I've always had a soft spot for unusual companies, and while operating barges and coastal cargo vessels may not be all that strange, it's not exactly a business sector rife with publicly-traded companies. Kirby (NYSE:KEX) has made M&A part of its DNA, and just executed another transaction - one that further consolidates the coast wise business and should improve the company's operating leverage. While Kirby is not really in value territory today, it remains a stock that value and GARP investors may want to keep on their radar.
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Another Day, Another Deal
Kirby has always been an active acquirer, and that hasn't changed this year. The company paid $116 million for Allied Transportation back in September, acquiring 20 coast wise/offshore vessels in the process.
On Tuesday, the company announced another deal - $295 million for Penn Maritime. Penn Maritime is (as the price tag would suggest) a larger company - the sixth-largest tank barge business. Penn Maritime focuses primarily on the coastal transport of "black products" - crude, asphalt and refinery feedstock. Kirby is paying almost eight times EBITDA for the company, but the transaction will drive its coast wise market share north of 30% and add another 34 vessels (18 tank barges and 16 tugboats).
Kirby will pay for this deal in a mix of cash and stock. Kirby will convey a half-million shares to Penn Maritime's owners and another $152 million of cash. While the equity value of the deal is $180 million, Kirby is also taking on Penn's $115 million of debt (hence, a total deal value of $295 million). To raise the cash, Kirby will be launching a $500 million offering of unsecured notes divided up between $150 million of 2.79% seven-year notes and $350 million of 3.34% 10-year notes. Up to $300 million of that will go towards the Penn deal, while the remaining $200 million will go the refinancing of $200 million in notes that come due in late February 2013.
SEE: Analyzing An Acquisition Announcement
Business Has Been Having Its ups and downs
Operating conditions have been mixed for Kirby. Underlying business demand seems solid, but low water levels on the Mississippi have impaired traffic.
In Kirby's third quarter, revenue fell 8% overall, with flat marine revenue. Barge ton-miles dropped 21% because of those water levels, but Kirby was able to mitigate that with strong pricing leverage (up 29%) and utilization (90 to 95%). The offshore business was still not doing great (ongoing legacy issues from the K-Sea deal) and utilization was still below 80%, but at least the offshore business generated a profit. Speaking of profits, overall profitably in the marine business has stayed solid ((margins up about 160 basis points (BPS)), due in large part to management's ability to control and contain costs.
At the same time, the diesel engine business continues to struggle. Although profitability improved (with operating margin up 50 BPS), revenue fell 20% as energy service companies like Halliburton (NYSE:HAL) continue to see weak pressure pumping demand.
Consolidation Should Pay Long-Term Dividends, but Operating Conditions Are Tricky Right Now
I have a lot of confidence in Kirby's overall consolidation strategy, and I think it will be increasingly difficult for small players to compete in the inland barge and coastal transport markets. Likewise, I think applying Kirby's demonstrated management skill to a wider set of assets should produce value over the long-term. Moreover, companies like Exxon Mobil (NYSE:XOM) and Dow Chemical (NYSE:DOW) don't exactly have an abundance of transportation alternatives - refinery feedstocks and asphalt can't go by pipeline (and even if they could, building new pipelines isn't always a slam dunk), and barge/coastal shipment is generally cheaper than truck or rail.
That said, near-term conditions offer challenges. Water level conditions on the Mississippi are still problematic, so much so that there's pressure on the government to declare a federal emergency along the waterway. Absent rain and physical interventions (dredging, moving rocks, etc.), companies like Kirby and ADM (NYSE:ADM) that use the Mississippi are going to have a hard time moving product, and Kirby's loadings are likely to suffer.
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The Bottom Line
Unfortunately for value or GARP investors, Kirby rarely gets all that cheap. Right now, an eight times multiple on my 2013 EBITDA estimate suggests a fair value in the mid dollar range of $60. That doesn't leave much upside and eight times is a little high for the multiple anyway; worse still is the fact that there's no yield to offset that modest capital appreciation upside. While I'd be in no hurry to sell if I owned Kirby shares, I need a wider discount to fair value before I'd buy.
At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.