RealMoney Silver - Forward Air Gets There Quickly -- by Truck

Forward Air Gets There Quickly -- by Truck
By John Reese
RealMoney.com Contributor
2/8/2008 11:51 AM EST

Not all air freight goes by air. That may seem a bit strange, but Forward Air Corporation (FWRD) has made a good business from this fact. Forward Air is the leading company in its freight transportation niche.

It provides scheduled surface transportation of cargo as a cost-effective, reliable alternative to air transportation. Its target market is air freight that must be delivered at a specific time but is less time-sensitive than typical air freight. It provides regularly scheduled deliveries between its network of 81 terminals that are located at or near airports in the U.S. and Canada. It also has a central sorting facility in Columbus, Ohio, and eight regional hubs serving key markets. The company primarily sells to air freight forwarders, integrated air cargo carriers and passenger and cargo airlines.

For a competitor to challenge Forward Air would require it to create a network of terminals around the country. This would be difficult and expensive, so Forward Air enjoys a nice barrier to entry. Forward Air also has a competitive advantage against air freight companies. According to Morningstar, Forward Air charges an average 18 cents per pound vs. 86 cents per pound for air shipments for expedited and two-to-four-day deferred deliveries.

Because of its strong competitive position and prominence in its market, a strategy I use that's based on the investment approach of Warren Buffett takes a positive view of Forward Air. This strategy looks for dominant players with competitive advantages, and this is definitely true for Forward Air. A number of other financial factors used by the Buffett strategy also put Forward Air in a positive light. During the past 10 years, its EPS has risen nine times; this shows good earnings predictability. Also, the company has virtually no debt (actually it has $1 million in debt while generating $44.1 million in earnings).

The strategy wants the average return on equity to be at least 15% for the past 10 years, and never to have been below 10%. Forward Air's ROE during the past 10 years has averaged 23.9% and has never dipped below 17.3%.

Because some companies can be financed with debt that is many times their equity, they can show a consistently high ROE, yet still be in unattractive, price-competitive businesses. To screen this out, the company's average return on total capital must be at least 12% and not have fallen below 9% during the past 10 years. Forward Air's ROTC has been a robust 22.7% when averaged over the past decade, and has never been below 12.4%.

The strategy also looks for companies that do not need to spend a ton of money on major upgrades of plant and equipment or on research and development to stay competitive. Forward Air's free cash flow per share of 90 cents is positive, indicating that the company is generating more cash than it is consuming.

Another criterion to pay attention to is how well management spends retained earnings. In Forward Air's case, its management has earned a 17.6% return for shareholders on retained earnings, which is excellent. Further, management has been repurchasing shares, and that is another plus.

All of these indicators suggest Forward Air is a stock to buy. But the Buffett strategy goes on to analyze the stock price to determine if it is low enough to create a situation where the investor is likely to enjoy a good return on his or her investment. It is not enough for a company to be performing well, which Forward Air is; its stock must be well priced.

The strategy analyzes the stock price in two ways that produce likely returns on investment, and then averages them. It wants this averaged return to be at least 15%, meaning someone buying the stock today could expect this return on an annualized basis over the next 10 years. In Forward Air's case, the expected rate of return is 17.0%, which is very strong and makes the company a good candidate for virtually any investor's portfolio.

I want to also point out that the strategy I base on Peter Lynch's writings also likes Forward Air. Of particular note is Forward Air's P/E/G ratio, which looks at the company's growth rate (23.36% based on the average of the three-, four- and five-year historical EPS growth rates) relative to its P/E ratio (20.20). Forward Air's P/E/G is 0.86. To be acceptable, this needs to be below 1.0, and this holds true for Forward Air.

This is a company that is dominant in its market niche, has protection via barriers to entry, is performing well financially and has a reasonably priced stock. Sometimes going by truck can be the quickest route to profits.