Morningstar | Kirby Is a Top-Shelf Barging Company, but a Narrow Moat Is Hard to Justify After the S&S Deal
After a fresh review of Kirby's overall competitive positioning, we are downgrading our economic moat rating to none from narrow. A s a result of this adjustment, we are also reducing our fair value estimate slightly to $66 from $68; the shares are trading in overvalued territory. Kirby’s legacy marine tank-barging division is a moatworthy operation, but we don’t think its distribution and services, or D&S, unit enjoys the same magnitude of competitive advantages and it now makes up more than half of total revenue after the 2017 Stewart and Stevenson acquisition. By no means are we implying that investors should avoid this high-quality company entirely--under the right circumstances, we wouldn’t hesitate to recommend the stock at an adequate margin of safety to our fair value.Scale-based cost advantages and related network efficiencies provide Kirby’s marine segment (46% of first-half 2018 revenue) with the characteristics of a narrow economic moat capable of defending long-run profitability from competing tank-barge operators. Additionally, its marine operations enjoy protection from foreign competition thanks to the Jones Act, which restricts U.S. marine shipping to domestically flagged and owned carriers--a strong intangible asset.
On the other hand, although Kirby’s D&S division ranks among the largest and most capable oilfield-equipment providers for drilling and fracking customers (particularly in terms of pressure pumps), we don’t think it has crafted an economic moat. Total company adjusted returns on invested capital plummeted in 2017 following the S&S acquisition, which pushed Kirby’s D&S operations to more than 50% of total revenue (and likely operating profit). While some of the ROIC decline stems from cyclical pricing pressure in the tank-barging industry, we no longer expect ROICs to materially exceed cost of capital over our forecast horizon, even with the D&S division performing nicely, including a midcycle segment margin near 10%.
Kirby operates tank barge. The company's marine transportation segment provides marine transportation services, operating tank barges and towing vessels transporting bulk liquid products. The company transports petrochemicals, black oil, refined petroleum products and agricultural chemicals by tank barge. The company's distribution and services segment, sells genuine replacement parts, provides service mechanics to overhaul and repair engines, transmissions, reduction gears and related oilfield services equipment, rebuilds component parts or diesel engines, transmissions and reduction gears, and related equipment used in oilfield services, marine, power generation, on-highway and other industrial applications.
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