Roadrunner Transportation (NYSE: RRTS) told the world back in 2017 that in the wake of an accounting scandal, its financial numbers could not be viewed as reliable, and it took months for them to catch up with accurate figures.
Understandably, no known equity analysts would put the company on their list to follow when the data was basically worthless. But with the company now regularly reporting earnings on time and with accuracy, at least one analyst has waded back into reviewing the company.
J. Bruce Chan of Stifel has begun coverage of the company with a "Hold" rating but with an overall review of Roadrunner that can only be viewed as positive. "For the first time in years, the company has a credible go-to-market strategy and turnaround plan that outlines significant opportunities," he wrote in the report. "It won't be easy, though, so we are resuming our rating on Roadrunner as a hold."
The report is extremely detailed about the history of Roadrunner, not only the accounting scandals but also the aggressive but discombobulated acquisition strategy that saw it buy numerous companies with no clear plan on what to do with them. As the title of one graph in the report says: "As the number of acquisitions grew, ROIC (return on invested capital) continued to decline, suggesting that the sum was indeed not greater than its parts."
"Underinvestment in IT talent and systems did not help...and create(d) an environment that lacked appropriate controls and consistent accounting and reporting," Chan wrote. The end result was that when correct math was substituted for the questionable math of the past, net income had been overstated by $66.5 million between 2011 and 2016, he said.
But the new management team has divested assets and reorganized others into the current structure. "Effectively, management reduced what had been over 20 disparate businesses and tied them together into six distinct operating groups," Chan wrote. Four of them are under Truckload & Express Services, accounting for 54 percent of revenue, including the temperature- controlled business and the Active On-Demand division. Less than truckload (LTL) generates about 21 percent of the company's revenues, and Ascent Global Logistics provides 25 percent of company revenue.
Chan described Active On-Demand this way: “The Active On-Demand network is built to serve North-South manufacturing supply chains via unscheduled expedited air and ground service, as well as scheduled, time-critical and door-to-door ground Truckload loops.” The business is about 70 percent automotive-oriented, he said.
Despite the turmoil, Roadrunner has managed to mostly hold on to its customer base, according to the Stifel report. With the corporate structure mostly fixed, Chan wrote, "it can focus on fixing the individual operating units." Of those, air freight-focused Active on Demand and logistics provider Ascent were both described as being "in good shape." Its intermodal division is "doing OK," but dry van "needs some work." The LTL division was the "most broken" part of Roadrunner but Chan said he remains optimistic. "We just need to be realistic about the effort and time frame required," the report said.
(The LTL division, according to Chan, generated a “scant” 22 percent of company revenue by 2017 after contributing 65 percent at the end of 2010. Its operating ratio blew out to be one of the worst in the LTL sector, climbing to well over 100 percent.)
One aspect of Roadrunner that gets remarkably little discussion in the report is the current rights offering that is likely to lead Elliott Partners – currently the holder of a significant share of high-yield preferred shares – as a 90 percent-plus owner of the common shares of Roadrunner. The rights offering calls for existing shareholders of the stock to be given the right to buy shares of the company at 50 cents per share; the current price is 54 cents. There are 900 million shares in the offering with a targeted capital raise of $450 million.
In an interview with FreightWaves, Chan said the dilution of existing shareholders and the effective takeover by Elliott Management for all intents and purposes occurred when Elliott bought its preferred shares, which provided a capital infusion and allowed the beleaguered company to survive. Even though Elliott owns less than 10 percent of existing common shares prior to the rights offering, Chan said the preferred stock effectively gives it control. (Elliott has agreed to “backstop” the rights offering, picking up whatever shares existing owners don’t purchase.)
When it has actual control of the common equity after the rights offering, Chan said the new structure will allow management more flexibility in how to run the company. Elliott can take its stake down to 75-80 percent through a variety of means, he said. And with the management and capital structure settled, it would allow some assets to be sold. "If somebody like XPO (NYSE: XPO) said, we want to buy LTL or C.H. Robinson (NASDAQ: CHRW) says, we want to buy logistics, it's easier if there is more liquidity and more of a common equity standard," Chan said.