I predicted that the largest bulk tanker company in the US, Patriot Transportation (NASDAQ:PATI) would post underwhelming FY23 financial results due to rising labor and insurance expenditures.

Additionally, the business recently reported its Q1 FY23 financial results, which exceeded my expectations. Revenue per mile increased by 17.5% as a result of rate hikes, while the driver turnover rate fell below 75%. Operating profit after adjustments came to $0.69 million. Yet because inflation is still high and the majority of rate hikes are scheduled for the first half of the fiscal year, I believe operating income growth rates will slow down over the coming few months. Patriot Transportation additionally intends to spend $12 million on CAPEX in FY23. As a result, it will have less cash on hand, while its enterprise value and amortization costs go up. Let’s go over everything again.

An Overview of FY23’s Q1 Financial Results

Florida Rock & Tank Lines, which specializes in transporting gasoline and diesel fuel from substantial gasoline storage facilities to convenience stores, truck stops, and fuel depots, handles the majority of the company’s operations. Transporting dry bulk products including cement, lime, and industrial powders generates about 85% of this industry’s revenue. The transportation of liquid chemicals and water accounts for the remaining 15%. As of December, Patriot Transportation has a fleet of 268 company tractors, 43 owner-operators, and 419 trailers, as well as 17 terminals and 6 satellite facilities throughout Florida, Georgia, Alabama, and Tennessee. This is a seasonal industry, and the company reported having roughly 360 drivers who were earning money on February 3 during its Q1 FY23 earnings call. The oil and construction industries often experience growth during the second quarter of the fiscal year.

In the end, this market is challenging to enter since there are few entry barriers and it is very cyclical, as seen by Patriot Transportation’s dismal financial performance over the past ten years. Revenues stayed the same between FY13 and FY22, but operating income plunged. It’s vital to keep in mind that normalized diluted earnings per share for FY19 were only $0.14, notwithstanding the possibility that the COVID-19 outbreak is to blame for the absence of profits over the previous three years.

Although the Nashville site closure and a decline in drivers resulted in a 5.5% decline in revenue miles, FY23 is off to a strong start. The primary driver of the higher revenues was a 17.5% increase in revenue per mile as a result of rate increases and an improved business mix. As a result, the adjusted operating profit significantly improved as all types of expenses were kept under control with the exception of salary and benefits.

Patriot Transportation increased driver pay recently in an effort to reduce turnover, and it appears to be working. But, decreasing spot freight costs throughout the entire freight sector have made it simpler to find drivers, which has also been helpful.

Patriot Transportation stated on its Q1 FY23 earnings call that the first and second quarters will see the most of its price rises for the year. It added that its freight rates have increased significantly over the previous two years and that there is no need for them to decrease. The fact that this is a very cyclical industry and that high inflation and increasing interest rates appear to be bringing on a recession and a decline in fuel prices in the near term makes me skeptical, though. As a result, freight rates and surcharges would decrease. According to a National Association for Business Economics poll released on February 27, 58% of economists believe that a recession would occur in 2023.

My list of businesses to watch includes Patriot Transportation because it has a track record of paying out significant dividends when it has more than $10 million in cash on hand. This was primarily due to the fact that they occasionally sold properties and didn’t invest much in tractors and trailers.

It appears that no terminals will be sold in the coming months despite sales increasing. Moreover, from one quarter to the next, cash and cash equivalents decreased by $0.49 million, while CAPEX in Q1 FY23 was $2.13 million. During the quarter, Patriot Transportation replaced nine tractors. For the entire fiscal year, the company aims to replace 64 tractors and 10 trailers. The rental tractors will be replaced by a total of 29 new ones. This will result in significant lease cost savings, but these savings will be more than offset by increased depreciation expenses. The company’s cash reserves are going to be depleted because the anticipated CAPEX for FY23 is still $12 million, and the cash flows from operating activities over the past 12 months have only been $4 million.

I believe that Patriot Transportation’s first quarter of fiscal year 23 results was excellent overall, and I believe that Q2 will be as successful due to additional pricing increases. The enterprise value could increase from $20.3 million to over $27.5 million in the coming months if the share price remains unchanged, but the cash reserves are still declining as this fiscal year is anticipated to have a high level of CAPEX. The new fleet will also increase the cost of depreciation by nearly $600,000 every quarter. Patriot Transportation may see issues in the second half of fiscal year 23 if the United States remains in a recession for an extended period of time in the coming months.

Bottom Line

I believe Patriot Transportation has performed well financially, especially considering that it operates in an industry with many competitors and few entry hurdles. FY23 is off to a strong start due to rising freight rates, but the company doesn’t appear to be cheap given that TTM operating income is less than $1 million and enterprise value is rising as liquidity is decreasing. The TTM EV/EBIT ratio is over 22x as of this writing, and many analysts predict that the US will enter a recession shortly. Nonetheless, Patriot Transportation has a history of giving out significant dividends when it sells properties during challenging times, so I believe it’s crucial to keep a watch on it. I find it interesting even when this company’s business is struggling (e.g. 2019-2021). I believe Patriot Transportation stock is a contrarian play.

Featured Image: Unsplash @ Pascal Meier

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