Is It Too Late to Buy Roadrunner Transportation Systems (RRTS) Stock?

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Argosy Investors recently released its Q1 2021 Investor Letter, a copy of which you can read here. First-quarter 2021 performance was 8.2% in select accounts. The S&P 500 by comparison returned 7.0%. You should check out Argosy Investors’ top 5 stock picks for investors to buy right now, which could be the biggest winners of 2021.

In the Q4 2020 Investor Letter, the fund highlighted a few stocks and Roadrunner Transportation Systems Inc. (NYSE:RRTS) is one of them. Roadrunner Transportation Systems Inc. (NYSE:RRTS) offers truck freight transportation services. In the last three months, Roadrunner Transportation Systems Inc. (NYSE:RRTS) stock gained 117% and on April 14th it had a closing price of $4.86. Here is what the fund said:

“You may remember my introduction to XPO in prior letters, and my explanation for why the LTL shipping industry is attractive. Certainly scale matters in the business, which is why XPO and ODFL are in a good position to continue to grow. With that said, I believe the industry at large is attractive, and smaller players can make decent profits as well, although they will struggle to achieve the best in class performance of players like ODFL.

Roadrunner Transportation Systems (RRTS) is an interesting story because over the last couple of years they have systematically dismantled a hodge-podge of transportation assets purchased with lots of debt, and they now sit in a position of being focused on a top-20 LTL shipping business with net cash on their balance sheet.

They have focused on improving customer service in the short-term which will pressure profits in the short-term but will ultimately drive additional growth across their network of warehouses, and increase profits. With over $400 million in LTL revenue, if RRTS can generate a 95% operating ratio (equivalent to 5% operating margin), then they can generate $20 million of operating profit (which will likely not be taxable due to $236 million of accumulated operating losses). Keep in mind that best-in-class operating ratios are between 80-85% so 95% is ambitious but not unrealistic. Based on a current market capitalization of about $170 million, this business would be trading at approximately 8x earnings if my hopes for 95% operating ratio materialize.

The difficult part is two-fold: 1) the company is 90%-owned by a very successful but also very aggressive hedge fund which could conceivably push remaining public shareholders out of future gains by acquiring the 10% it does not own at a fire sale price; 2) the company has delisted and stopped reporting financial results publicly as of earlier this year to avoid the compliance costs of staying listed, which are typically $3-5 million annually.

This is probably the right decision for the business as it executes its turnaround, but I will be in the dark for a period of time. The best-case scenario involves the company fixing its LTL business, relisting on a stock exchange, and then the 90% owner selling down its stake at much higher prices, bringing even greater liquidity to the stock, which could attract additional owners.

I have not committed significant capital to this idea, but it is a set-up that I like and am willing to bet lightly on given the explosive returns possible if things go my way.

As a bit of premature post-script, since I began writing this letter, RRTS announced a private placement investment that will enable them to continue to invest in their strategy. At the same time, RRTS announced encouraging operational results that they claim will enable them to offer guaranteed shipping in some lanes very soon. Offering guaranteed times should increase demand for their offering as customers begin to gain confidence their goods will be shipped in a timely manner. Shares are up over 70% since my purchase because of the recent news but I think there is additional upside.”

Pixabay/Public Domain

Our calculations showed that Roadrunner Transportation Systems Inc. (NYSE:RRTS) isn’t ranked among the 30 most popular stocks among hedge funds.

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Disclosure: None. This article is originally published at Insider Monkey.