Q2 earnings call: Daseke acquisitions pay off big

Daseke Inc. stock (NASDAQ: DSKE) surged as much as 14.8% on Thursday when the flatbed and specialized heavy-haul consolidator released its second quarter results before trading began. The stock has since settled at $9.00, up 5.5% on strong revenue growth, both from acquisitions and organically, and raised guidance for the back half of 2018. DSKE is trading at a 10.7 P/E ratio. 

Daseke has a compelling growth story to tell, as founder Don Daseke reminded an audience of Wall Street equities analysts in his closing remarks. Founded ten years ago with $30M in top line revenue, Daseke has grown its acquisition-adjusted annual revenues to about $1.7B. 

Year over year, Daseke’s second quarter revenue increased 91% to $376.9M (flatbed revenue was up 87% to $162.2M and specialized revenue increased by 95% to $218.4M). However, Daseke has completed seven acquisitions since 2017 second quarter results were posted, so Daseke President Scott Wheeler emphasized the company’s ‘Acquisition Adjusted EBITDA’, which measures organic growth only by treating recent acquisitions as if they’ve been part of the company for the entire year. Acquisition Adjusted EBITDA grew 13% year over year, to $48.1M. 

The other side of rapid growth through acquisitions is a fairly high leverage ratio, at 4.2x according to GAAP measurements. Daseke said its current leverage covenant was at 4.25x but would step down to 4x in the first quarter of 2019. After the acquisition of Builders Transportation and two smaller tuck-ins, cash on Daseke’s balance sheet declined to $25M, the remaining capacity on the credit revolver shrank to $82M, and net debt increased to $635M. 

Flatbed revenue per mile was up 12.7% year over year, to $2.03, exclusive of fuel surcharges, and flatbed revenue per tractor increased 6.5%, to $45,700 per week. Specialized revenue per mile increased 9.9% to $2.88, while specialized revenue per tractor jumped 16.9% to $57,400 per week. A large portion of the revenue gains in Daseke’s specialized segment was attributed to its acquisition of Aveda, a carrier specializing in moving oil rigs. Exclusive of Aveda, for instance, specialized revenue per mile only increased 5%.

Strong organic revenue growth was driven primarily by a favorable freight mix with heavier equipment being moved and more commercial glass and high security cargo. Wheeler said that Daseke had not seen significant headwinds from tariffs—in fact, the opposite may be true. 

“With demand so high, capacity so tight, it’s difficult to feel any of that. Diversity is our strength. We have begun to see really positive rates and volumes related to domestic steel, which is one of the big categories of the tariffs,” Wheeler said.

Although Daseke is known for its soft integration model, where it approaches companies who have not even considered selling or put themselves on the market, and promises them that they can keep their branding, leadership, and customer base, Daseke’s executives did speak to significant cost synergies emerging from their acquisitions. Daseke has been able to consolidate facilities in Savannah, Houston, southern California, and Laredo. Wheeler said “that is something that we will do to wring out costs from the system,” but noted that acquisitions often had real estate encumbrances like leases that hindered rapid facility consolidation.

One analyst asked Wheeler if there was a fundamental reason why a flatbed carrier would trade at a lower multiple than other publicly traded transportation companies. “There’s not a fundamental reason why flatbed should trade at a different multiple than other public companies,” Wheeler said. “Long term, we’ll be judged by our results, our growth rate, and our execution. We’re a relatively new public company and we’ve got a lot to prove to the market.”

Daseke was bullish on the second half of 2018. Daseke executives raised their overall 2018 guidance from ~$1.35B in revenue to $1.55B; projected adjusted EBITDA numbers increased from $150M to $170M.

Commenting on Daseke’s second quarter results, Stifel’s David Ross wrote, “The most compelling thing about DSKE currently is its free cash flow yield, which significantly exceeds its earnings yield to do deal-related amortization and dilution.

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