On the Road Again

01/21/2005 12:00 am EST


Vahan Janjigian

Editor, Bottom Line's Money Masters Stock Report

The Forbes Special Situation Survey, from  Vahan Janjigian, stands out not just for its great record-it came in seventh on Hulbert's 2004 list-but for its highly-focused approach. Each issue offers an in-depth analysis of just one stock, culled from a database of 5,000 issues.

"Thanks to a growing economy, the demand for shipping services is strong. Most trucking companies are seeing higher revenues and profits. We expect this situation to continue into 2005. Werner Enterprises (WERN NASDAQ) is the one trucking company we like best. Werner operates more than 8,000 trucks and almost 23,000 trailers throughout North America. Dollar General is the largest single customer, accounting for 9% of 2003 revenues. Other key customers include Wal-Mart, Home Depot, Kraft, Procter & Gamble, Staples, and OfficeMax. The company enjoys a number of advantages over competitors.

"First, its fuel-cost recovery rate per mile is the highest in the industry. This has helped mitigate the cost of higher diesel prices. Second, WERN has a wholly owned subsidiary to sell used trucks in the secondary market for a higher price than it could get by simply trading them in. Third, WERN is the only carrier in the industry that has implemented real-time tracking of driver logs, freight optimization, load monitoring, fuel optimization, and Internet tracking. This proprietary technology improves delivery times and keeps drivers on the road as much as legally possible. Finally, the company has focused on internal growth while many of its competitors have learned the hard way that acquisitions aren't always successful.

"WERN also has one of the youngest fleet of trucks in the business. The average age of its trucks is only 1.6 years and almost all its trucks are 2002 models or newer. The company plans to reduce the average age of its fleet to 1.5 years by year-end. A new line of trucks sporting either Caterpillar or Detroit Diesel engines should be in place by 2007, by which time the newly mandated EPA standards for heavy-duty diesel emissions will have gone into effect. WERN also allows customers to transfer their entire transportation requirements over to the company. It also derives some non-trucking revenues, which consist of value-added services such as supply chain management. It provides logistics services such as cost analysis, load planning and route optimization, and facility site selection.

"Our discounted cash flow model indicates that the stock is grossly undervalued. Finances are in excellent shape. Current assets are 2.2 times current liabilities. The company has $105 million in cash and no debt. We have evaluated WERN using a discounted cash flow analysis, which verifies the undervalued nature of the stock. Our analysis indicates that the stock has a current intrinsic value of more than $28 per share, well above the stock's recent price. We expect WERN to hit our $32 price target within two years."

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