A business that helps other businesses be more productive, efficient and profitable would tend to have a bright future. Furthermore, when they can do it as an outsourcing service it allows the business they are serving to focus their resources and management on their core competencies. Echo Global Logistics Inc. (ECHO) is a very fast-growing small-cap that represents a quintessential example what I’ve just described.
Directly from their website
“Echo global logistics Inc. is A leader in transportation management Echo Global Logistics is a leading provider of technology-enabled business process outsourcing, serving the transportation and logistics needs of our clients. Our proprietary web-based technology, dedicated service teams and robust procurement power enables our clients to see significant transportation savings while receiving best-in-class service.”
Utilizing their own proprietary web-based technology, Echo Global Logistics provides transportation and supply chain services to more than 11,000 clients across many business sectors to include retail, consumer products, manufacturing and even construction companies. Even though the company has generated extraordinary earnings growth averaging over 53 percent per annum, I believe they have barely scratched the surface of the enormous market opportunity in front of them. According to MorningStar, they estimate the total outsourced 3PL (third-party logistics provider) market at over $127 billion that is expanding 2-3 times faster than the rate of GDP growth. Furthermore, a growing trend towards outsourcing logistics management plays strongly into Echo Logistics’ hands.
The following slide from Echo Global Logistics’ investor presentation in February of 2012 summarizes the opportunity described above. Clearly, the potential for this fast growing small-cap is quite exciting.
Strong Earnings Growth
The following F.A.S.T. Graphs™ fundamentals analyzer software tool plots Echo Global Logistics’ earnings since they went public in October of 2009. By looking to the right of the graph you can see that the company’s earnings growth rate has been 53.7 percent per annum and that the company has no long-term debt on the balance sheet.
When monthly closing stock prices (the black line) are added to the F.A.S.T. Graphs™ we discover that price has not kept up with historical earnings growth. Consequently, the company’s current PEG ratio is .48 where a PEG ratio of one would be considered fair value. Therefore, based on historical earnings growth, the company appears to be undervalued.
Even though Echo Global Logistics’ stock price has not kept up with its earnings growth, long-term shareholders have received an annualized rate of return of 10.2 percent. Although this has not kept pace with the Russell 1000 growth, the return is not bad considering current low valuation.
The Future
The following estimated earnings and return calculator plots future earnings for Echo Global Logistics based on the consensus estimates of seven analysts reporting to Capital IQ, a Standard & Poor’s company. This 30 percent estimate seems reasonable based on what the company has historically achieved and also considering the huge opportunity that still lies before it. However, if these estimates do, in fact, come to pass, then prospective investors could earn a rate of return in excess of 33 percent per annum assuming the company traded at a PEG ratio valuation by year-end 2017.
The following earnings guidance from Echo Global Logistics’ fourth quarter financial performance presentation corroborates the consensus 2012 estimate of $.72 per share. Management guides 2012 earnings to be in a range of $.68-$.76 per share.
When putting the above earnings and return calculator picture into numerical form, we learn that Echo Global Logistics currently has an earnings yield of 4.4 percent that would explode to 49 percent by 2021, assuming the company could continue to grow earnings at 30 percent per annum. Although this is an aggressive forecast, it is far from impossible for a company in a high-growth market with a decent moat and only a $360 million market cap. In other words, Echo Global Logistics has lots of room to grow.
The following five sides from Echo Global Logistics’ investor presentation provide an overview of the company and its unique opportunity.
(Click to enlarge)
(Click to enlarge)
Summary and Conclusions
Based on its proprietary software system, Echo Global Logistics has created a market with huge potential for growth. The company currently trades at a very reasonable valuation given the amount of growth that is expected from this company and its industry. Therefore, investors seeking significantly above-average growth from a small-cap company with a strong balance sheet and huge market opportunity might want to give this company careful consideration.
Disclosure: Long ECHO at the time of writing. Read disclaimer here.
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