Forward Air: In it for the long haul

Paul Rolfes | Aug 08, 2008 6:15am EDT | Comment

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Forward Air Corp. (Nasdaq:FWRD) is one of the pack mules of the transportation industry, a hybrid that blends its niche air-freight service with surface movement of cargo. And despite the economic doldrums and sky-high fuel costs, Forward Air is moving forward as it hauls out a plan that includes organic growth and acquisitions.

Of the dozen analysts surveyed by Thomson Reuters, there’s an even split of six calling Forward Air a “strong buy” and six rating it the equivalent of “hold.” The median price target is $41 for Forward Air, which saw its 52-week high of $41.90 on Aug. 9, 2007, while hitting its 52-week low of $25.55 on Jan. 23. The stock closed Thursday at $36.02.

KeyBanc Capital Markets analyst Todd Fowler, who has the stock at “hold,” said in an interview that Forward Air is currently benefiting “from some things they’ve done internally, as well as external factors, the prime one being that (transportation competitor) Kitty Hawk filed for bankruptcy in October and went out of business. That helped stabilize pricing in the market.”

Fowler is on the sidelines with Forward Air not only because of its exposure to what is known as the deferred air-freight business, “since people tend to shy away” in a soft economy; but also because the company might need some time to absorb three recent acquisitions.

Forward Air began operations in 1981 in Greeneville, Tenn., northeast of Knoxville. The South is home to a number of transportation and logistics companies, including Memphis-based FedEx Corp. (NYSE:FDX) and Atlanta-based United Parcel Service Inc. (NYSE:UPS).

Forward Air differentiates itself from the big integrated shipping companies. It has focused on providing scheduled surface transportation as an alternative to air cargo. Over-the-road shipments take four days to go cross-country, but at a cost savings.

Forward Air serves the deferred air-freight market — transporting the cargo that is less time sensitive than traditional air freight. It markets airport-to-airport service mostly to air-freight forwarders and other large cargo haulers. In 2007, the average shipment weighed 720 pounds.

Similar to UPS and FedEx, Forward Air operates an airport-to-airport network with terminals in 85 cities, 10 regional hubs and a sorting facility in Columbus, Ohio. Forward Air’s services also include local pickup and delivery, warehousing and logistics services.

Shares of Forward Air have not totally avoided the damage from the U.S. economic downturn, and rising fuel costs — which are passed along to customers through surcharges. Yet over the past two years, Forward Air stock has traded mostly above $30.

For 2007, Forward Air’s revenue grew 11.3% to $392.7 million, while net income dropped 8.2% to $44.9 million. Earnings per share fell to $1.50 from $1.55. The company had a record fourth quarter, with revenue increasing 22.8% to $114.5 million but net income of $12.4 million was little changed from the $12.2 million posted in 2006.

Under the leadership of Bruce Campbell, the chairman, president and CEO, Forward Air has tabbed its growth initiatives as “Completing the Model,” adding services, controlling costs and shopping for acquisitions. The company ended last year by buying Illinois-based competitor Black Hawk Freight, which opened up some Midwest markets. Previous acquisitions included Pinch and USA Carriers.

Forward Air began 2008 with continued strong revenue growth in the first three months — a 23.6% increase to $107.9 million — while its net income remained relatively flat at $10.0 million, down from $10.3 million. The pace picked up in the three months ended June 30, with revenue climbing 30.5% to $121.6 million and net income rising to 5.5% to $12.1 million from the year before. Earnings per share rose to $0.42 from $0.38. The company also has paid a quarterly dividend of $0.07 a share since 2005.

In its midyear report, Forward Air said it expects third quarter year-over-year revenue growth of 22% to 27%, with earnings per share between $0.40 and $0.44 — up from the year-ago EPS of $0.36.

Following release of the second-quarter results, a number of the analysts who follow Forward Air found something to like. While at “hold,” KeyBanc’s Fowler pointed to its “still respectable” operating margins of 16.7%. Morgan Keegan’s Art Hatfield, who has the stock rated “market perform,” raised his third-quarter earnings outlook a penny to $0.44 a share.

John Barnes III of BB&T Capital Markets reiterated a “buy” and maintained a $50 price target, commenting, “we believe FWRD will continue to post strong revenue growth through stronger pricing, improving industry fundamentals, and its ability to take market share from its weaker competitors,” as it copes with rising costs.

Similarly, two analysts who have Forward Air at “outperform” saw no reason to alter their thinking. Nate Brochmann of William Blair & Co. wrote to investors that the second-quarter results demonstrated “a strong performance in a challenging operating environment,” while slightly raising third-quarter estimates. While modestly trimming his 2009 expectations, Jon Langenfeld of Robert W. Baird & Co. raised his price target $1 to $41, telling clients: “We recommend purchase as an attractive early-cycle investment for patient growth investors. Solid in-line quarter and outlook.”

Sometimes for investors, a company such as Forward Air that’s a pack mule can become a portfolio thoroughbred.