Several months after Daseke expressed disappointment that one of the leading debt ratings agencies didn’t increase its rating, the flatbed operator got its wish when another one did.
When Moody’s conducted a review of Daseke (NASDAQ: DSKE) earlier this year, it came out with a report that said the outlook on the company’s debt was “stable,” which means conditions were not in place to suggest an upgrade or downgrade. Daseke officials at the time were not happy, noting that its flatbed rates were rising even as dry van rates were starting to slide.
But last week, S&P Global Ratings increased the rating on Daseke to B+ from B.
“Daseke Inc. has continued to improve its revenue and leverage while maintaining relatively stable EBITDA margins due to a strong freight rate environment, demand from industrial end markets that the company serves, and higher fuel surcharge revenue, partially offset by persistent supply chain and inflationary constraints,” S&P Ratings said in its report.
The outlook for the company was rated as stable, which the agency said “reflects our assumption that Daseke will benefit from relatively firm revenue and earnings, supported by favorable near-term demand trends in the flatbed freight market.”
The ratings agencies do not comment on profitability of the companies they rate, though Daseke’s profitability is not a secret, given that it is publicly traded. In its latest earnings report, the company reported adjusted earnings per share of 42 cents, flat compared to 2021’s second quarter. It also increased its guidance for full-year 2022 to revenue growth of 12% to 15%.
At B+, the credit rating for Daseke is still considered noninvestment grade, or more colloquially, “junk.” But it is only four notches into the noninvestment grade category.
When Moody’s came out with its status quo report in April, Daseke CEO Jonathan Shepko told FreightWaves that while dry van rates at the time were declining, his company was not seeing that slide in flatbed rates. “We’ve actually gotten price increases from shippers,” he said.
S&P seemed to echo that view, albeit several months later. It said the company’s average freight rate was up 12.2% between fiscal 2020 and fiscal 2021, which matches the calendar year. And it said for the first six months of 2022, the average rate was 10.9% more than in fiscal 2021.
The key Los Angeles to Dallas flatbed lane did show a decline in flatbed rates between April and August but has started to turn, according to the TSTOPFR.LAXDAL data series in SONAR.
While total miles at Daseke have been down, that has mostly been because of delays in receiving new equipment, S&P said.
“Daseke has offset the decline in total miles driven by strategically deploying company-owned assets in end markets that offer higher rates and margins and deferring excess volumes to its brokerage service,” it said.
Strong flatbed rates are expected to hold this year, the S&P report said. For the rest of 2022, according to the agency, “we expect Daseke to continue to benefit from strong flatbed freight rates and demand in key industrial end markets as opposed to the commodity-oriented consumer retail markets where rates are softening.”
Ratings agencies’ focus is always on the ability to service debt. S&P said in 2021 that Daseke’s debt to EBITDA ratio was 3.2X, which was better than the 4X ratio the agency had expected.
EBITDA in 2021 was driven by elevated freight rates and lower maintenance costs, partially offset by higher driver costs, S&P said.
That 4X ratio was consistent for the company between 2018 and 2020, S&P said. And if there were a deterioration in spot market rates and macroeconomic conditions, the agency said, “we believe peak leverage would likely rise to about these levels, which would still be in line with the ‘B+’ rating.”
Agencies also are heavily focused on capital expenditures, because debt payment and free cash flow are linked and can be impacted by the size of capex spending. S&P said capital expenditures at Daseke are expected to be $70 million this year, up from $53.7 million last year. But part of the higher number in 2022 is because of $25 million allocated last year that didn’t get spent because OEMs couldn’t provide the equipment.
The S&P estimate of free cash flow to debt is 12% to 14% this year and improving to 16% to 18% next year.
One positive noted by S&P Ratings was unusual: higher revenue from fuel surcharges. Even while listing that as a plus for the company — “we … believe Daseke’s revenue will benefit from higher fuel surcharges for the remainder of 2022,” S&P said–it also conceded that the higher revenue doesn’t hit much of the bottom line. Fuel surcharges, S&P said, are “primarily a pass-through that doesn’t significantly affect EBITDA or cash flow.”