Investors Should Hitch a Ride on P.A.M. Transportation Services

After the S&P, Nasdaq, and other major U.S. averages had remarkable runs in 2020, many investors are wondering where to turn to for growth in the new year. For some with a hearty risk appetite, the small and micro-cap space contains some prospective 2021 winners.

P.A.M. Transportation Services (NASDAQ:PTSI) is a lesser-known industrial play that could really get a portfolio's growth engine revving in the new year. The trucking company's shares went in reverse 15% last year, but a pickup in economic activity along with some favorable technical indications point to bigger things down the road.

What is the Nature of PAM Transportation's Business?

Based in Arkansas, PAM Transportation is a $275 million market cap trucking company. President and CEO Dan Cushman has been in the driver's seat since 2009 navigating the company through the ups and downs of the transportation cycle.

Today, PAM Transport operates a fleet of more than 2,000 class 8 trucks and over 6,000 trailers that serve the automotive, retail, manufacturing, and commodity markets. The company offers several trucking services including local, regional and cross-border hauls. It transports a wide range of freight from consumer goods to manufacturing appliances to auto parts.

Roughly half of the business comes from shipping vehicles and parts for the automotive industry. Ford, General Motors, BMW, Nissan, and Audi are among its biggest customers although no one customer in the auto segment accounts for more than 20% of sales.

Despite its small stature, PAM Transport shouldn't be mistaken for a high growth potential market cap. Rather, it can be expected to generate more modest mid-to-upper single-digit growth which is the nature of the beast in the competitive trucking business.

Revenues have historically grown at around a 7% clip. And after a tough stretch in the industry over the last couple years, investors can expect this type of growth to resume (assuming vaccine and economic improvements go as planned).

What Can Drive Growth at PAM Transportation?

Trucking stocks have been heating up in recent weeks and PAM has been no exception. The consumption of goods has outpaced that of services since the start of the pandemic. More specifically, the boom in e-commerce means more goods are being shipped around the country than ever before. And with online shopping habits expected to persist in the post-pandemic economy, PAM should continue to be a beneficiary.

Yet given that half of its revenue is derived from auto manufacturers and suppliers, the health of the auto industry will be critical to PAM's growth. The good thing here is that the company's customer base within the auto segment is well diversified—and it is agnostic in terms of the vehicles or vehicle parts it transports. This means it will remain relevant as the electric vehicle market takes off while still being able to generate growth from traditional car and car accessory sales.

The U.S. automotive industry suffered a sharp drop in demand at the onset of the pandemic that set the tone for the year. According to rating agency Fitch, light vehicles sales in 2020 are expected to have been down about 20% to 14.2 million units. Fortunately for PAM, the outlook for 2021 points to improvement. Fitch forecasts the auto sector to rebound this year as the economic backdrop improves. It sees light vehicle sales increasing 10% in 2021 and returning to 2019 levels by 2022.

Beyond the key auto segment, PAM Transport has opportunities to expand in its existing non-auto markets and to enter new markets. The company has traditionally been perceived as solely an auto-transport company, but that is changing.

Also supportive of future growth are improved labor dynamics. Driver shortages has been a growth limiting issue for many trucking companies, but that has improved as more people consider truck driving jobs due to better compensation and a tough jobs market.

Meanwhile, PAM is getting more out of its fleet these days extending the life of its trucks and reducing capital expenditures. It operates one of the newest fleets in the industry which is a selling point for both drivers and customers.

The company reports fourth-quarter earnings later this month, so we'll soon get a good sense of where it is headed in the new year. The analyst consensus for EPS is $0.66 which represents a major improvement over the $2.37 per share loss posted in Q4 of 2019.

What About PAM Transportation's Chart and Valuation?

There have been multiple bullish chart patterns that have formed since December 1^st. A couple of continuation diamond patterns formed on December 1^st and 10^th pointing to a potential run in the stock to the $57 to $59 range over the intermediate term.

This was followed by yet another bullish continuation pattern on December 30^th (with $60 as the high-water mark). This was not to be outdone by a bullish megaphone bottom pattern that points to the possibility of a more modest climb of a few bucks over the next couple weeks. The megaphone pattern could be the one that ushers in the bigger rally.

So, with PAM Transportation's fundamentals and technicals both attractive, there appears to be fuel in the tank for a run to start 2021. PAM's stock is trading at 0.6x sales and is also one of the cheapest trucking stocks in terms of earnings multiples. Short term traders could consider this a near-term play on the technicals while investors anticipating busier highways in the next few years may want to be in this stock for the long haul