The Echo chamber

 

Doug Waggoner chuckled as he answered the question the only way he legally could. The chairman and CEO of Chicago-based freight broker Echo Global Logistics Inc. was asked at an Armstrong & Associates Inc. 3PL conference last month, in the wake of UPS Inc.’s $1.8 billion acquisition of hometown rival Coyote Logistics LLC, had Echo been approached by a possible buyer that wanted the same type of skills that UPS had identified in Coyote, namely the ability to fill UPS’ underutilized trucks and reduce its network variability?

As the head of a publicly traded company, Waggoner said he couldn’t answer that question under any circumstances. But Waggoner did applaud UPS and Coyote for agreeing to a deal he said makes perfect sense for both.

These days, Waggoner can afford to be jovial and magnanimous. His company is in excellent shape, with solid positions in truckload, less-than-truckload, and intermodal brokerage to accompany Echo’s footprint in managed transportation. From its start in 2005 as an LTL broker, Echo has penetrated the exponentially larger truckload market with much success. And it closed June 1 on its $420 million purchase of rival Command Transportation, a broker that focuses exclusively on the non-contract, or spot, market and is strong in the East Coast and Southeast, balancing Echo’s well-entrenched positions in the upper Midwest and West Coast.

Like other brokerage executives, Waggoner has preached the mantras of geographic coverage and shipment density. Echo’s third-quarter numbers bear out that strategy. Its third-quarter gross revenue increased 40 percent year-over-year to $450 million. Net revenue increased by 50 percent to $87 million from the third quarter of 2014, numbers that included 8 percent organic growth. Net transport margins rose to 19.4 percent, up year-over-year and sequentially. Earnings before interest, taxes, depreciation, and amortization (EBITDA) rose 46 percent. Truckload volume increased by 134 percent over the third quarter of 2014, results that were boosted by Command’s contribution. The tailwind from Command notwithstanding, these were very good numbers in an otherwise subpar macro environment.

While Command’s volume growth was stunted by a spot market that’s been weak virtually all year, its value will show through if and when capacity tightens again. Meanwhile, Echo’s organic truckload growth in the quarter surged 24 percent. That’s the beauty of the model: It is a designed to work in all market conditions. It can also be effectively cross-sold by Echo’s sales force. These positive traits should significantly boost the top line, if estimates are accurate. Investment firm BB&T Capital forecast $2.09 billion in gross revenue next year and $2.73 billion in 2017, up from a 2015 estimate of $1.53 billion.

Despite all this, the market value of Echo equity was cut by more than half from peak to through, dropping from $34.35 in late June to $16.56 a share in late October; it has since climbed to $24.31 a share in the wake of the strong third-quarter numbers. 

As of the Nov. 7 close, Echo’s market cap sits at a little more than $752 million. Its enterprise value, which is often referred to as a business’ “takeover” price because it includes the amount of debt and cash an acquirer would assume, is $842 million.

That begs the question: If UPS can take out Coyote for $1 billion or so more than Echo’s market cap and enterprise value—to be sure, Coyote went for a healthy premium, but with a market cap of $94 billion, what UPS shelled out was a rounding error—what’s to stop FedEx Corp., a large truckload carrier, or anyone with similar deep pockets, from pursuing a strong business like Echo?