ArcBest (ARCB)

Freight Delivery Company ArcBest (NASDAQ:ARCB) missed Wall Street’s revenue expectations in Q1 CY2025, with sales falling 6.7% year on year to $967.1 million. Its non-GAAP profit of $0.51 per share was in line with analysts’ consensus estimates.

Company Overview

Historically owning furniture, banking, and other subsidiaries, ArcBest (NASDAQ:ARCB) offers full-truckload, less-than-truckload, and intermodal deliveries of freight.

The growth of e-commerce and global trade continues to drive demand for shipping services, especially last-mile delivery, presenting opportunities for ground transportation companies. The industry continues to invest in data, analytics, and autonomous fleets to optimize efficiency and find the most cost-effective routes. Despite the essential services this industry provides, ground transportation companies are still at the whim of economic cycles. Consumer spending, for example, can greatly impact the demand for these companies’ offerings while fuel costs can influence profit margins.

Competitors offering similar products include C.H. Robinson (NASDAQ:CHRW), FedEx (NYSE:FDX), and J.B. Hunt (NASDAQ:JBHT).

Reviewing a company’s long-term sales performance reveals insights into its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Regrettably, ArcBest’s sales grew at a mediocre 6.7% compounded annual growth rate over the last five years. This fell short of our benchmark for the industrials sector and is a rough starting point for our analysis.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. ArcBest’s performance shows it grew in the past but relinquished its gains over the last two years, as its revenue fell by 8.1% annually. ArcBest isn’t alone in its struggles as the Ground Transportation industry experienced a cyclical downturn, with many similar businesses observing lower sales at this time.

We can better understand the company’s revenue dynamics by analyzing its number of units sold, which reached 19,491 in the latest quarter. Over the last two years, ArcBest’s units sold averaged 1% year-on-year declines. Because this number is better than its revenue growth, we can see the company’s average selling price decreased.

This quarter, ArcBest missed Wall Street’s estimates and reported a rather uninspiring 6.7% year-on-year revenue decline, generating $967.1 million of revenue.

Looking ahead, sell-side analysts expect revenue to grow 5.3% over the next 12 months. Although this projection implies its newer products and services will catalyze better top-line performance, it is still below average for the sector.

For industrials businesses, cost of sales is usually comprised of the direct labor, raw materials, and supplies needed to offer a product or service. These costs can be impacted by inflation and supply chain dynamics in the short term and a company’s purchasing power and scale over the long term.

ArcBest has bad unit economics for an industrials business, signaling it operates in a competitive market. As you can see below, it averaged a 9.7% gross margin over the last five years. That means ArcBest paid its suppliers a lot of money ($90.31 for every $100 in revenue) to run its business.

ArcBest was profitable over the last five years but held back by its large cost base. Its average operating margin of 5.7% was weak for an industrials business. This result isn’t too surprising given its low gross margin as a starting point.

On the plus side, ArcBest’s operating margin rose by 1.6 percentage points over the last five years, as its sales growth gave it operating leverage.

In Q1, ArcBest’s breakeven margin was down 1.5 percentage points year on year. The reduction is quite minuscule and shareholders shouldn’t weigh the results too heavily.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

ArcBest’s EPS grew at a remarkable 12.9% compounded annual growth rate over the last five years, higher than its 6.7% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

Diving into the nuances of ArcBest’s earnings can give us a better understanding of its performance. As we mentioned earlier, ArcBest’s operating margin declined this quarter but expanded by 1.6 percentage points over the last five years. Its share count also shrank by 11.3%, and these factors together are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.

For ArcBest, its two-year annual EPS declines of 32.9% mark a reversal from its (seemingly) healthy five-year trend. We hope ArcBest can return to earnings growth in the future.

In Q1, ArcBest reported EPS at $0.51, down from $1.34 in the same quarter last year. This print slightly missed analysts’ estimates, but we care more about long-term EPS growth than short-term movements. Over the next 12 months, Wall Street expects ArcBest’s full-year EPS of $5.46 to grow 16.9%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

ArcBest has shown weak cash profitability over the last five years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 4.1%, subpar for an industrials business.

Taking a step back, we can see that ArcBest’s margin dropped by 3.4 percentage points during that time. This along with its unexciting margin put the company in a tough spot, and shareholders are likely hoping it can reverse course. If the trend continues, it could signal it’s becoming a more capital-intensive business.

ArcBest burned through $36.84 million of cash in Q1, equivalent to a negative 3.8% margin. The company’s cash burn was similar to its $48.58 million of lost cash in the same quarter last year. These numbers deviate from its longer-term margin, indicating it is a seasonal business that must build up inventory during certain quarters.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Although ArcBest hasn’t been the highest-quality company lately, it historically found a few growth initiatives that worked out well. Its five-year average ROIC was 16.4%, impressive for an industrials business.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, ArcBest’s ROIC has decreased over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

ArcBest reported $98.67 million of cash and $462.9 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $304.5 million of EBITDA over the last 12 months, we view ArcBest’s 1.2× net-debt-to-EBITDA ratio as safe. We also see its $3.16 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was good to see ArcBest narrowly top analysts’ sales volume expectations this quarter. On the other hand, its revenue and EBITDA missed Wall Street’s estimates. Overall, this was a mixed quarter. The stock traded up 2.9% to $60.79 immediately after reporting.

Updated: May 16, 2025 at 10:06 PM EDT

Before investing in or passing on ArcBest, we urge you to understand the company’s business quality (or lack thereof), valuation, and the latest quarterly results - in that order.

ArcBest doesn’t pass our quality test. To kick things off, its revenue growth was mediocre over the last five years, and analysts expect its demand to deteriorate over the next 12 months. And while its projected EPS for the next year implies the company’s fundamentals will improve, the downside is its diminishing returns show management's prior bets haven't worked out. On top of that, its low gross margins indicate some combination of competitive pressures and high production costs.

ArcBest’s P/E ratio based on the next 12 months is 10.5x. While this valuation is reasonable, we don’t see a big opportunity at the moment. There are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $79.08 on the company (compared to the current share price of $66.55).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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