Target Logistics (TLG)

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SeekingAlpha
Target Logistics: Shaping Up or Shipping Out?
Tuesday April 10, 5:06 am ET

http://biz.yahoo.com/seekingalpha/070410/31844_id.html?.v=1

Scott Nussbaum submits: Target Logistics Inc. (AMEX: TLG - News) provides freight forwarding and logistics services to over 3200 customers worldwide. The company specializes in time sensitive shipping for manufacturers. Its average shipment is 1400 pounds. Target employs minimal physical assets, instead focusing on selling value-added service of logistical coordination (i.e. pick up from manufacturer on the manufacturer’s terms, delivery to multiple customers, and handling of all documentation and scheduling). Over half of Target’s employees are devoted to customer service and logistics coordination. The company has invested heavily in an efficient infrastructure, which will allow it to generate substantial economies of scale as the company drives revenue. The company is essentially an infant version of Expeditors International (NasdaqGS: EXPD), which is often considered the best-in-breed within the logistics industry.

Management of Target Logistics is long-term oriented, with insiders owning over half of the total shares. Target Logistics' market cap is approximately $42M, and the company carries no debt. Importantly, the company's credit lines were up for renewal in March 2007, and the company expanded its credit lines and was able to do so on better terms than its existing facility.

The stock sells for approximately 16x trailing EPS (2006 EPS were $0.13, June fiscal year), 16x 2007E EPS, 0.25x Sales, and generates an approximate 20% ROIC. Comparable, but larger companies typuically sell for 20-40x forward earnings and 0.5-2.0x sales with 30%+ ROIC. Recently, one of Target’s larger competitors, EGL Inc. (NasdaqGS: EAGL), went private through a CEO led buy-out at over 20x trailing and close to 25x forward earnings, and 0.5x sales.

Target announced disappointing FQ107 EPS in November 2006, and noted that the spillover would continue through FQ207 (announced Feb07). Target's earnings softness was largely the result of identifiable and largely fixable business issues. Specifically, a small acquisition made in F2006 performed worse than expectations. FQ207 earnings were inline with company guidance and the company reiterated its targets for the full year (ending June 30, 2007). The company is on track to grow revenue 15% in F2007. Looking through the acquisition related disappointment in F1H07, the company is poised to return to an earnings growth trajectory of 15-25% earnings growth from F2008-F2009.

Importantly, this organic growth could very likely be complimented by acquisitions. Given the recent expansion of the credit facility and the CEOs comments on the acquisition pipeline in the FQ2 call in February, it would not be surprising to see an acquisition in the near term (3-6 months). The stock experienced a moment of strong momentum in June/July 2006, which has clearly left a number of holders underwater.

Given the number of buyers entering the stock in its summer rally and the disappointing quarterly results, the stock came under severe pressure in November and December, ostensibly due to tax loss selling. It is not surprising to see excess supply that needs to be worked through before the stock is poised to rally towards a more fair fundamental valuation of $2.75-$3.50. Given the limited liquidity in the stock, the shares appear to be dead money while the excess supply of shares is worked through.

However, given the limited float, the shares could easily move higher on even a whiff of positive news making it too difficult to build a position AFTER any number of positive catalysts become visible. Should the company deliver results on track with its recent guidance and affirm its estimates for F2007, the stock could move materially higher. The company has an historical track record of delivering against stated targets and announcing results promptly after quarter end (30-45 days).

Disclosure: Author holds a long position in TLG