A recent filing with the SEC shows that P2 Capital Partners owns 9.8 million shares of UTi Worldwide Inc. (NASDAQ:UTIW), giving it 9.4% of the total shares outstanding. P2 had reported owning 8.7 million shares in October, and a position of 5.2 million shares at the end of September (which, according to 13F filings, was the fund’s largest position by market value at that time). P2 is managed Claus Moller, who had previously worked at Blum Capital Partners. See more of P2 Capital Partners’ stock picks. UTI is a $1.4 billion market cap supply chain management company providing freight forwarding and logistics services.
UTI’s business has not been doing well this year. In the first nine months of this fiscal year, revenue was down 9% from the same period a year ago, including an 11% decline last quarter. The company has reduced its costs, but not enough: earnings are down substantially, resulting in earnings per share of 41 cents between the first three quarters of the year. That performance, when annualized, implies a P/E multiple of 24, and judging from the 10-Q Q3 was a particularly bad quarter for UTI’s bottom line so the business does not seem to be improving. The sell-side, however, is counting on very good numbers for the fiscal year ending in January 2014 with the stock’s current market cap of $1.4 billion representing a forward P/E of 15.
Chuck Royce’s Royce & Associates added to its stake in UTi Worldwide Inc. during the third quarter and closed September with 4.8 million shares in its portfolio (check out Royce’s stock picks). Royce tends to specialize in small- and mid-cap stocks which don’t get as much attention from other investors but which may still be undervalued. Activist hedge fund Starboard Value, which is managed by Jeffrey Smith, initiated a position of 1.6 million shares during the quarter (find more stocks Starboard has been buying). Starboard is currently battling for control of Office Depot Inc (NYSE:ODP).
Expeditors International of Washington (NASDAQ:EXPD) is the company’s closest peer. It is significantly larger in terms of market capitalization, with a market cap above $8 billion, and also seems pricy in terms of its recent performance: it carries trailing and forward P/Es of 24 and 21, respectively. In the third quarter of 2012, revenue was down 5% from the third quarter of 2011 and this contributed to pulling earnings down 17%. As with UTI, the company would have to reverse its poor performance and start doing very well in order to be a good buy, and we’re not confident that it will do so.
Of course an investor looking at UTi Worldwide Inc. could also consider FedEx Corporation (NYSE:FDX) and United Parcel Service, Inc. (NYSE:UPS) to be alternatives. FedEx in particular seems quite competitive in value terms: its trailing P/E multiple is only 14, and its business was about flat in its most recent quarter compared to the same period in the previous year. It would require some growth to justify its valuation, but it’s hard to see a scenario where it is a worse buy than UTI or Expeditors International. Even in terms of EBITDA- FedEx’s EV/EBITDA multiple is 5.2x, easily lower than where the two companies we’ve previously discussed are valued- it seems like at least a moderately interesting value prospect. UPS, as something of the market leader in delivery, freight, and logistics services, carries a bit of a premium to FedEx at 22 times trailing earnings, placing it more in the same neighborhood as UTI or Expeditors International. Its net income has also been down strongly, but we feel that it’s at least a safer pick due to its market position.
It’s possible that P2 is buying up a large stake in the company because it has plans to shake up management, corporate strategy, or some other element of UTI’s business that will increase profits. However, at the moment FedEx seems like a better buy.
