MCINTIRE INVESTMENT INSTITUTE AT THE UNIVERSITY OF VIRGINIA

Transcription

1 MCINTIRE INVESTMENT INSTITUTE AT THE UNIVERSITY OF VIRGINIA Echo Global Logistics, Inc. Roy Ma 2/28/2013 1

2 STOCK PERFORMANCE 2/28/2013 P/E: Current Share Price: (3:24 PM EST) 52 Week Range: Market Cap M 2

3 AGENDA Analysis Conclusion Three Main Points Additional VAR Indicators Further Research Possibilities 3

4 OVERALL ANALYSIS CONCLUSION A weakening customer base, increased threat from substitutes, and little potential for expansion into new markets will make it difficult for Echo Global Logistics to sustain its rapid growth. 4

5 ECHO IS A TECHNOLOGY BASED SUPPLY CHAIN MANAGEMENT FIRM Shipper Echo Carrier 5

6 ECHO S RAPID GROWTH WILL BE DIFFICULT TO SUSTAIN Struggling Market Small businesses in the U.S. have not experienced significant recovery since the Recession Threats from Substitutes Large asset based logistics firms are developing their own supply chain solutions Off the shelf 3PL software looks to provide a cheaper alternative to Echo s services No Plans for Expansion Echo has no infrastructure in place for expansion into new or international markets 6

7 ECHO S TARGET CUSTOMER BASE HAS BEEN GROWING MORE CONSERVATIVE Our niche market is small to middle sized firms - Echo representative We have already scaled down to a point where we can t operate on any less. That s the mindset of most small businesses these days. We run a very lean and conservative business, even more so in recent years, - Landon Garner, Garner Building Supply 7

8 SMALL BUSINESSES HAVE NOT FULLY RECOVERED SINCE THE RECESSION The overwhelming majority [of small businesses], 86 percent, still believe the U.S. economy will be flat or recessionary in 2013, Number of Firms (millions) NSBA President and CEO Todd McCracken Number of small firms in U.S ( ) (employees <500)

9 ECHO HAS BECOME INCREASINGLY DEPENDENT ON TRANSACTIONAL CLIENTS 2009 Revenue Sources 2010 Revenue Sources 2011 Revenue Sources 42% 58% Enterprise Clients Transactional Clients 39% 61% 32% 68% Transactional Clients Clients who use Echo s services on a shipment by shipment basis Enterprise Clients Clients who have long term contracts with Echo Approximately 80% of [Eternal Asia s] revenue in a year are long term or returning customers, this tends to be the case for most SCM companies - Eternal Asia SCM representative 9

10 ECHO HAS NOT MADE RESEARCHING ITS CUSTOMER BASE A TOP PRIORITY Are a portion of your transactional clients returning customers? Yes, but I couldn t tell you how many because we don t keep track of that. - Echo representative Why don t more transactional clients become enterprise clients, especially if they are returning customers? Different customers have different needs, I don t really have an answer other than that. - Echo representative 10

11 EMERGING LOGISTICS SOFTWARE Average annual cost of Echo s services to a transactional client (in 2011): Annual cost of subscription to Magaya Supply Chain Solution with Access to Magaya Network: $14,060 $900 11

12 ECHO AND COVERAGE ANALYSTS DO NOT SEE OFF-THE-SHELF LOGISTICS SOFTWARE AS A THREAT In the future, do you see off the shelf supply chain management software as a source of competition? I don t know enough about off the shelf supply chain management software to give you an intelligent answer I would say that we can provide combination of service, reporting, technology, competitive pricing, ease of use that you can t get with software. - Echo Representative Off the shelf software has been around a while you re not getting same level of sophistication, analysis, reporting, customization - Barrington Research Associates Off the shelf software has never threatened any company in the business - Thompson Davis & Company 12

13 LARGE ASSET-BASED LOGISTICS FIRMS ARE PROVIDING THEIR OWN SUPPLY CHAIN MANAGEMENT (SCM) SERVICES UPS Supply Chain Solutions Provides SCM services for small businesses Their technology is the best in their business, but they can t compete against firms like UPS. - Thompson Davis & Company We don t compete with the large asset based logistics firms Our focus is on low technology small businesses - Echo Representative 13

14 ECHO GROWTH STRATEGY DOES NOT INVOLVE DIVERSIFYING THEIR BUSINESS We are not looking to go into any new markets within the next 5-10 years - Echo Representative Part of our growth strategy is to increase our revenue and the market regions that we serve through the acquisition of complementary businesses. - Echo K 14

15 ECHO S BUSINESS IS ALMOST ENTIRELY DEPENDENT ON TRUCKLOAD AND LESS THAN TRUCKLOAD SHIPMENTS Revenue by transportation mode Other 8% TL 44% LTL 48% 15

16 ANALYSTS SEE ECHO AS A LONG They are good, unique technology system, that provides a lot of visibility to truck capacity and client s needs. They focus on small to mid-sized customers who are often underserved, there is not a lot of competition. - Barrington Research Associates They have competitive advantages through technologies, training, personnel, experience, and background. - Thompson Davis & Company 16

17 INDICATORS TO WATCH OUT FOR Echo s acquisitions are a major source of it s growth. The development of off the shelf SCM software may lead to competition. The behavior of the small business market will determine Echo s success. 17

18 FINAL RECOMMENDATION & FURTHER RESEARCH Echo s future is uncertain, but it could potentially be a compelling short. Areas that could use further research: - Echo s software vs its competitors and substitutes - The technological capabilities of its clients - The before and after performance of Echo s acquisitions 18