Horizon Lines - Management & Outlook
- Horizon Lines (part 1) report written 12/15/2007
- Part 2 - Risk Detail
- Part 3 - Possible Upside
- Part 4 - Competitor Review
- Part 5 - Valuation and Assessment
- Part 6 - Management & Performance Targets
** Integrity: Charles (Chuck) Raymond, CEO: B
Chuck Raymond has worked at the various incarnations of what is now Horizon Lines for over 40+ years. He has been CEO of Horizon Lines since 1999, during which the company has been spun off, purchased by two private equity groups (first Carlyle Group who then sold it to Castle Harlan). In four decades, Raymond has seen many business cycles and changes. Horizon as a public company only has a 2 year track record.
** Past Performance: Incomplete
Horizon's financial performance is hard to judge due to the over-leveraged balance sheet from the private buyouts. However, the company is projecting robust free cash flow through at least 2008.
Probabilities are completely subjective based on my research and judgment. Scores based on multiplying the probability by the projected stock price. Using $16 base price and a dividend of $0.44, odds the stock:
- Doubles to $30: 10%
- Company hits all targets: $120M FCF, logistics segment; Puerto Rico market ticks up; economic downturn is brief and shallow.
- 1.48
- Reaches our intrinsic valuation to $24: 25%
- FCF > $75M, PR stops decline; other markets stable; US recession brief.
- 2.11
- Appreciates to ~$20: 15%
- FCF ~ our target of $50M; slight volume slippage but rates hold and fuel surcharges keep up w/ inflation; current revenue levels maintained
- 0.67
- Floats around entry price: 16% (due to opportunity cost, time loss of money, we penalize a flat result)
- FCF < $50M; US recession noticeably reduces volume and revenues slip.
- -0.19
- Drops 30% to $14.50: 20%
- FCF < $35M; US recession; bear market in US stocks.
- -0.87
- Slides 60% to $6.40: 7%
- No or little FCF; bad misses on guidance; pronounced US recession; ability to service debt questionable
- -0.64
- Goes to zero: 7%
- Global economic slowdown; bankruptcy
- -1.09
Total Score: 1.47 (9.2% of price)
Certainty Rating: C+
While it is hard for me to imagine the company missing on its FCF projections by over 60%, there's that high debt load and the possibility of a looming US slowdown or recession. In the latter case, it's impossible to project how that would affect shipping volume and revenues. The fact that some of Horizon's business is military-base related and Horizon's specific non-contiguous US markets are somewhat reliant on imports suggest that business would presumably hold up even in a recession to some extent. The valuation and protected nature of the business makes this an attractive opportunity, if not without risk. The 2%+ yield is a nice bonus for a small-cap stock.
- Performance Measurements:
- 2008 FCF > $50M
- Bunker fuel surcharges to keep pace with market prices.
- Improve upon Q3 '07 utilization rate of 75%.
- Prefer to see some prudence regarding acquisitions and instead focus on debt reduction.
- Management schedule and plan for CapEx re: vessel replacement
DISCLOSURE: Please see our portfolio page for all disclosures.
This report reflects the research and analysis I've performed on this company. It is provided for informational purposes only and does not constitute personalized financial advice nor an endorsement or solicitation to purchase stock in this or any other company. Please do your own due diligence or hire a financial advisor before making any investment decisions.
The author received no compensation and is not affiliated with the company reviewed in this report with the possible exception of being a shareholder. The author reserves the right to buy or sell the stock as deemed personally prudent without further notification
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