Activity is strong and steady within transportation and logistics and the automotive aftermarket, according to Managing Directors Jason Bass, Frank Mountcastle and Joe Conner. Investor and buyer attention is especially focused on third-party logistics (3PL) businesses benefiting from booming e-commerce, as well as in essential automotive services with recession-resistant demand.
Below, Bass, Mountcastle and Conner share their thoughts on which metrics and trends matter most, and what management teams, strategic buyers and private equity investors should be thinking about as 2019 unfolds.
Within your industry, which sub-sectors do you anticipate experiencing the highest levels of interest? Why?
Bass: Within 3PL, interest is highest in freight forwarding, transportation management, brokerage and anything having to do with parcel. That’s being driven by strong consumer confidence and overall economic conditions, and a robust industrial economy. And while freight is strong overall, capacity to move it is tight across all modes, and freight rates continue to rise. At the same time, e-commerce continues to proliferate, resulting in smaller, more frequent, more time-sensitive shipments.
Mountcastle: I agree with Jason’s list, and would add infrastructure logistics to it. All things 3PL, and especially parcel, are attracting interest due to tight capacity in all modes, e-commerce growth and more companies embracing the outsourcing model.
Conner: Within the automotive aftermarket, we’re seeing high levels of interest in services: collision, car wash, general repair, tire, oil change and others. There is significant fragmentation in the space, and many opportunities to build platforms of scale. These also tend to be recession-resistant businesses.
Which metrics are you watching most closely in relation to the performance of companies in your industry?
Bass: Spot market truckload rates, drayage/intermodal trucking rates, railcar loads and consumer confidence.
Mountcastle: Year-over-year price and volume movement, and the relationship between shipper demand and carrier capacity. The price of purchased transportation is a major focus area for 3PL companies.
Conner: Same-store sales growth: Strong aftermarket service providers today are able to achieve two or three times GDP. The best operators are driving both car count and ticket growth. They’re gaining new customers and selling more to each.
Which industry-specific trends or issues are you watching most closely?
Bass: E-commerce is finding its way into all industry verticals, and changing inventory and supply chains. Multiple ports of entry, coastal distribution centers and opportunities for intermodal moves are increasing. We’re also seeing small shippers embracing 3PLs and 4PLs for expertise and cost savings.
Mountcastle: I’m watching the availability and pricing of transportation carriers across trucking, shipping and rail, as well as the trade situation with China and its impact on import and export volumes.
Conner: There's a lot of buzz around self-driving vehicles, electric vehicles, ride sharing, and how they will change things. And while I think those trends will have an impact on the aftermarket, I think it will be gradual, and will create as many opportunities as risks.
Which geopolitical and/or macroeconomic issues are most relevant to your industry? Why?
Bass: Tariffs that impact goods from Asia, slowing freight volumes. Interest rates and oil prices that impact consumers’ pocketbooks.
Mountcastle: International trade and tariffs, and, domestically, GDP, consumer spending and unemployment.
Conner: While we’re watching tariffs, aftermarket supply chains have proven to be pretty resilient. Many companies have been able to get cost concessions or alternative supply.
Given the length of the current bull market, what should private companies, private equity groups and strategic buyers be thinking about?
Bass: Management teams should be thinking about strategies to achieve scale while implementing a more variable cost structure within their business. Fundamentally, this should help companies remain competitive once the market turns. Private equity groups should be thinking about taking gains if a portfolio company is saleable. And strategic buyers should be actively calling on private equity-backed companies so that they have a competitive edge when a business comes to market.
Mountcastle: This is a very dynamic time in the industry, so companies should be thinking about disruptive technologies, achieving full supply chain transparency, and the “Amazon effect” on their business. Private equity ought to be looking for platform opportunities over the next 1-2 years given M&A volume in the last 18 months. Strategic buyers should be looking at the linkages between targets’ and acquirers’ multiples.
Conner: I would say to management teams that are thinking about selling that there’s very little upside to waiting, and some significant potential downside. Private equity should be looking for assets that have strong growth profiles as well as defensibility through cycles, particularly those that sell essential, non-discretionary services. Strategic buyers should be looking for the same attributes, plus the ability to readily boost growth or reduce costs.
Which qualities make acquisition targets most appealing in a more challenging operating and investing environment?
Bass: Variable-cost, asset-light models. Target companies rich in young talent and, as such, prepared to springboard out of the downturn faster than others in the market.
Mountcastle: High free cash flow, secular growth trends and cycle resistance.
Conner: Again, it goes back to offering services consumers will need no matter what happens with the economy.