Wabash National(US:WNC) Seeking Alphaยท2024-09-12 03:16Investment Thesis - Wabash National Corporation (NYSE: WNC) is identified as a strong investment opportunity due to its growing operating margins, capital efficiencies, and returns over recent years, with updated valuations indicating the stock is undervalued [2][24]. Background - The stock price of WNC has decreased from USD 23 per share in May 2024 to USD 18 per share, prompting a re-evaluation of its valuation and margin of safety [3][24]. - WNC is a leading manufacturer of trailers and liquid transportation systems, having repositioned itself as a leader in connected solutions for the transportation and logistics sectors [3][24]. - From 2017 to 2024, WNC experienced a revenue growth of 3.8% CAGR, indicating it is not a high-growth company, consistent with market research suggesting low single-digit growth for the sector [3][4]. Valuation Narrative - The valuation of WNC is based on an operating model that includes fixed and variable costs, with key parameters being revenue, contribution margin, and capital turnover [5][6]. - Revenue projections are based on average performance from 2017 to 2024, with an assumption of 4% CAGR growth in perpetuity [7][24]. - The cyclical nature of the business is acknowledged, with 2024 performance expected to be lower than 2023 but still better than 2017 [8][24]. Efficiencies - WNC has shown improvements in operating profit margin and return on assets (ROA), although there are mixed results in other efficiency metrics such as inventory turnover and operating expense ratio [10]. - Capital efficiencies have improved in gross profitability and capital turnover, but the cash conversion cycle has deteriorated [10]. Growth - The average return on invested capital (ROIC) from 2017 to 2024 was 14.6%, with a derived reinvestment rate of 26.0%, indicating that the company has not been efficient in reinvesting [11]. - The actual reinvestment rate averaged 40.2% during the same period, suggesting a discrepancy between actual and derived rates [11]. Valuation - Three valuation methods indicate that WNC is undervalued: intrinsic value based on Free Cash Flow to the Firm (FCFF) suggests a value of USD 27 per share, while the Acquirer's Multiple and Free Cash Flow yield also point to a cheap valuation [13][24]. - The intrinsic value calculation incorporates normalized values for revenue, contribution margin, and capital efficiency from 2017 to 2024 [15][24]. Conclusion - Despite a decline in revenue for 2024, WNC is still considered a strong company due to more improving metrics than deteriorating ones from 2017 to 2024, and stable solvency and liquidity metrics [24]. - The intrinsic value assessment provides a margin of safety of over 30%, reinforcing the view that WNC represents a viable investment opportunity [24][25].