax