Value Investors Club / ROADRUNNER TRANS SYSTEMS INC (RRTS)

Description

RRTS is an illiquid but potentially very high rewarding stock over the next 36 months as the economy

reopens and demand for less-than-truckload shipment and logistics recovers. After 18 months of

restructuring and divestitures, the timing and pricing is ripe for RRTS to return substantially for

shareholders. It has a singular focus, esteemed investors (affilliates of Elliot) new management and

board with skin in the game. Finally, the economy is reopening with much fewer competitors.

Since the stock is illiquid and its recent jump from $3 to $5, I believe this stock’s volatility will offer an

investor multiple entry points over the next 12 months for a more than satisfactory return over the next

36-60 months. The home run potential outcomes of the stock cannot be ruled out as it transforms into

more of a technology play and speculators bid the stock up to valuations similar to other growth SAAS

companies. The company’s most recent announcement, management and board additions hint at this

direction. I think this stock can easily be worth $12 in eighteen months.

The only drawback from all of the positive items that I mentioned is that RRTS is an illiquid OTC

stock and many members here may not be used to buying OTC stocks. While OTC stocks do have

risks, I believe RRTS is an outlier OTCBB solid company over $1 Billion in revenues. The LTL

business is a stable, recurring business models whose demand does not see much obsolescence risk for

the foreseeable future. It is one of those companies where even if the stock market is closed, you can

track its activity very easily – by the number of Road Runner trucks on the road, by calling their offices

to track activity, by tracking their Alexa rankings, and many other means.

Background

After a year of dramatic restructuring and divestitures, RRTS went back to its roots, from a business

with 6 segments to one segment - its origins as a less-than-truckload carrier. It all started in Mar 2020.

Even before Covid, RRTS was already in need of restructuring its unfocused, di”worsified” operations

as a result of poor operations, leverage, and the strike at GM, its biggest customer that accounted for

16%.

Since Mar 2020, the following events happened.

Mar 2020 – RRTS announces restructuring, divestiture plans and its intent o terminate SEC registration

to keep costs down, but keep the stock trading on the OTC The goal of this strategy is to improve

RRTS' operating performance, increase RRTS' returns on invested capital, and add significant value-

creation opportunities.

Apr 2020 – RRTS sells its division called Stagecoach Cartage and Distribution

Aug 2020 – RRTS completes the spin-off of its Ascent Global Logistics division

Aug 2020 – RRTS divests 3 more divisions to go back to its roots and focus on one business – LTL

carrier.

Mar 2021 – RRTS announces new web site and a preferred equity investment of $50 million by several

strategic investors.

After all these divestitures, the company went from a net debt position of nearly $500 million to a net

cash position of over $50 million dollars.

Business Overview

After 5 divestitures in the last 18 months, Roadrunner Transportation Systems is back to its roots as an

asset-light business focused on one segment - less-than-truckload operations. Specifically, Roadrunner

Freight is a leading less-than-truckload provider offering high quality, reliable LTL services.

Roadrunner's "Ship It Like You Own It" commitment guides the company to provide unparalleled

service and reliable LTL solutions for customers. With 31 service centers and strategic partnerships

across the country, Roadrunner delivers expansive long haul, regional and next day service in all major

US markets.

Product

Key aspects of RRTS’ LTL service offering include the following:

•Pickup. In order to stay as close as possible to RRTS' customers, RRTS prefer to directly pick up

freight whenever cost-effective. RRTS generally directly pick up freight within 150 miles of one of

RRTS' service centers, primarily utilizing local ICs. Although RRTS generally do not own the tractors

or other powered transportation equipment used to transport RRTS' customers’ freight, RRTS own or

lease trailers for use in local city pickup and delivery. In 2019, RRTS picked up approximately 79% of

RRTS' customers’ LTL shipments. The remainder was handled by agents with whom RRTS generally

have long-standing relationships.

•Consolidation at Service Centers. Key to RRTS' model are RRTS' 27 LTL service centers that RRTS

lease in strategic markets throughout the United States. At these service centers, numerous smaller LTL

shipments are unloaded, consolidated into truckload shipments, and loaded onto a linehaul unit

scheduled for a destination city. In order to continuously emphasize optimal load building and enhance

operating margins, dock managers review every load before it is dispatched from one of RRTS' service

centers.

•Linehaul. Linehaul is the longest leg of the LTL shipment process. In dispatching a load, a linehaul

coordinator uses RRTS' technology system to optimize cost-efficiency and service by assigning the

load to the appropriate IC, Company driver, or purchased power. In 2019, approximately 50% of RRTS'

linehaul shipments were handled by over 350 ICs with the remainder shipped via Company driver,

purchased power, or rail.

•De-consolidation and Delivery. Within RRTS' unique model, linehaul shipments are transported to

RRTS' service centers, delivery agents, or direct to end users without stopping at a break-bulk hub, as is

often necessary under the traditional, asset-based hub and spoke LTL model. This generally reduces

physical handling and damage claims. In 2019, RRTS delivered approximately 46% of LTL shipments

through RRTS' service centers and approximately 54% through RRTS' delivery agents.

Business Market Size

LTL carriers specialize in consolidating shipments from multiple shippers into truckload quantities for

delivery to multiple destinations. LTL carriers are traditionally divided into two categories — national

and regional. National carriers typically focus on two-day or longer service across distances greater

than 1,000 miles, while regional carriers typically offer delivery in less than two days. According to the

ATA, the U.S. LTL market generated revenue of approximately $64.2 billion in 2019.

Business Model

Sales & Marketing

In RRTS' LTL business, RRTS market and sell RRTS' LTL services through a sales force of over 60

people, consisting of account executives, sales managers, inside sales representatives, and

commissioned sales representatives.

Expenses and Fuel Costs:

Purchased transportation costs within RRTS' LTL business represent payments to ICs, over-the-road

purchased power providers, intermodal service providers, brokers and agents, based on a combination

of contractually agreed-upon and spot market rates.

Within RRTS' LTL business, RRTS' ICs and purchased power providers pass along the cost of diesel

fuel to us, and RRTS in turn attempt to pass along some or all of these costs to RRTS' customers

through fuel surcharge revenue programs.

Pricing:

RRTS’ LTL pricing is dictated primarily by factors such as shipment size, shipment frequency, length

of haul, freight density, customer requirements and geographical location.

Competitive Advantage of RRTS in LTL

RRTS is one of the largest asset-right providers of LTL transportation services in North America in

terms of revenue. RRTS provides LTL service originating from points within approximately 150 miles

of RRTS' service centers to most destinations throughout the United States and parts of Canada. Within

the United States, RRTS offers national, long-haul service (1,000 miles or greater), inter-regional

service (between 500 and 1,000 miles), and regional service (500 miles or less). RRTS serves a diverse

group of customers within a variety of industries, including retail, industrial, paper goods,

manufacturing, food and beverage, health care, chemicals, computer hardware, and general

commodities.

RRTS uses approximately 140 third-party LTL delivery agents to complement its service center

footprint and to provide cost-effective full state, national, and North American delivery coverage.

Delivery agents also enhance RRTS’ ability to handle special needs of the final consignee, such as

scheduled deliveries and specialized delivery equipment.

RRTS generally utilizes a point-to-point LTL model that is differentiated from the traditional, asset-

based hub and spoke LTL model. RRTS’ model does not require intermediate handling at a break-bulk

hub (a large terminal where freight is offloaded, sorted, and reloaded), which RRTS believes represents

a competitive advantage.

Revenues and Profitability:

From 2017 to 2019, revenues of the LTL business were $464, $432 and $431 million, EBIT were -26, -

27, -36 and D&A were 4.5, 4, 5. Assets deployed were 79, 74, and 116.

In Mar 2021, RRTS issued a business update that in January and February 2021 operated with record

level on-time delivery rates and the lowest exceptions in company history. Due to the continued service

improvements, Roadrunner will be launching a guaranteed service offering in select lanes by the end of

spring 2021.

Management, Smart Money Investors and Board Members.

As of Mar 2021, the company has added several successful people to its management team and board

including affiliates of Elliot Management, Andrew Leto of Emerge, Ken Shuba of OmniTRAX.

I quote the following PR:

In Mar 2021, Roadrunner Freight ("Roadrunner" or the "company") (OTC:RRTS) today announced the

recent closing of a $50 million equity private placement. The round was led by Andrew Leto, founder

of GlobalTranz and Emerge, who invested $10 million and is joining Roadrunner's Board. Other round

participants included affiliates of Elliott Investment Management, Fox Hill Capital, Memento S.A.,

Solas Capital, existing management and several individuals from the transportation and logistics sector,

including Kevin Shuba, who has also joined Roadrunner's Board.

