Daseke is the target of an investment fund that is asking the flatbed operator to launch a buyback of its shares, saying they are undervalued because the broader market is not giving it credit for the relative strength of the flatbed market.
Alta Fox Capital Management, based in Fort Worth, Texas, sent the letter to the directors of Daseke (NASDAQ: DSKE) Thursday. It simultaneously released the contents of the letter to the public.
Daseke so far is declining comment. It is in a blackout period before the release of its earnings, scheduled for May 3.
Alta Fox owns about 4% of outstanding Daseke stock, according to Connor Haley, the company’s founder and managing partner.
At the heart of the Alta Fox call for a $60 million buyback is its belief that Daseke stock has been dragged down by the recent fall in several truckload and LTL carrier stocks because of a false belief that the Daseke economic outlook is correlated closely to dry van rates.
In an interview with FreightWaves, Daseke CEO Jonathan Shepko recently challenged any perception that its own rates were falling. That interview came after the Moody’s rating agency held Daseke’s debt rating stable and suggested in its analysis that the macroeconomic factors suddenly putting pressure on truckload carriers would not impact Daseke.
“Given the company’s limited sell-side coverage and investor awareness, the market has failed to distinguish Daseke’s flatbed and specialized exposure versus the more commoditized dry van exposure of the other publicly listed trucking companies,” Alta Fox wrote in its letter to the board. “As a result, Daseke is currently trading at less than 7X our forward estimate of earnings per share and a 20% normalized free cash flow to equity yield despite strength in its end markets.”
In a tweet under his account Wednesday, Haley previewed what Alta Fox was going to do the next day without identifying the company that had its interest. “It is rare to find a business trading at a ~20% free cash flow yield and 7x fwd earnings that can grow mid teens EPS organically over the medium term. Significant confusion in the market has created what we believe is a very attractive risk/reward,” he wrote.
Daseke has not been in the merger and acquisition market for several years after years of building itself out primarily through M&A. In recent earnings calls, the company’s management has made clear it intends to come back to that arena in 2022.
But Haley said the best acquisition Daseke can make now is its own stock.
“We are not bearish on the idea of M&A,” Haley told FreightWaves. But given the calculations that Alta Fox has made on forward free cash flow, “if you can make 20% on your own company just by retiring shares, it is very hard to argue that M&A is a better use of your capital on a risk readjusted basis.”
“The shares are very cheap,” he said.
In its letter to the directors, Haley cites the FreightWaves article of March 24 projecting a “bloodbath” in freight markets. That article, according to Alta Fox, “highlighted significant near-term weakness in dry van rates.”
But given that Daseke has no exposure to those rates, and given how much the stock price of the company has fallen in the interim, “we believe this is an unsustainably low valuation.”
Daseke stock closed Thursday, the day of the announcement, at $8.41. It traded as high as $8.86 on the news of the Alta Fox letter but has since fallen back. At roughly 2 p.m. Friday, Daseke stock was trading at $8.15, down more than 3% on the day.
In the past month, according to Barchart, Daseke’s stock is down 29.7%, though for the past 12 months, it is up about 12%, more than most dry van carriers.
Daseke last year did announce plans to buy back up to 3 million of its own shares. In its annual 10-K report, the company said it did acquire the full allotment of the 3 million shares at a total cost of $20.4 million, roughly $6.80 per share.
The $60 million buyback called for by Alta Fox would be almost three times as large. Daseke’s market capitalization as of late Friday was about $526 million.
In his interview with FreightWaves, Haley expressed support for current Daseke management several times. “I think the CEO [Shepko] understands value creation and they understand that this is a very attractive price to allocate capital to retiring shares,” he said. “We think the business is stronger today and the stock price is in the same territory.”
Daseke earned 77 cents per share in 2021. Alta Fox thinks that can almost triple. “We firmly believe that Daseke is on track to earn $2 in EPS by fiscal 2025, which should warrant a stock price well in excess of $20 per share,” it said.
Haley said Daseke is one of the largest positions held at Alta Fox. He did not disclose the size of the position or the total amount of capital under management at the company. Haley added that Alta Fox has diverse holdings and does not have a specific transportation focus.