Growing at full throttle: Echo Global Logistics a resounding success story

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Asset-light, Chicago-based Echo Global Logistics is on a roll.

In 2005 it set out “with one simple objective — to take the ‘complicated’ out of transportation management”. And it did it using a proprietary technology platform.

Just a decade later, its tailored supply chain management solutions command an equity valuation of $1bn. Its acquisition-led strategy, a balanced capital structure and an outstanding growth rate all contributed to a surge in its valuation in recent times, but its fortunes are deeper-rooted.

Its aggressive compensation schemes and the appointment of one key senior executive have, arguably, made a difference over the last 24 months.

It is no coincidence, in my view, that since chief financial officer Kyle Sauers was appointed in October 2013, the group has pushed the pedal to the metal, growing at full throttle while maintaining a good degree of financial discipline.

Douglas Waggoner, its chief executive officer, has merit, too. A board member since February 2008, Mr Waggoner has been chief executive since December 2006, granting operational continuity at a very critical economic juncture and guiding the company through the severest recession the modern logistics industry has had to face.

In 2014, his compensation was split as follows:

• 24.5% basic salary
• 29% stock awards – this is a combination of restricted stock awards and performance shares, with each component representing 50% of the total number of shares granted to each executive
• 44.6% non-equity incentives – the non-equity incentive awards made last year were based on Ebitda growth, which stood at $41.4m, up 22.4% from £33.8m in 2013
• 1.9% others

The mix was very similar for Mr Sauers, who is going to pocket the biggest pay rise (22%) in 2015, although at $395,000, his emolument will still be dwarfed by that of Mr Waggoner, at $700,000.

2013: the watershed

The salaries of key executives did not increase a cent in 2014 – the best year ever for shareholders, who saw a 35% capital appreciation in 2011; 12.7% in 2012; 16.8% in 2013; and 43% in 2014.

Meanwhile, the forecast increase in 2015 is rather modest in the light of its performance.

Admittedly, things have changed a lot since 2007/2008, both with regard to salary increases (in double-digit territory for all senior executives back then) and the overall structure of the package (the base salary was more than 50% of the total package).

(Please click here for its summary compensation table, page 84.)

“The principal elements of our executive compensation programme are base salary, annual performance-based cash incentives, long-term equity incentives generally in the form of restricted stock and (beginning in 2013) performance shares and other benefits and perquisites,” Echo Global said in a recent filing with the Security Exchange Commission.

“Beginning in 2013, we began to issue a combination of restricted stock awards and performance shares to our named executive officers on an annual basis, with each component representing 50% of the total number of shares granted to each executive.”

The debut; a subdued performance & the rise

The company made its debut on the stock exchange in October 2009, one year after the collapse of Lehman Brothers. Its stock was then priced at $14 a share.

Its value rose 31% between the first day of trade and 2 January 2013 – vs S&P 500, which grew at 36% during the same period – when it traded at $18.5. However, since then it has outpaced the market, growing 76% against the S&P 500’s growth of 42%, and in a much shorter period of time.

According to market consensus estimates from Thomson Reuters, its shares are almost fully priced at their current level of $32.6, in spite of impressive forecasts for growth in revenues and profits for the next three years. If forecasts are met, by 2017 its top-line will have grown at a compound annual rate of 27% to $2.5bn from $750m in 2012.

Projections for revenues notwithstanding, consensus estimates for its stock price may well be wrong, for two reasons – and they could err on the side of caution.

Consensus & change-of-control clause

Firstly, it’s been a catch-game over the last 12 months, during which analysts have struggled to cope with Echo’s impressive stock rally. Consider that the average price from brokers has surged more than 50% to $34 from $22 over the period.

As one would expect, operating and net income margins are thin, but the business looks properly financed and could continue to exploit the strength in its stock, using it as M&A currency in pursuing deals and cost synergies.

In late May, analysts at FBR Capital reiterated their outperforming rating on Echo, raising their price target to $43 (currently the best-case scenario, according to all market estimates), arguing in favour of revenue synergies and earnings accretion, while suggesting a spectacular growth rate for Ebitda on the back of its $420m purchase of truckload broker and non-asset based transport provider Command Transportation on 21 April.

Secondly, a takeover is a distinct possibility once the integration of Command is completed – a “change of control” clause is mentioned a few times in its recent filing with the SEC.

As far as would-be suitors are concerned, I have no particular name in mind, but it is certain that as a target Echo would command a hefty premium 12 months down the line, which could boost its already rich, albeit not prohibitive, forward trading multiples.