Andrew Leto, CEO of Emerge, and Kevin Shuba, recently departed CEO of OmniTRAX, have joined

Roadrunner's Board of Directors as Independent Directors. Donald Brown, Scott Dobak and Paul

Svindland remain as Independent Directors on Roadrunner's Board.

Andrew Leto is founder and CEO of Emerge, a cloud-based shipping platform and marketplace helping

logistics professionals to more efficiently procure and manage their overflow truckload capacity.

Founded by Leto in 2017, Emerge is on track to generate $250 million in sales this year, making it one

of the fastest growing supply chain technology companies. Leto has been in the logistics industry since

2003 when he founded GlobalTranz, a top five customer for Roadrunner, after serving five honorable

years in the U.S. Navy. GlobalTranz quickly became one of the top-10 Truckload and LTL brokers in

the U.S. with over $1 billion dollars in sales. Leto also founded 10-4 Systems, a truckload and visibility

platform which was acquired by Trimble in 2016.

Kevin Shuba served as the CEO of OmniTRAX, Inc., one of North America's largest private railroad

holding companies, for over seven years. He remains a senior advisor to the OmniTRAX parent

company, The Broe Group. As CEO he led the daily operations of 22 Short Line Railroads, Port and

Terminal Operations, and OmniTRAX Logistics Services. Prior to joining OmniTRAX and The Broe

Group, Shuba had a sixteen-year career with Brambles Limited, the $6 billion dollar logistics services

company, where he oversaw Chep's U.S. and Americas operations. Prior to joining Brambles, Shuba

held several senior sales and management positions with Baxter Healthcare Corporation. Additionally,

he served in the United States Army for six years obtaining the rank of Captain.

Frank Hurst, Partner and President of Roadrunner, added, "Andrew and Kevin are already proving to be

invaluable partners in bolstering RRTS' capabilities. It is no surprise they have both created such

successful organizations."

Dave Ross Named Partner and Executive Vice President for Roadrunner

Dave Ross, former Managing Director and Group Head of Stifel's Global Transportation and Logistics

Equity Research practice, has been named Partner and Executive Vice President for Roadrunner. In this

role, Ross will focus on operations and pricing, while working with the Board to set strategic vision for

the company as a whole. He brings over 20 years of extensive experience, study and knowledge of the

LTL industry.

"Dave will play a critical role in architecting the emergence of the new Roadrunner," Jamroz stated.f

During Ross' tenure at Stifel, his awards included ranking #1 in stock picking multiple times in the

Wall Street Journal's Best on the Street Analysts Survey and in Financial Times/StarMine America's

Top Analysts report. He is the former author of the monthly Cass Transportation Index Report, speaks

regularly at industry conferences, and has advised supply chain leaders and executives of both public

and private carriers, shippers, and 3PLs on operations and strategy.

Valuation:

After its recent equity financing of $50 million, the company has a net cash position and using 60

million fully diluted shares outstanding, the stock is trading at an enterprise value of $250 million,

about half of its 2019 revenues. Assets required to run this business is about $120 million.

Estimate:

After speaking with a few experts in the LTL business about RRTS’s renewed focus, I came up with an

estimated EBIT margin of 9% in this business and a revenue estimate of $750 million by 2022. This

$750 million is not a stretch by any imagination as it represents only about 1.3% of the total market. At

a normalized EBIT of $70 million, I estimate this asset light business to at least be worth 112-15 times

EBIT. Furthermore, the home run optionality can come when it becomes valued more like a

technology SAAS business and that is where the stock can go up tremendously as speculators bid it as

high as other SAAS companies.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Renewed focus to its roots as one business segment after 5 divestitures and spinoffs

New investors

New management with skin in the game

Reopening of the economy with fewer competitors

Elimination of debt

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			2021	2022
Price:	5.00	EPS	0	0
Shares Out. (in M):	60	P/E	0	0
Market Cap (in $M):	300	P/FCF	0	0
Net Debt (in $M):	-50	EBIT	0	0
TEV (in $M):	250	TEV/EBIT	0	0