Saia: Initiating Coverage With $230 Fair Value Estimate; Valuation Sets High Bar for Execution

Saia SAIA ranks among the 10 largest less-than-truckload, or LTL, carriers and is a strong operator in terms of profitability. Pure-play public competitors of similar quality include XPO and best-in-class Old Dominion. Saia was historically a super-regional carrier, but in 2017 it started expanding into the Northeast, while more recently boosting door capacity in existing regions with attractive long-term growth prospects. Saia has bolstered its margin profile in recent years with help from disciplined yield management, improved business mix (higher margin, heavier weighted freight), and rising lane density in recently expanded regions. Also, in our view, Saia’s heavy terminal investment has positioned it well to take market share once the trucking landscape works through its current normalization/pullback phase.

Saia is a high-quality carrier, and entry barriers in LTL shipping are higher than the full-truckload sector. That said, we don’t believe it has carved out an economic moat, as LTL trucking is price competitive and offers limited opportunities to differentiate over the long run. Although the process can take years, network reach, service quality, and strong terminal/linehaul productivity can be replicated by well-capitalized competitors over time, and for most carriers, scale economies have proven insufficient over the full cycle.

In terms of valuation, investors are optimistic about a potential bottoming in freight demand later this year, less of a pricing pullback than seen in the full-truckload sector, and Saia’s ability to reduce its margin gap to Old Dominion. There is validity to those views, but the shares have surged over the past few quarters and trade at a 29% premium to our $230 DCF-derived fair value estimate, making Saia modestly overvalued relative to our longer-term free cash flow growth forecasts. This creates a high bar for execution, in our view. Note that Saia is not alone—LTL peers XPO and Old Dominion are also looking rich.